Reports on the paper:

WHAT IS
SHOCK

 THERAPY?


WHAT DID IT DO IN

POLAND AND RUSSIA?


BY PETER MURRELL


in Post-Soviet Affairs, Volume 9, 2.April-June 1993. pp. 111-140.

Nicoline Blom

Since the fall of communism, Eastern Europe and Russia have been restructuring their economies in order to create a Western-type, competitive market. All the nations have concluded that a command economy is not viable and are converting to a market economy. Yet, there are many different methods in which this can be done. The most prominent theories are shock therapy and gradualism. David Lipton and Jeffrey Sachs are the leading advocates of shock therapy. In the article, "What is Shock Therapy? What Did it do in Poland and Russia?", by Peter Murrell, the author refutes Lipton and Sachs' theories and he believes in an altered version of gradualism, which he calls an evolutionary or organic view of society.

Peter Murrell considers the difference between shock therapy and evolutionary "reflects fundamental disagreements about the way human societies function, differences in judgments on matters of politics, psychology, and society, as well as economics." (Murrell, p.116) Although this statement is quite vague, Murrell specifies differences between the two approaches. One of the differences is the behavior of the economic agents. The author explains that shock therapists believe that economic agents will be functional in a new economic society because reformers are only concerned with present issues and incentives, not with the historical means in which these agents were formed. The evolutionists believe that these agents are formed by both historical and current issues. That these agents "accumulate knowledge in a learning-by-doing process". (Murrell, p.119)

Another difference is the belief by shock therapists that the technocrats who create the reforms should be outsiders who have an objective point of view. Murrell believes that the outside technocrats are just familiar with the theories of economics and this is not enough. He believes reforms must be made "intertwined with the social system". (Murrell, p.120)

Shock therapists believe in top-down reforms. This entails the elite of the nation to command the reforms and society must adhere to them. Evolutionists feel that "formal policies will be most effective if they are a product of the deeper informal structures of society. Law can be a powerful tool, but only if it is created by society rather than imposed upon it." (Murrell, p.120)

Peter Murrell reveals that the evolutionist believes in a gradual change congruent with society and is "efficient only if it responds to real economic needs". (Murrell, p.122) He believes change must be bottom-up so the people do not reject the reforms or are unable to adjust.

I agree with some of Peter Murrell's points, yet, I must say I am a shock therapist. I believe in grass-root movements, such as the author's bottom-up theory, but they are not always successful. If reforms were implemented gradually the people would have no incentive to adjust and improve, as they do with shock therapy. Murrell believes that reforms should be "responding to real, immediate needs rather than imagined long-term ones." (Murrell, p. 121) I disagree wholeheartedly. I believe that the long-term ideals are what a nation should be striving for in order to become economically stable. Short-term solutions only relieve the pressure at the moment while long-term problems persist. I agree "As one wit has put it, if the British were to shift from left-hand-side drive to right-hand-side drive, should they do it gradually, say, by just shifting the trucks over to the other side in the first round?" (Sachs, p.7)

Sachs, Jeffrey. THE ECONOMIC TRANSFORMATION OF EASTERN EUROPE: THE CASE OF POLAND. economics of Planning, 1992, 25, pp.5-19.

 

John Papantonakis

Peter Murrell is a respected economist who's focus lately has been on the economic changes taking place in Eastern Europe. His main thrust has been to discredit Shock therapy; and to promote instead policies of evolution (gradualism). His concern has been that Shock therapy is not the proper means with which economic change can take place, mainly because of its top-down approach. To full understand his argument, one must analyze his assumptions as well as his strategies for proper economic transformation to the market economy. One must therefore examine his paper, "What is Shock therapy? What did it do in Poland and Russia?"

Murrell argues that the two policies, Shock versus Gradualism, are not only different in the means which they attempt to reach the ends of market economies; but that they show philosophical extremes as well. That is, their differences are not only technical but fundamental as well.

Murrell uses the paper of Lipton and Sachs to define Shock therapy. According to Murrell, Shock therapy is a radical policy instilled by a group of technocrats that is designed to cause economic hardship early, but stability later (Murrell 113-114). He says that shock therapy assumes that economic conditions will respond quite rapidly. After all, "emphasis is on short-term efficiency gains flowing from macroeconomic Stabilization", is a statement coming directly from Lipton and Sachs (1990a pp 89-90). What Murrell objects to is that economists such as Lipton and Sachs assume that technocratic solutions can be easily instilled (Murrell 114). Murrell criticizes Shock therapy because it avoids all political means; and assumes that it can be implemented by a few non-politically tangible figures. He concludes that Shock therapy is theoretically efficient; but realistically impossible that it can be implemented by a few non-politically tangible figures. Also, the fact that Shock therapy attempts to move as fast as possible in destroying or replacing existing economic institutions before the opposition has time to gather surmountable strength is a major flaw of Shock therapy. The reason is that it lacks potential continuity.

On the other hand, the Gradualist approach is preferred much more by Murrell because of its ease in application purposes. Unlike Shock therapy which assumes to have all the right answers, the Evolutionary viewpoint takes a "learning-by-doing" approach. This method, according to Murrell, values the society factor (Murrell 120). It values the concept that before society can use new rules it must be able to understand them; that is be able to apply them. In summation then, the evolutionary (gradual) standard, interprets market transformation progress to be judged by the number of new small businesses in the private sector. This means a bottom-up transformation that stars in the small private sector and eventually leads to the giant state sector. Under the Evolutionary process, society has a great voice in the progress of economic transformation.

Murrell's strategy for economic transformation can thus be explained as the need for an engine in small private business, not injured by credit rations and etc., that slowly builds closer and closer to encourage market transformation (Murrell 123). Notice how this fundamentally differs with the Shock therapy which assumes the top-down approach on its people; in hope of changing their institutions and past ways of life. Murrell belies that because this 'bottom' was injured in Poland during the credit crunches of Shock therapy is why marketization did not succeed.

According to Murrell's thinking, Shock therapy imposed an ideal of laws on its people that the people were not willing to accept. As a result, Shock therapy was abandoned in September of 1990, just 9 months after it had begun in Poland (Murrell 128-129). He provides reasons of non-coordination of the technocrats with society; and even goes as far as saying that the Polish economy was doing just well in its transformation immediately before the Shock therapy was instilled. That is the budget had been close to being balanced, the inflation rate was showing signs of decreasing and industrial output had picked up in the last quarter of 1989 (Murrell 127-128).

Murrell's arguments are quite hard to argue with when one takes into account what has occurred in Poland. Yet, the Czech Republic was able to achieve market transformation using Shock therapy. How can Murrell and the last situation which I described be compatible. One finds it a difficult question to answer; yet Murrell answers this in a roundabout way. Murrell allows the assumption that, under Gradualism, each country ought to pick its own way of market transformation, depending on where they are on the evolutionary scale (Murrell 122-123). In that case then, it is highly possible that the Czech Republic could have been in a much better position to transform than Poland. That would account for the former's success and the latter's not so great results. An argument that furthers Murrell's thinking is the fact that Poland has gone back to the Gradualism approach. This is the policy it had before shock therapy. This could prove to be a momentary stance until Poland is mature enough politically and socially to really commit to the transformation. Of course, Murrell does not say this. His argument for Gradualism, though, may imply this.

A point where he may be attacked quite well is his assumption that the Shock instruments must be instilled as quickly as possible to avoid defeat by the opposition. I do not think that this is the case. If the people are really ready, they will sacrifice. The perfect example is the Czech Republic. Where I have to agree with Murrell is the need for the Bottom-up strategy. If the Czech Republic had not achieved a good support from the bottom then transformation may not have been achieved yet. That is, 'the engines' must exist in the bottom. In Poland they did not. The cries for reform were there; but the driving engines had not been turned on. This is why I accept Murrell's stance in favor of Gradualism. The technocrats may have the answers; but they must also weigh the ripeness factor.

 

 

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