Shock therapy (economics)

Shock therapy is a term used by some non-economists to refer to the sudden release of price and currency controls (economic liberalization), withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large-scale privatization of previously public-owned assets.

The term was popularized by Naomi Klein. In her 2007 book The Shock Doctrine, she argues that neoliberal free market policies (as advocated by the economist Milton Friedman) have risen to prominence in some developed countries because of a deliberate strategy of "shock therapy". Johan Norberg of the Cato Institute criticized the book, saying that the concept of shock therapy is falsely attributed to Friedman. According to Norberg, Friedman's quote ("Only a crisis—actual or perceived—produces real change") is taken out of context and misinterpreted.

The economist Jeffrey Sachs (sometimes credited with coining the term) says he never picked the term "shock therapy", does not much like it, and asserts that the term "was something that was overlaid by journalism and public discussion" and that the term "sounds a lot more painful in a way than what it is". Sachs' ideas on what has been referred by non-economists as "shock therapy" were based on studying historic periods of monetary and economic crisis and noting that a decisive stroke could end monetary chaos, often in a day.

The first instance of shock therapy were the neoliberal pro-market reforms of Chile in 1975, carried out after the military coup by Augusto Pinochet. The reforms were based on the liberal economic ideas centered on the University of Chicago.

The term is also applied to Bolivia's case. Bolivia successfully tackled hyperinflation in 1985 under Gonzalo Sánchez de Lozada, using Sachs' ideas. In particular, Sachs and Sanchez de Lozada cited West Germany as inspiration where, during 1947–48, price controls and government support were withdrawn over a very short period, kick-starting the German economy and completing its transition from an authoritarian post-War state.

Economic liberalism rose to prominence after the 1970s and liberal shock therapy became increasingly used as a response to economic crises, for example by the International Monetary Fund (IMF) in the 1997 Asian Financial Crisis. Liberal shock therapy became very controversial, with its proponents arguing that it helped to end economic crises, stabilise economies and pave the way for economic growth, while its critics (like Joseph Stiglitz) believed that it helped deepen them unnecessarily and created unnecessary social suffering.

This page was last edited on 19 March 2018, at 18:54.
Reference: under CC BY-SA license.

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