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.

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