Question

What do you understand by 'shock therapy'? Mention its consequences.

Hint:

Shock therapy may achieve fast economic restructuring, but its social consequences can be severe, causing long-term instability.

Answer 1

Shock Therapy:
- Shock therapy refers to a set of rapid and dramatic economic reforms designed to transition an economy from a centrally planned system to a market-based one. The term was first used in the context of post-Soviet economic reforms in the early 1990s, particularly under leaders like Yegor Gaidar in Russia.
- It typically involves currency devaluation, privatization of state-owned enterprises, and removal of price controls to introduce competition and efficiency into the economy.
- Shock therapy is intended to spur quick and drastic economic changes to accelerate growth and integration with global markets.
Consequences of Shock Therapy:
1. Economic Instability:
- Immediate inflation and unemployment due to sudden price hikes, currency devaluation, and privatization of state-owned industries.
2. Social Dislocation:
- A significant rise in poverty, inequality, and social unrest. Many individuals, especially in the lower-income brackets, suffered as their purchasing power sharply decreased.
3. Increase in Corruption:
- Privatization led to the emergence of oligarchs who bought state assets at very low prices, creating a new class of extremely wealthy individuals and increasing corruption.
4. Inefficient Transition:
- Shock therapy’s rapid pace often led to poorly planned reforms, causing economic inefficiencies and social backlash. In many cases, markets did not function as expected due to the lack of legal frameworks and institutional support.
5. Political Backlash:
- Public dissatisfaction led to political instability in countries like Russia, where reforms were met with protests and declining trust in government institutions.
Conclusion:
While shock therapy can yield quick economic results, its rapid implementation often results in significant social and political costs. It highlights the importance of a balanced approach to economic transition, ensuring gradual reforms alongside support systems for vulnerable populations.