Transcript Gaidar’s “Shock Therapy”

Gaidar’s “Shock Therapy”
By Kirsty Williams
Yegor Gaidar
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19th March 1956 – 16th December 2009.
Came from a family with strong political background.
Graduate from Moscow State University.
During Gorbachev’s Perestroika he joined Yeltsin’s
camp.
In 1991 he became a member of Yeltsin’s
Government.
What is Shock Therapy?
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First introduced by Jeffrey Sachs who saw its roots in the
revival of Germany in the 1940’s.
The process by which price and currency controls are
removed suddenly.
The withdrawal of state control over industry.
Trade liberalization.
The shock therapy approach is based upon the premise that
spontaneous generation of markets and market institutions
will occur (and will do so rapidly), given the absence of state
interference. (Hall & Elliott, 1999:1)
Why Shock?
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The alternative to shock therapy was one of
gradual reform.
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A push from the Western Governments who
were eager to ‘see the Communist system
destroyed root and branch’ (Steele, 1994:298).
The expectation of Shock Reform
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‘everyone will find life harder for
approximately six months, then prices would
fall and goods will begin to fill the market. By
the autumn of 1992 the economy will have
stabilised’ (Steele, 1994:295)
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“experts…predicted that shock therapy would
displace people for a short time but lead to
growth before long” (Gerber & Hout, 1998:3)
The Immediate Consequences
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Overnight, prices “immediately skyrocketed
ten- to twelvefold” (Chubarov, 2001:200)
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Masses of the population woke to find
themselves below the poverty line, unable to
afford essentials.
Negative Effects
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Prices remained high:
“companies cut output but continued to raise their own prices
to compensate for the higher cost of their inputs” (Steele,
1994: 301)
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Hyperinflation:
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“Inflation had wiped out millions of people’s savings in a
matter of a few weeks” (Steele, 1994:303)
Increase in Criminal Activity
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People who could not afford to buy, stole instead.
Negative Effects
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Mass Unemployment
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By mid-year approximately a million Russians were
unemployed. Women were in the majority as companies
tried to reduce their spending, crèche and child care
facilities were stopped. (Steele, 1994)
Many had to wait for their wages and pension.
–
“the economy was soon faced with a massive shortage of
cash simply to pay people…millions were told to wait one or
two months before getting paid, or were sent away from
their factories on temporary unpaid leave” (Steele,
1994:302)
Negative Effects
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Decline in living standards:
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Decline in Birth Rate:
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Due to unemployment and the lack of payment of wages.
Having a baby was a luxury that not everyone could afford.
Lower Life Expectancy
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Due to poor living conditions and a poor diet, as a result of
inflation of prices.
“Consumption of food dropped sharply, as people changed
their diet to try and make ends meet” (Steele, 1994:303)
Positive Effects
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Supply and Demand principle was established
Basic goods were now available.
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Money was actually being used for its purpose.
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“Gaidar’s measures released goods into the
shops…although they moaned about the prices, many
consumers nevertheless could go out shopping again”
(Service, 2002:139)
“Despite the horrendous rate of inflation, the ruble
recovered its function as money, as a means of circulation
and payment, that it had nearly lost in the Soviet economy”
(Chubarov, 2001:202)
A rise in financial services.
In Conclusion…
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It was not the ‘quick fix’ that they had hoped for. They
had shown little compassion for the population that
were to be affected by these reforms.
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“Using five surveys spanning from February 1992-1996, we
analyse trends in employment, earnings, and the
mechanisms of income…our results show that there had
been more shock than therapy in post soviet Russia….self
employment is still rare…incomes are down and
unemployment is up.” (Gerber & Hout, 1998:3)
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However, these reforms, though unpopular at
the time, were made so that there was no
possibility of Russia returning to the Soviet
Command Economy
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‘Gaidar’s price control had achieved one of its
aims. He had broken the last elements of the
state planning system’ (Steele, 1994:305)
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The basic principles of liberalisation remain
intact. The state now considers intervention
in the economy only when emergency
circumstances warrant it. (Gerber & Hout,
1998:5)
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“Despite the temptation to blame shock
therapy for this fall, countries (like Ukraine)
that tried a ‘soft landing’ into economic
reform faired even worse.” (Sakwa,
2002:285)
References
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Bacon, E & Wyman, M. (2006) Contemporary Russia. United Kingdom,
Palgrave Macmillan.
Chubarov, A. (2001) Russia’s Bitter Path to Modernity. New York, The
Continuum International Publishing Group Inc.
Gerber, T & Hout, M. (1998) More than shock therapy. In, American Journal of
Sociology, Vol 104(1) pp1-53. Chicago, University of Chicago Press.
Hall, T & Elliott, J. (1999) Poland and Russia One Decade after Shock Therapy.
In, Journal of Economic Issues. Vol 33, pp 1.
Sakwa, R. (2002) 3RD Ed. Russian politics and society. London, Routledge.
Service, R. (2002) Experiment with a People, Russia. London, Macmillan.
Smith, G. (1999) State-Building in Russia. New York, M.E. Sharpe Inc.
Steele, J. (1994) Eternal Russia. London, Faber and Faber Limited.