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.

  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. Economics

    Understanding Donald Trump's Stance on China

    Find out why China bothers Donald Trump so much, and why the 2016 Republican presidential candidate argues for a return to protectionist trade policies.
  9. Markets

    Will Paris Attacks Undo the European Union Dream?

    Last Friday's attacks in Paris are transforming the migrant crisis into an EU security threat, which could undermine the European Union dream.
  10. Investing

    World Bank Data For Dummies

    Developing countries can't always afford to track the data crucial to setting the right economic policies and programs. That's where the World Bank steps in.
  1. How do you make working capital adjustments in transfer pricing?

    Transfer pricing refers to prices that a multinational company or group charges a second party operating in a different tax ... Read Full Answer >>
  2. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Historically, because people in the United States have shown a higher propensity to consume, this is likely the more important ... Read Full Answer >>
  3. When do I need a letter of credit?

    A letter of credit, sometimes referred to as a documentary credit, acts as a promissory note from a financial institution, ... Read Full Answer >>
  4. Is Japan an emerging market economy?

    Japan is not an emerging market economy. Emerging market economies are characterized by low per capita incomes, poor infrastructure ... Read Full Answer >>
  5. When has the United States run its largest trade deficits?

    In macroeconomics, balance of trade is one of the leading economic metrics that determines the trading relationship of a ... Read Full Answer >>
  6. Which is more important to a nation's economy, the balance of trade or the balance ...

    There is no question the composition of a country's balance of payments is more important than its balance of trade. This ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center