John Marangos

The Political Economy of Shock Therapy

The collapse of the centrally administered economies gave rise to a transition process towards economic systems based on market relations. Nevertheless, the transition process is not restricted to the economic field. The political and ideological aspects of the transformation are fundamental. As such an analysis of the shock therapy model requires the exposition of what I define the primary elements of the shock therapy model. 1) The body of economic analysis used by the shock therapy model. 2) What structure of society the shock therapy model desires to achieve? 3) The speed of the reforms. 4) The political structure consistent with the model. 5) The consistent ideological structure. After the identification of the primary elements of the shock therapy model the next step is to identify secondary elements, the desired changes with respect to: 1) price liberalisation-stabilisation; 2) privatisation; 3) institutional structure; 4) monetary policy; 5) fiscal policy; 6) international trade and foreign aid; and 7) social policy. The analytical framework developed makes possible to understand the shock therapy model from a new and more enlightening perspective. We are better able to comprehend the complexities involved and the disagreements about the reform process. Copyright 2002 by Blackwell Publishers Ltd

Was Shock Therapy Really a Shock

The shock therapy model derived its name from Poland’s stabilization and liberalization program, initiated on January 1, 1990, which became known as “shock therapy” or “big bang.” The countries that followed with the shock therapy approach were Czechoslovakia (starting January 1991), Bulgaria (February 1991), Russia (February 1992), Albania (July 1992), Estonia (September 1992), and Latvia (June 1993). In summary, the shock therapy model was a neoclassical model of transition advocating the immediate implementation of the necessary reforms to establish a free market economy. The shock therapy model of transition, the dominant model of transition, was attractive to transition governments, international financial institutions, and mature market economies due to its simplicity and narrow transition policies recommended. “Get prices right” and the remaining elements of a market capitalist system would, more or less, fall into place was an antithesis to an institutionalist approach to transition. The shock therapy approach abstracted from the more insightful and complicated institutionalist dimensions of the transition process. The transition process was characterized by uncertainty and the absence of any historical paradigms. Hence the Economist’s metaphor about the transition process was that there was no known recipe for unmaking an omelette (“No Halfway House” 1990, 18). Few economists attempted to approximate the initial conditions of centrally administered economies with the stabilization programs initiated in the mature market economies. For example, Jeffrey Sachs (1993, 3) argued “the prototypical case in Europe that I will refer to is that of Spain, which in many ways provides a kind of guidepost to the path that the economies of Eastern Europe should follow.” Sebastian Edwards (1992, 131)

A Political Economy Approach to the Neoclassical Model of Transition

The neoclassical model of transition from a centrally-administered socialist economic system to a market-based economic system was implemented in Russia and Eastern Europe. The neoclassical process took the form of either shock therapy or gradualism. However, each approach actually involved a combination of shock therapy and gradualist policies, making the distinction between the two approaches unfounded. In addition, both approaches suffered by the innate inadequacies of neoclassical economic analysis as being politically/institutionally naked. Both shock therapy supporters and gradualist neoclassical economists did not provide a specific process of institutional development, favouring a gradual market-driven institutional outcome. With regard to the political structure, democracy was inconsistent with shock therapy, while active state intervention during transition was inconsistent with the ultimate goal of the gradualist neoclassical economists of competitive capitalism. Copyright 2002 The American Journal of Economics and Sociology.

Was Shock Therapy Consistent with Democracy

The transition process in Russia and Eastern Europe was dominated in the literature and in policy making by the shock therapy process. However, shock therapy was short-lived. Governments that implemented shock therapy were not able to sustain the reform program since they lost power after the first term as a result of unfavourable electoral results. The new governments implemented gradualism. While after the first term shock therapy governments were substituted by gradualists, a government in favour of shock therapy never substitute any gradualist governments. The aim of the paper is to demonstrate that shock therapy was inconsistent with a democratic process of decision-making. Actually shock therapy was only consistent with a pluralistic political structure in the tradition of Hayek, Buchanan and Friedman. Foreign aid was inadequate to ensure the continuation of the shock therapy reforms within a democratic environment.

Alternative paths to the transition process

Purpose – The purpose of the paper is to develop alternative paths to the transition process as a result of alternative models of transition. Design/methodology/approach – A political economy methodology to the transition process results in alternative transition models. As a result five alternative models of transition come into being. Findings – Transition models can be distinguished on the basis of economic analysis, speed and the political structure. Each model recommended a set of economic policies to facilitate the transition process. The adoption of gradualist processes of transition – except in the case of shock therapy – requires a sequence by which the reforms should be introduced. Originality/value – The paper contributes to the transition literature by developing a set of economic policies combined with a sequence path for each transition model.

The Evolution of the Anti-Washington Consensus Debate: From ‘Post-Washington Consensus’ to ‘After the Washington Consensus’:

The term ‘Washington Consensus’, as Williamson the father of the term conceived it, in 1989, was a set of reforms for economic development that he judged ‘Washington’ could agree were required in Latin America. However, the Washington Consensus has been identified as a neoliberal manifesto and as a consequence an anti-Washington Consensus was initiated, as calls were made for the establishment of a different set of policies, such as the ‘Post-Washington Consensus’, ‘Washington Contentious’ and ‘After Neoliberalism’. Lately, even Williamson has come up with a new set of policies, ‘After the Washington Consensus’. The aim of this paper is to investigate the different interpretations and alternatives of this controversial set of policies, and to reveal that the evolution of the debate conceptualizes the evolution of economic thought regarding the required policies for economic development.

The shock therapy model of transition

The aim of this paper is to develop a comprehensive analysis of the shock therapy model of transition. As such the model requires an analysis of what I define as the primary elements: economic analysis, definition of a good society, speed, political structure, ideological structure and initial conditions. Also it is necessary to develop an appropriate mechanism of implementation, what I define as the secondary elements: price liberalisation-stabilisation, privatisation, institutional structure, monetary policy and the financial system, fiscal policy, international trade and foreign aid and social policy. In addition, there was a need for a strategy by which the reform program would be implemented. In the conclusion an assessment of the shock therapy model as a political strategy takes place.

The impact of adverse initial conditions and the resulting speed and sequence of reforms in determining the delayed EU membership of Bulgaria

Abstract The subject of the paper is the analysis of the speed, sequence and path of a formerly centrally administered economy, Bulgaria, to a market economy. Comparing the macroeconomic developments and transition reforms of Central and Eastern European (CEE) countries, Bulgaria is lagging behind. It is concluded that the stop-and-go nature of the conducted Bulgarian reforms and the lack of commitment to deep-seated reforms by successive governments were due to the adverse initial economic conditions that the country experienced during transition, as well as the intense external shocks the country endured. These factors were the main barriers to attaining sustained growth, and contributed to Bulgarias delayed entrance to the EU.

The Role of Risk as an FDI Barrier to Entry during Transition: The Case of Bulgaria

Abstract This article reports the results of a questionnaire that was designed to extract information regarding the determinants of foreign direct investment (FDI) in Bulgaria during the post-communist decade of the 1990s. We surveyed established multinationals in Bulgaria in order to discover their perceptions regarding the business environment. From the results of the survey, 52% of the total number of foreign investors stated that their investment in Bulgaria is of high risk. We explored whether the high risk environment in Bulgaria has been affected either by the foreign entry mode, the prior trade relations, the invested amount, the sector that the multinational operates, and finally the origin of the MNE.

Motives for Foreign Direct Investment in the Manufacturing Sector in FYR Macedonia

The aim of this article is to provide clear insight into the key FDI motives in the manufacturing sector in FYR Macedonia and suggest recommendations that might be applied in attracting FDI. Based on questionnaire data on 79 manufacturing companies, the manufacturing sector was found to perceive the low cost of unskilled labour as the strongest FDI driving force, followed by ownership advantages and geographical proximity. Contrary to the prevailing consensus in the literature, market factors seem to exert very limited influence in attracting investment, except for investment targeting the local market. One major lesson that can be drawn is that generalised investment promotion policies and strategies might not work equally well for all manufacturing industries and might have no impact in attracting FDI in particular cases. Instead, policies should employ a tailor-made approach, taking account of specific features of the targeted industries, companies and countries of origin.