In economics, shock therapy refers to the sudden release of price and currency controls, withdrawal of state subsidies, and immediate trade liberalization within a country, usually also including large-scale privatization of previously public-owned assets.
Economics is a social science concerned with the factors that determine the production, distribution, and consumption of goods and services.
Privatization, also spelled privatisation, may have several meanings.
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As shock policy, the term was coined by economist Milton Friedman.
Milton Friedman was an American economist who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy.
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In time, it became absorbed into the group of ideas about economics, that are sometimes referred to as economic liberalism.
Economic liberalism is the ideological belief in organizing the economy on individual lines, meaning that the greatest possible number of economic decisions are made by individuals or households and not by collective institutions or organizations.
The economist Jeffrey Sachs coined the expression of shock therapy.
Jeffrey David Sachs is an American economist and director of The Earth Institute at Columbia University, where he holds the title of University Professor, the highest rank Columbia bestows on its faculty.
The alleged difference between the two shock expressions lies only in the degree of economic liberalisation.
Sachs' ideas 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.
Augusto José Ramón Pinochet Ugarte was President of Chile between 1973 and 1990 and Commander-in-Chief of the Chilean Army from 1973 to 1998.
The reforms, dubbed a shock policy at the time by Milton Friedman, were based on the liberal economic ideas centred on the University of Chicago.
The University of Chicago is a private research university in Chicago, Illinois and one of the world's leading and influential institutions of higher learning, with top ten positions in numerous rankings and measures.
The term was truly born after Bolivia successfully tackled hyperinflation in 1985 under Gonzalo Sanchez de Lozada, using Sachs' ideas.
Gonzalo Sánchez de Lozada Sánchez de Bustamante, familiarly known as "Goni", is a Bolivian politician and businessman, who served as President of Bolivia for two non-consecutive terms.
In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.
Bolivia, officially known as the Plurinational State of Bolivia, is a landlocked country located in western-central South America.
In particular, Sachs and Sanchez de Lozada cited West Germany as inspiration where, during a period over 1947–1948, 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.
West Germany is the common English name for the Federal Republic of Germany or FRG in the period between its creation on 23 May 1949 to German reunification on 3 October 1990.
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 in the 1997 Asian Financial Crisis.
The International Monetary Fund is an international organization headquartered in Washington, D.C., of "189 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world."
The Asian financial crisis was a period of financial crisis that gripped much of East Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.
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 believed that it helped deepen them unnecessarily and created unnecessary social suffering.
Sachs' ideas were applied to the post-communist states in their transition to capitalist systems with very mixed results.
Some countries that used shock therapy did better than those that did not.
To further cloud understanding, China made its highly successful transition in a gradualist fashion.
China, officially the People's Republic of China, is a sovereign state in East Asia.
One opinion is that successful market economies rest on a framework of law, regulation, and established practice that cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised, and subject to state ownership of assets.