Gaidar’s “Shock Therapy”

By Kirsty Williams

Yegor Gaidar

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?

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?

The alternative to shock therapy was one of gradual reform.

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

‘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)

“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

Overnight, prices “immediately skyrocketed ten- to twelvefold” (Chubarov, 2001:200)

Masses of the population woke to find themselves below the poverty line, unable to afford essentials.

Negative Effects

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)

Hyperinflation:– “Inflation had wiped out millions of people’s savings in a

matter of a few weeks” (Steele, 1994:303)

Increase in Criminal Activity– People who could not afford to buy, stole instead.

Negative Effects

Mass Unemployment– 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

Decline in living standards:– Due to unemployment and the lack of payment of wages.

Decline in Birth Rate:– Having a baby was a luxury that not everyone could afford.

Lower Life Expectancy– 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

Supply and Demand principle was established Basic goods were now available.

– “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)

Money was actually being used for its purpose.– “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…

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.

– “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)

However, these reforms, though unpopular at the time, were made so that there was no possibility of Russia returning to the Soviet Command Economy – ‘Gaidar’s price control had achieved one of its

aims. He had broken the last elements of the state planning system’ (Steele, 1994:305)

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)

“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

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.