Problem

Policy shock

Other Names:
Abrupt policy changes
Inappropriate structural shock therapy
Nature:

Economic shock therapy has become the preferred treatment advocated by those who believe that rapid change is less wasteful, less vulnerable to sabotage, and therefore more likely to succeed, than gradual change. While policy shock therapy can prove effective for fighting inflation, shocks are not a reliable recipe for introducing the new thinking, behaviour and norms required. A market economy consists not simply of a predominance of private ownership and a minimum of government control, combined with appropriate laws; it is also a complex multitude of organizations, traditions and understandings that have usually evolved organically over time.

Incidence:

The very rapid policy changes in Central and Eastern Europe reduced pre-reform output levels by approximately third and considerably increased unemployment. As a result many of the former socialist countries found themselves in 1993 in a twilight zone where there is neither plan nor market. The economic and social situation is now shaped by the most negative elements of both systems. Overriding importance has been given to dismantling the old system, while avoiding new forms of government intervention, even though this is required to give shape to the new market system and to cushion transition.

The situation in Africa has mirrored that in eastern Europe. Cuts in public spending have contributed to the deterioration of social welfare provisions, including the virtual collapse of health and education services. High interest rates and the disintegration of economic infrastructures have contributed to a collapse in investment and fuelled a vicious cycle of de-industrialization and mass unemployment.

Claim:

The shock therapy approach to institutional and structural change causes more shock than therapy. Dismantling one pattern of institutions, such as those based on socialism, does not ensure that the vacuum will be filled by the spontaneous appearance of appropriate market mechanisms and institutions. The smooth withdrawal of subsidies and other forms of protection is vital in any transition process. A market economy consists not simply of a predominance of private ownership and a minimum of government control. It is also a complex multitude of organizations, traditions and understandings that have usually evolved organically over time.

Counter Claim:

Examples of successful application of shock therapy include the overnight end to hyperinflation in Germany after World War I and the mass privatization of industry in the Czech Republic in 1993. In most cases where negative effects of "too much shock and too little therapy" are claimed, it can be shown that there was in fact very little shock.

Problem Type:
F: Fuzzy exceptional problems
Related UN Sustainable Development Goals:
GOAL 3: Good Health and Well-beingGOAL 9: Industry, Innovation and InfrastructureGOAL 16: Peace and Justice Strong Institutions
Date of last update
16.01.2018 – 21:09 CET