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In Economics, what is Shock Therapy?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 20 November 2016
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In the realm of economics, shock therapy refers to a phenomenon that takes place when actions are taken that generate immediate and rather drastic reforms in the economy. In many instances, governments drive the shock therapy by suddenly waiving any controls on the prices of goods and services within a given market, or ending government subsidies to specific industries. The idea behind this type of economic strategy is to literally create widespread change within the economy in ways that are anticipated to ultimately improve the stability of that economy. Presumably, the business world begins to identify ways that make it possible to take advantage of the new circumstances, once the initial shock of the sudden changes has passed.

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There are a number of strategies that can be utilized as shock therapy within an economy. Along with releasing currency and price controls, a government may launch an effort to privatize certain sectors of the business world by encouraging the privatization of assets and businesses that were once publicly owned. Another approach to shock therapy involves trade liberalization, effectively dispensing with trade on imports or exports. With any of these strategies, the initial reaction is usually one of disbelief, followed by the emergence of ideas on how to capitalize on the new order of things. In the best possible scenario, the sudden changes help to promote economic reform and strengthen the economy in ways that would not have been possible had the government taken no steps to implement these severe changes.

While the concept of shock therapy has many proponents, this approach also has detractors. Those who support the idea of this type of rapid and severe change note that in an economy that is stale and shows no signs of improving, these types of intense changes are sometimes necessary. With this approach, the therapy serves to shake things up enough that consumers and businesses operating within the country are motivated to create an economic situation that is ultimately better for everyone involved.

Detractors of shock therapy point to the fact that too much change within a short period of time has as much potential to drive the economy downward as it does to move it upward. As a result, people and businesses may be in worse shape after the therapy effort is launched. Those who oppose the use of shock therapy to bring about economic change prefer methods that involve making incremental changes that are measured before additional changes are initiated.

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