Bryan Caplan  

The Myth of Shock Therapy

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If Russia really had "shock therapy" in the early nineties, how come it didn't move out of the bottom decile of the Economic Freedom of the World index until 2002? 

Is moving from the bottom decile to the next-to-bottom decile over the course of eleven years really what people have in mind when they sneer at Russia's ruination at the hands of "market fundamentalist" reformers?


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COMMENTS (14 to date)
Matt writes:

Without justice liberty's advantages are nullified. You can't have any kind of free market when the mafia and political characters are allowed to take from the population at will.

Tom West writes:

I suspect that many of those who sneer at "market fundamentalist" reformers are really sneering at the idea that it's possible to have free markets and a weak government without the market players essentially becoming the government.

Think of it as "private choice theory". In the absence of a strong robust government, financial leaders will inevitably attempt to ensure their position by influencing the government to their position (or even essentially becoming the government), as they have the power and influence to do so.

Of course, "market fundamentalists" may claim that that is exactly why it is important to have a government that does not wield that much power and influence.

The obvious response would be that it is a fantasy to assume that you can continue to have a weak government. A weak government first easily becomes a tool of the powerful and then becomes a strong oppressive government to enforce the will of the powerful.

Far better to have a strong government that derives its strength from the people's interests and at least claims to support the interests of the people.

david writes:

Someone hasn't actually read the Economic Freedom of the World report - Russia moved rapidly towards smaller government, international trade, and reduced regulation of business and labor between 1990 and 1995 as noted in the report.

Scroll to page 160 of the country data section.

Wilmot of Rochester writes:

Russia contrasts with China on their market reforms in the way the market shifted. Russia attempted to force the market on people from the top down, China kind of just let the market happen from the bottom up.

This is the primary difference I see. It was explained on a recent Russ Roberts podcast.

Jayson Virissimo writes:

david, if I jumped as high as I can off of the ground am I moving "rapidly towards" the moon?

Simply because Russia dismantled some of its central planning institutions doesn't mean that it was an experiment in free market economics.

DVDs and players are now allowed into Cuba, but does that really mean that Cuba is an experiment in free speech?

david writes:

Jayson, the point here is not whether Russia ever became an epitome of free markets - obviously, it is not - but whether there was a shock. And, yes, there was rapid and dramatic liberalization in a country that lacked the institutions to effectively respond to it. Cue massive corruption and surges in crime and poverty.

Since you brought up physics, don't confuse acceleration with distance traveled. If I tied you to a rocket and launched you to the moon at 10g, you would not reach there for hours, but you would be dead shortly after takeoff.

The only point to be made here is that liberalization should staggered. Russian GDP began to increase again after 1998, but it suffered needlessly through nearly a decade of chaos for no real reason. Compare China.

Daniel Kuehn writes:

What is called "shock therapy" is usually rapid privatization and the introduction of market prices, right?

Is the index primarily concerned with those things? I always thought the freedom index had more to do with regulation and trade and that sort of thing.

David writes:

Daniel,

Rapid privatization and the introduction of market prices would correspond to bullets two and three in the Fraser Institute's list of four "key ingredients of economic freedom" (found on their report):

* personal choice
* voluntary exchange coordinated by markets
* freedom to enter and compete in markets
* protection of persons and their property from aggression by others.

Peter Boettke writes:

Bryan,

Good post. I wrote an op-ed in 1993 after my stint as a visitor at the Russian Academy of Sciences entitled: Shock Therapy Applied Too Litle Voltage. It was published in the Orange County Register, but unfortunately, the art work they published with the article was Yeltsin riding a giant Russian bear like a rodeo cowboy.

Doc Merlin writes:

People who sneer at "free market reforms" rarely actually sneer at free market reforms. A good example is those who sneer at "financial deregulation" under bush. The industry became more regulated than ever, but the left called it "being deregulated" when it failed. Its the standard political tactic of blaming the other guy.

mdc writes:

david,

The whole point here is that Russia has moved away from economic statism only very slowly. Compare this with a country like Estonia or the Czech Republic which have moved much more quickly, and are now also much more prosperous. Talking about acceleration as distinct from displacement is specious when the time difference in every case has been exactly the same. The worse a country has fared since the fall of the USSR is inversely proportional to the extent of market reforms.

Why does this even surprise people? If market reforms were bad and command economies were good, why didn't the West fall instead of the USSR? In my experience use of the term "market fundamentalist" is a sure sign you're talking to a blinkered fool.

Curt Gardner writes:

Seems to me that Bryan's original post is a bit too vague (or in other words raises all sorts of interesting questions and appears to have some built-in unspoken assumptions).

1. Was a 'shock' applied?
2. What kind of 'shock' was it?
3. If the changes had been 'true' free market reforms (whatever that means) then Bryan seems to assume that the country would have been in much better shape economically than it is currently.
4. What are the prerequisites for successfully applying market reforms? Institutions? Are there cultural factors?
5. Why did reforms work better in some places than in others?

How about 'the myth of easy free market reforms'?

mdc writes:

Curt Gardner,

His argument is really very simple and clear: Russia hasn't moved much towards free markets. This doesn't assume that market reforms would be beneficial, or that they're "true"[?]. It's possible that Russia hasn't moved towards free markets because of cultural, etc. factors, but this isn't an argument against markets, only against these cultural factors.

Scott Sumner writes:

Anyone who thinks "shock therapy" brought "poverty" to Russia doesn't understand what the situation was like before prices were de-controlled. As this article from The Economist shows, in late 1991 Russia was teetering on the edge of becoming another North Korea.

http://www.economist.com/obituary/displaystory.cfm?story_id=15125467

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