The Political Economy of Shock Therapy

Abstract

The collapse of the centrally administered economies gave rise to a transition process towards economic systems based on market relations. Nevertheless, the transition process is not restricted to the economic field. The political and ideological aspects of the transformation are fundamental. As such an analysis of the shock therapy model requires the exposition of what I define the primary elements of the shock therapy model which are: 1) The body of economic analysis used by the shock therapy model. 2) What structure of society the shock therapy model desires to achieve? 3) The speed of the reforms. 4) The political structure consistent with the model. 5) The consistent ideological structure. After the identification of the primary elements of the shock therapy model the next’step’is to identify secondary elements, the desired changes with respect to: 1) ’Price liberalisation–stabilisation. 2) Privatisation. 3) Institutional structure. 4) ’Monetary policy. 5) Fiscal policy. 6) International trade and Foreign Aid. 7) ’Social policy. The analytical framework developed makes possible to understand the shock therapy model from a new and more enlightening perspective. We are better able to comprehend the complexities involved and the disagreements about the reform process.