Poland and Russia One Decade after Shock Therapy

By Hall, Thomas W.; Elliott, John E. | Journal of Economic Issues, June 1999 | Go to article overview

Poland and Russia One Decade after Shock Therapy


Hall, Thomas W., Elliott, John E., Journal of Economic Issues


Poland and Russia present puzzles for both adherents and detractors of rapid economic reform. Shock therapy advocates cite the former's successful economic performance as a vindication of the big bang approach; critics cite the latter's economic quagmire as proof that a more gradual economic transformation would have been preferable. This paper presents these opposing viewpoints and assesses the speed of reform debate as the first decade of transition policy in Poland and Russia comes to a close.

The two perspectives differ in several important ways. On a theoretical level, each school contends that transformation is viable only under its policy prescriptions and is unlikely if the other policy is followed. On an empirical level, disagreement exists concerning which countries enacted shock therapy and what the results actually were. The objective of this paper is to reconcile some empirical issues and to determine what lessons can be drawn from the theoretical dispute in order to inform the larger research program concerning economic policy reform more generally. Both political and economic considerations are important in shaping policy; therefore, the paper considers aspects of the debate from a political economy perspective.

The Case for Shock Therapy

Shock therapy advocates differ in several major ways from gradualists: intellectual genealogy, policy recommendations, views regarding the role of politics, and assumptions about the nature of the state.

The intellectual antecedents of shock therapy include neo-liberal thinkers such as James Buchanan, Milton Friedman, and Friedrich Hayek. This perspective is based on an uncompromising defense of market economy and private property relations combined with a "repudiation of the liberal-democratic welfare, regulatory, and interventionist state" [Waligorski 1990, vii]. For the shock therapist, state activity is generally considered to be predatory - government interference in markets is often associated with rent-seeking and other economically deleterious acts.

The shock therapy approach is based upon the premise that spontaneous generation of markets and market institutions will occur (and will do so rapidly), given the absence of state interference. The state, which was much too large (and too interventionist) during the era of state socialism, should essentially exit the economic arena. Liberalization will lead to the development of market allocation of resources - capitalism - and thereafter to rapid economic growth. "Economic problems solve themselves: markets spring up as soon as central planning bureaucrats vacate the field" [Sachs 1993, xiii]. The ultimate goal of transition is to build market capitalism such as it exists in Western Europe and, eventually, to allow former Communist nations to join Europe. The aims of transition are to "depoliticize the economy, to activate markets, and to institute private ownership of the means of production" [Aslund 1997, 454]. The shock therapy mechanisms to arrive at these goals commonly include price and exchange rate liberalization, privatization of state-owned enterprises, and macroeconomic stabilization. In the later (post-1992) shock therapy accounts, the goal of creating an effective institutional framework also emerges [e.g., Aslund 1997; Sachs 1998]. From the perspective of rapid reform advocates, a gradual approach to transition is not only needlessly costly in terms of time and lost output, but it may even be impossible to implement, given the likelihood of political frictions. The dynamic of reform suggested in Adam Przeworski's [1991] model of consumption during transition indicates the possible deleterious economic (and, subsequently, political) effects of switching from rapid to gradual change. Drawn out, ineffective, gradual reform can weaken democracy, especially if it justifies the need for an authoritarian state to impose harsh, rapid reform [Przeworski 1991, 177-180].

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