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- According to Yavlinsky, what accounts for the worsening of inflation after the implementation of "shock therapy" in Russia?
In Russia, price controls were lifted without dismantling several monopolies. Rather than freeing up prices to seek the natural levels dictated by the laws of supply and demand, this freed up the remaining monopolies to charge whatever they wanted without the incentives provided by competition to lower prices.
- According to Balcerowicz and Gorbachev, what factors account for the differences in the experience of "shock therapy" in Russia, as compared with Poland?
According to Balcerowicz, shock therapy failed in Russia due to:
- the unstable politics that interrupted the reform program,
- the wealth of natural resources that "poisoned" the reform process by tempting private enterprise to make special deals to control them, and
- in Russia, these reforms represented the dismantling of their former superpower status, and this dampened Russian motivation. By contrast, the Poles were fighting for their independence and so were highly motivated to weather the trials of shock therapy reforms.
Gorbachev points to Poland's previous experience with market economics in agriculture where no such experience was present in Russia. Also, even the large Polish defense budget was dwarfed by the Soviet military which accounted for one half or more of the Soviet economy. There was no way to privatize Russia's military through shock therapy. Gorbachev emphasizes the need to adjust approaches to managing economies to the specific conditions of a country. Rather than "shock" the Russian economy overnight, his reforms were aimed at a time span of 10 to 15 years, a generation, to develop the legal and cultural institutions that Poland already had but in Russia had to be created from almost nothing. (See Gorbachev's interview: 'Shock Therapy' in Poland and Russia, and Yeltsin's Mistake.)
- If you were the Chief Economist of a developing country afflicted with runaway inflation, severe shortages of consumer goods, price controls, heavy foreign debt, and several nationalized heavy industries, what additional conditions would you need to identify in your economy before you would advise your president to institute "shock therapy" measures?
Some of the possible answers include:
- A sufficient understanding and experience with free market capitalism in the population to justify confidence that with the right ground rules in place, an entrepreneurial class will be mobilized.
- A political will in both the leadership and the general citizenry to endure the temporary sacrifices of higher unemployment and lower wages in some sectors in order to attain long term gains for the whole society.
- A willingness by Western creditor nations and international institutions to offer some form of debt relief (loan forgiveness, loan restructuring, etc.)
- Sectors of the economy with the potential to grow and flourish under conditions of free market capitalism.
- The likelihood that foreign investors would be attracted to the investment opportunities opened up by dropping barriers to cross-border flows of capital.
- The potential for the formation and growth of significant export-producing activities.
- There are many other possible responses to this question ranging from assertions that the Chief Economist would not advise "shock therapy" measures under any conditions to willingness to implement "shock therapy" based solely on the fact that market liberalization had not yet occurred. Whatever viewpoint is taken, students should be encouraged to back up their conclusion with logical arguments and evidence drawn from the cases considered.
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