Shock Therapy

AAA

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.

INVESTOPEDIA EXPLAINS '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. Mixed Economic System

    An economic system that features characteristics of both capitalism ...
  2. Jeffrey Sachs

    An American economist who is director of the Earth Institute. ...
  3. Trade Liberalization

    The removal or reduction of restrictions or barriers on the free ...
  4. Nationalization

    Refers to the process of a government taking control of a company ...
  5. Milton Friedman

    An American economist and statistician best known for his strong ...
  6. Privatization

    1. The transfer of ownership of property or businesses from a ...
Related Articles
  1. Adam Smith: The Father Of Economics
    Economics

    Adam Smith: The Father Of Economics

  2. Nobel Winners Are Economic Prizes
    Options & Futures

    Nobel Winners Are Economic Prizes

  3. Do Deflationary Shocks Help Or Hurt ...
    Economics

    Do Deflationary Shocks Help Or Hurt ...

  4. Explaining The World Through Macroeconomic ...
    Options & Futures

    Explaining The World Through Macroeconomic ...

comments powered by Disqus
Hot Definitions
  1. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  2. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  3. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center