One of the most famous phenomena in the domestic economy of the last decade of the last century was the so-called shock therapy in Russia (1992). In short, this term means a set of radical measures aimed at improving the economy. In different countries, this tool has had varying degrees of success. How did shock therapy appear in Russia (1992), what is it, what were the consequences of using this method for the state? These and other questions will be the subject of our study.
Description of the concept
Before turning to the details accompanying such a phenomenon as shock therapy in Russia in 1992, let's find out in more detail what this term means.
The basis of shock therapy is a set of comprehensive measures that are designed to contribute to the rapid exit of the state from the crisis. But, unfortunately, these measures do not always give the effect that is expected of them, and in some cases, if applied incorrectly, they can even aggravate the situation.
A typical set of measures for conducting shock therapy include:
- reduction in the amount of money in circulation;
- instant application of free pricing;
- adoption of a balanced budget;
- a significant reduction in inflation;
- privatization of some state-owned enterprises.
Shock therapy in Russia (1992) was far from the only example of the implementation of such an instrument in world history. This set of measures has been applied in various countries of the world both earlier and later.
Post-war Germany and modern Poland are some of the most famous examples of the successful application of the method. But in the countries of the post-Soviet space and Latin America (Bolivia, Chile, Peru, Argentina, Venezuela), shock therapy did not have such a clear success, although, no doubt, in most cases it contributed to the emergence of positive economic processes. Quite successfully, measures similar to those considered by us were undertaken at one time in the UK, New Zealand, Israel and other countries.
The main advantages of the shock therapy method are its universalism and relatively high speed of obtaining the desired result. First of all, rather high risks and a decline in the standard of living of the population in the short term can be attributed to negative ones.
Previous events
Now let's find out what events in economic and political life forced the government to use such an instrument as shock therapy in Russia (1992).
The end of the 80s - the beginning of the 90s was marked by such an event on a global scale as the collapse of the Soviet Union. This phenomenon was triggered by a number of factors of both a political and economic nature.
One of the main prerequisites for the collapse of the USSR was the inefficiency of the existing economic model, which was based on command and administrative management. The need for change was recognized by the Soviet government in the mid-80s. To this end, a set of economic and political reforms, known as "perestroika, " was carried out, which was aimed at democratizing society and introducing elements of market mechanisms in the economy. But these reforms were half-hearted and could not solve the accumulated problems, but only exacerbated the situation.
After the collapse of the USSR, the economic situation in Russia began to deteriorate even more, which was also facilitated by the breakdown in ties between the former Soviet republics. Some experts, such as, for example, Deputy Prime Minister for Economic Policy Yegor Gaidar, believed that Russia was on the verge of starvation due to disruptions in food supplies.
The government headed by Boris Yeltsin understood that the country immediately needed fundamental economic reforms, and half measures, given the current state of affairs, would not help. Only through the adoption of drastic measures can the economy improve. Shock therapy in Russia in 1992 just became the tool that was designed to lead the state out of the crisis.
The first steps
The first step with which shock therapy began to be implemented in Russia (1992) was price liberalization. This implied the formation of the value of goods and services using market mechanisms. The complexity of the situation was that until then state regulation was applied in pricing the vast majority of products, so the sharp transition to free pricing was a rather strong shock for the economy of the whole country.
They started talking about the possibility of introducing free prices at the end of the USSR’s existence, in the late 80s, but things did not come to serious steps in this direction. The situation was further complicated by the fact that the question arose about the very possibility of forming free prices in the conditions of the economic model that existed in Russia at that time.
Nevertheless, in December 1991, a decree of the Government of the RSFSR on price liberalization was adopted, which came into force from the beginning of January 1992. This was largely a necessary step, since it was originally planned to introduce this measure in mid-1992. But problems with food supplies, threatening hunger, forced to hurry up with a decision. Thus, a set of measures was launched that became known as shock therapy in Russia (1992).
The problem with the shortage of food and other goods was overcome, but the introduction of free pricing triggered hyperinflation, which led to a significant reduction in real incomes of the population and even impoverishment of some sections of society.
Changes in Foreign Trade
Price liberalization was far from the only innovation of the time. At the same time, foreign trade was liberalized. The imbalance of prices in the domestic and foreign markets has led organizations engaged in foreign trade to start earning extra profits. It was beneficial not to invest in production, but to resell raw materials. This led to increased corruption and the concentration of significant capital in the hands of individuals, who were later called oligarchs.
The growth of inflation, the rampant gangsterism and corruption created the feeling that shock therapy in Russia (1992) is a path to the abyss.
Gaidar Government
The main driving force behind the reforms was the young politician Yegor Gaidar, who alternately held the positions of Deputy Prime Minister for Economic Affairs, Minister of Finance and First Deputy Prime Minister. Since June 1992, due to the fact that the President of Russia could not combine the post of head of government, Yegor Gaidar was appointed acting official. The cabinet included such reformers as Vladimir Shumeyko, Alexander Shokhin, Andrey Nechaev, Grigory Khizh, Anatoly Chubais, Peter Aven and others.
It was a government whose mission was to carry out the most important economic reforms for Russia.
Key Government Steps
Let's take a look at the main steps that the Russian government took at that time to carry out reforms. In addition to price liberalization and foreign trade, this includes the transition from a planned economy to a state order, the introduction of market principles of economic relations, the formation of a tax service, ensuring the convertibility of the ruble, guaranteeing free trade, reducing budget expenditures, introducing a tax system and much more.
We can say that at this time the main starting points were formed for the development of the modern economy.
Privatization
One of the main principles of the shock therapy method is the privatization of state enterprises. Although it only began in large numbers in 1993, after the resignation of Yegor Gaidar, it was his office that laid the foundation for this important event and outlined the main steps to achieve the goal.
The law on privatization was adopted in the summer of 1991, but only from the beginning of next year, a methodology for implementing this process began to be developed. The first cases of privatization of state property date back to the summer of 1992. It gained the widest momentum in 1993-1995. At that time, Anatoly Chubais was the head of the State Property Committee, therefore privatization was associated with his name, and primarily its negative consequences. Why?
The peculiarity of Russian privatization was that it could be attended by all citizens of the country who were given a special type of securities - privatization checks, or vouchers. It was assumed that any citizen would be able to redeem part of the enterprise, which was subject to withdrawal from state ownership.
Privatization of state property was an integral part of the mechanism by which shock therapy was carried out in Russia (1992). Its result turned out to be rather ambiguous. On the one hand, the state managed to get rid of most unprofitable enterprises, thereby freeing up budget money for other purposes, but at the same time they sold a number of organizations for a pittance that, with skillful leadership, could bring considerable profit. Most of these enterprises were concentrated in the hands of a small group of oligarchs.
The resignation of the Gaidar government
As reforms were carried out, inflation did not slow down, and the real standard of living of citizens invariably fell. This led to the fact that the Gaidar government was increasingly losing popularity among the country's population.
There were many opponents of Gaidar’s politics among the political elite. This led to the fact that in December 1992 the Congress of People's Deputies actually expressed no confidence in the head of government. President B. Yeltsin was forced to resign from all his posts, and Viktor Chernomyrdin was appointed chairman of the Council of Ministers.
I would like to note the following: although E. Gaidar was able to realize far from all of his plans, he set a general course for the development of a market economy in the state.
Results of the use of shock therapy
The use of such an economic mechanism as shock therapy in Russia (1992) had rather mixed results for the country. Pros and cons in the short term clearly indicated the predominance of negative consequences.
Among the main negative phenomena, it is necessary to single out a significant increase in inflationary processes bordering on hyperinflation, a rapid decrease in real incomes of citizens and impoverishment of the population, an increase in the gap between different sectors of society, a fall in investment, a decrease in GDP and industrial production.
At the same time, many experts believe that it was thanks to the use of the shock therapy method that Russia managed to avoid a terrible humanitarian catastrophe and hunger.
Reasons for failure
The relative failure of the use of shock therapy in Russia is explained by the fact that not all elements of the classical scheme were exactly observed. For example, the method of shock therapy implies a reduction in inflation, and in Russia, on the contrary, it has reached unprecedented proportions.
A significant role in the failure was played by the fact that, due to the resignation of the Gaidar government, many reforms were not completed as soon as possible, as required by the shock therapy strategy.
