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. Fundamental Analysis

    How Influential Economists Changed Our History

    Find out how these five groundbreaking thinkers laid our financial foundations.
  2. Insurance

    The Causes And Effects Of Credit Shocks

    These shocks cycle through history. Find out what you need to know to avoid the alarm bells.
  3. Economics

    Adam Smith: The Father Of Economics

    This free thinker promoted free trade at a time when governments controlled most commercial interests.
  4. Options & Futures

    Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  5. Economics

    Do Deflationary Shocks Help Or Hurt The Economy?

    Find out how deflationary shocks can both benefit and hurt consumers and businesses.
  6. Options & Futures

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  7. Forex Education

    Free Market Maven: Milton Friedman

    As proponent of free market capitalism, this economist changed the way the world's economies operate.
  8. Investing

    Can Europe’s QE Be A Stimulus For U.S. Investors?

    Finding value in today’s markets has been difficult, so many investors are turning to opportunities outside of the U.S. But where should they look?
  9. Economics

    Benefits From A Tango Of China-US Trade and Debt

    China has been accumulating US debt for many decades. Here's why it continues to do so, and the risks and benefits of this for both the US and China.
  10. Economics

    10 Countries With The Biggest Forex Reserves

    Without adequate reserves, a nation's economy can grind to a halt. Here are the 10 nations with the biggest forex reserves.

You May Also Like

Hot Definitions
  1. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage.
  2. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  3. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  4. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  6. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
Trading Center