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Shock therapy (economics)

The shock therapy programs carried out on the economies of the former Soviet Union and countries of Eastern Europe during the 1990s derived from neoliberal economic theory. The shocks took the form of sudden radical changes to the structure and incentives within economies.

Some people consider the effects to be primarily negative, such as unemployment rates ranging from 20-40%, increased crime rates and increased social tensions between the poor and the rich. Others judge that the effects have been positive, and that the theory was inadequately applied.

What is not in doubt is that sudden changes to economic structure and incentives require changes to behaviour, financial flows and the structure of the economy that are not as rapid as the shocks that initiate them. It takes time for firms to be formed and built up; it takes time for human capital to change (to acquire the skills) to exploit new circumstances.

A developed Western economy rests upon and tends to take for granted a framework of law, regulation and established practice (including between parts of the domestic and international economy) that cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised and subject to state ownership of assets. Even re-defining property law and rights takes time.

Some judge that the military attack on the Russian parliament in November 2003 reduced the possibility of Russian economists with alternative economic models to participate in economic decision-making.

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