Yeltsin had commenced a reform program in the year 1991, a strategy where the country would change into a market economy. They planned on price liberalization, ending subsidies and privatizing industries. The shock therapy was put in place to fasten the process of turning the country into a market economy. The underlying problem was that incapable company would quickly go out of business resulting in a vast number of employees getting unemployed.
What is shock therapy?
The term ‘Shock Therapy’ refers to the sudden release of price and currency controls, withdrawal of state subsidies and immediate trade liberalization within a country. This process also includes the privatization on a wide range of public-owned assets and businesses. This is a simple solution where in order to improve a countries economy, the government introduces reforms to cut their losses and start fresh.
Jeffrey Sachs was the man behind the Shock Therapy, and he advocated free-market reforms for Eastern European countries like Poland and Russia in the early 1990s. He claimed that the name made it sound more painful than it actually was at the time.
The consequence of Shock Therapy in Russia in 1992
During the cold war in 1992, Russia had made a sudden decision to change their ideology. This led to further damage as the consequences were dreadful during the cold war. The model of economic transition in Russia, which was influenced by the World Bank and the international monetary fund was called the Shock Therapy. The shock therapy ruined the economy of Russia as well as East European countries.
- When the reforms were implemented, about 90 per cent of industries in Russia were sold to rich individuals or companies that were private.
- The restructuring was carried out by market-driven forces rather than the policies implemented by the government. This caused most industries in the region to disappear. The most top rated and valuable industries that were once dominating were now placed at an undervalued position. The worst part was that the industries were sold at throwaway prices, causing major disruption in the market. This was infamously known as ‘ The largest garage sale in history’ which took place in 1992.
- Another condition that worsened the situation was the high rate in inflation. Ruble, which is the currency of Russia, had lost most of its value considerably. This resulted in most people losing all their hard-earned savings.
- When we look into the agriculture and food sector, the collective farms had disintegrated. This left the people of Russia without any food security. The old trading structure of Russia had broken down without having a possible alternative in its place. This led to them importing food from other countries.
- The poverty-stricken people and small business owners were the most affected during this time. Furthermore, the government later withdrew its subsidies on various goods and services which had pushed people into poverty.
- With this being the situation in Russia, the Mafia took control over the economic functioning and activities in Russia. Privatization had led to greater inequalities among the people worsening the effects of the cold war.
- The establishment of democracy was not given any priority. Constitutions of the former republics of the USSR gave wide powers to the President. In a few eastern European countries, the President turned into dictators.
The economies of the eastern European countries including Russia began to revive from the year 1998 after a six-year struggle since 1992.
Why did shock therapy fail in Russia?
Notable economist Joseph Stiglitz connects all these ideas together to explain as to why shock therapy failed in Russia.
Using the idea of property rights, Stiglitz uses the idea of Adam Smith’s invisible hand to explain the failure in shock therapy. In the presence of major corruption, a lack of institutionalized law and order and artificially depressed exchange rates, the free market created by shock therapy in Russia had formulated to strip the assets of the country and remove the capital abroad. This took place rather than the mutually beneficial race controlling the market in commodities.
With the large Soviet nationalized industries becoming privatized, the situation had become such that major markets operated in a monopoly which was owned by a few powerful individuals who were in contact with the government of Boris Yeltsin.
Undertaking rapid economic and political change at the same time, as well as the policies of shock
therapy, left Russia a disoriented state. Socially volatile, and hijacked by oligarchs, Yeltsin’s reforms brought Russia to the verge of collapse. The last time such monumental change in Russian politics happened was the 1917 revolutions and short-lived Provisional government, ended with the Bolshevik taking over and 70 years of Communist rule.
During shock therapy, it briefly appeared that past events might repeat themselves. Living with the memories of the Soviet past, the policies of shock therapy gave Russia the appearance of democracy and capitalism, while in reality, it became a hybrid of authoritarianism and democracy, command and capitalism, past and present. Since 1998, the Russian economy has recovered, aided by rising natural resource prices and more competitive domestic production, securing the status of Vladimir Putin and the place of the Russian state in the economy. Bolstered by strong leadership and economic growth, Russia
has resumed its place amongst the world’s power elite, but cynicism about Yeltsin’s contribution persists.
The Yeltsin legacy remains incomplete, as the painful memories of shock therapy caused many Russians to consider whether free markets and democracy were in their country’s best interest. Due to the relatively brief period of time that has passed and the fact that shock therapy’s disturbance still reverberates through social and economic circles, scholarship on the Yeltsin era has yet to promulgate a definitive conclusion. However, a general consensus about the impracticality of Yeltsin’s program which essentially enacted change too liberally and too quickly has found scholarly consensus. The answers to these questions are still being worked out, and will undoubtedly be revised by future historians as Russia’s natural resources, the catalyst for its current prosperity, begin to expire.
Regardless of the Effects of shock therapy, we must take into consideration the efforts of society as well into consideration. They have stood by and bared the economic backlash, especially small business owners and still come out strong in a matter of six years. The year 1992 will be known as one of the worst years yet a knowledgeable year.