Shock Therapy

DEFINITION of 'Shock Therapy'

A sudden and dramatic change in national economic policy that turns a state-controlled economy into a free-market one. Characteristics of shock therapy include the ending of price controls, the privatization of publicly-owned entities and trade liberalization. Shock therapy is intended to cure economic maladies such as hyperinflation, shortages and other effects of market controls in order to jump-start economic production, reduce unemployment and improve living standards.

BREAKING DOWN 'Shock Therapy'

Shock therapy can entail a rocky transition while prices increase from their controlled levels and people in formerly state-owned companies lose their jobs, creating citizen unrest that may lead to forced changes in a country's political leadership. The opposite of shock therapy, gradualism, indicates a slow and steady transition from a controlled to an open economy.


Economist Jeffrey Sachs is widely associated with shock therapy. He developed a plan of shock therapy for post-communist Poland in 1990, for post-communist Russia in 1992 and for several other countries, including Bolivia and Chile. Sachs did not like the term "shock therapy," which he said was coined by the media and made the reform process sound more painful than it actually was.

RELATED TERMS
  1. Financial Therapy

    Financial therapy merges finance with emotional support to help ...
  2. Economic Shock

    An event that produces a significant change within an economy, ...
  3. Statement Shock

    The shock associated with opening an investment statement and ...
  4. Demand Shock

    A sudden surprise event that temporarily increases or decreases ...
  5. Supply Shock

    An unexpected event that changes the supply of a product or commodity, ...
  6. Reverse Culture Shock

    The shock suffered by some people when they return home after ...
Related Articles
  1. Retirement

    The Bright Side Of The Credit Crisis

    Find out how this tough economic period can be a learning experience for all.
  2. Markets

    5 Economic Effects Of Country Liberalization

    Liberalization provides new opportunities for diversification and profit.
  3. Markets

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  4. Markets

    How a Weaker Pound Could Absorb Market Shocks

    Markets remain nervous after Brexit, which sent the British pound plummeting. Yet, we point out some of the long-term benefits for the UK from a weakening currency that many investors are forgetting.
  5. Markets

    Edwards Lifesciences Corp (EW)

    Edwards Lifesciences Corp competes in the cardiovascular medical technology industry. This article highlights the operations, trends and growth for the company.
  6. Personal Finance

    All Marketplace plans must cover Essential Health Benefits

    All Marketplace plans must cover Essential Health Benefits Regardless of whether you choose a Bronze, Silver, Gold or Platinum plan, certain essential health benefits must be covered and your ...
  7. Markets

    The Importance of Commodity Pricing in Understanding Inflation

    Commodity prices are believed to be a leading indicator of inflation, but does it always hold?
  8. Managing Wealth

    Controller: Career Path & Qualifications

    Find out what it takes to become a financial controller, starting with undergraduate educational requirements and moving into professional certification.
  9. Managing Wealth

    Controller: Job Description & Average Salary

    Learn about becoming a controller and what the job entails. Understand the education and skills required, and how much money you can expect to make.
  10. Investing

    Banks Survive Economic Shock in Fed Stress Test

    America's most systemically important banks proved able to withstand a severe economic shock according to the Fed's annual stress test.
RELATED FAQS
  1. How long does the average demand shock affect pricing?

    Read about the nature of demand shocks in an economy, how they correlate with prices, and what determines the length and ... Read Answer >>
  2. What are some common examples of demand shock?

    Discover some common examples of demand shock. Demand shocks lead to rapid increases or decreases in demand that catch everyone ... Read Answer >>
  3. What are common examples of aggregate demand shocks?

    Learn about some common examples of demand shocks in the economy, how they occur and function, and what it means to aggregate ... Read Answer >>
  4. Why do supply shocks occur and who do they negatively affect the most?

    Take a deeper look at the nature of supply shocks, an economic phenomenon that dramatically changes the equilibrium level ... Read Answer >>
  5. What does it mean that an investor faces binary outcomes when investing in drug companies?

    Learn why investments in biotech and drug companies can result in what are called binary outcomes, and understand why these ... Read Answer >>
  6. How does a nation transition from a socialist economy to a free market economy

    Read about why and how markets transition from socialism to capitalism, and learn how privatization can become hijacked by ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center