The package of economic reforms passed in some post-communist countries in the early 1990s was known as “shock therapy.” This video briefly describes what those reforms were (and weren’t) and the debate over their success.
While economic reforms were led by local politicians such as Leszek Balcerowicz in Poland or Yegor Gaydar in Russia, shock therapy is most often associated with economists David Lipton and Jeffrey Sachs, who promoted this policy as the best path forward for socialist economies.
What exactly were these policies? Essentially, it was a program for macro-economic stabilization. Elements included:
- Convertible currencies
- Remove price controls
- Remove restrictions on foreign trade
- End subsidies to state-owned companies
You’ll note that privatization is not on that list. These reforms were intended to make economies ready for market -based growth with as short an adjustment period as possible. They were about avoiding extended hyperinflation, and creating the conditions for privatization, not privatization itself. And the idea was that the faster you implement them, the better. There would be a short-term shock, but economies would emerge stronger.
So did this work? Maybe. Poland, Estonia, and the Czech Republic all implemented rapid reforms and emerged with pretty good economies. Few other countries found the same success, instead getting mired in high unemployment, negative growth, and human misery.
Why didn’t these reforms work everywhere (assuming they did anywhere)? It depends who you ask. Jeffrey Sachs argues that the West did not provide Russia in particular enough support to weather the storm of shock therapy – that international aid was needed and lacking. Supporters of shock therapy also argue that reforms failed where they weren’t fully implemented, or implemented too slowly. Critics argue the opposite – that reforms should have been more gradual – and that they ignored local contexts, particularly the lack of economic institutions to implement and manage reform.
To illustrate the different paths economies took, I’ll highlight some economic data from Poland, the poster child for shock therapy, and Russia, the poster child for failed reform.
In both countries, inflation was brought under control, but it took a few years in Russia rather than a few months in Poland.
Poland’s overall economy fared better as well, avoiding the severe contraction that Russia faced in the 1990s.
Unemployment figures show a more complex story. Polish unemployment reached higher levels than seen in Russia and took longer to recover, although Poland did not experience the sharp decline in life expectancy seen in Russia.
It is difficult to know whether these differences are the result of different macroeconomic policies. Poland and Russia also had different privatization policies, different starting points, different levels of international aid. So it’s hard to craft a counterfactual and these reforms remain highly controversial.
I want to end by returning to Russia’s GDP growth. Putin received a lot of credit for Russia’s relatively strong growth during the 2000s with a focus on stability and state-directed development. I just want to note that the 2010s were not as great a success for Russia’s economy, with some observers saying Russia is returning to a period of stagnation. We’ll talk about some of the reasons why in two weeks.