Shock therapy in Russia in 1992

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 had different success. How did shock therapy manifest itself in Russia (1992), what is it, what consequences did the use of this method have for the state? These and other issues will be the subject of our study.

Characteristics of the concept

Before turning to the details that accompany the phenomenon, such as shock therapy in Russia in 1992, let's find out in more detail what the term means.

At the heart of shock therapy is a set of comprehensive measures that are designed to facilitate a rapid exit of the state from the crisis. But, unfortunately, not always these measures give the effect expected of them, and in some cases, if they are misused, may even aggravate the situation.

The typical complex of measures for shock therapy include:

• Reduction in the amount of money in circulation;
• Instant use of free pricing;
• Adoption of a no-deficit budget;
• A significant reduction in the level of inflation;
• Privatization of some state-owned enterprises.

Shock therapy in Russia (1992) was by no means the only example of the realization of such an instrument in world history. This set of measures was applied in different countries of the world, both earlier and later.

Postwar Germany and modern Poland are some of the most famous examples of successful application of the method. But in the countries of the post-Soviet space and Latin America (Bolivia, Chile, Peru, Argentina, Venezuela) shock therapy had no such unequivocal success, although, undoubtedly, in most cases contributed to the emergence of positive economic processes. Quite successfully, measures similar to those we are considering were undertaken at one time in the United Kingdom, New Zealand, Israel and other countries.

The main advantages of the method of shock therapy is its universalism and the relatively high speed of obtaining the desired result. To negative, first of all, it is possible to include rather high risks and decrease in a standard of living of the population in short-term prospect.

Prior Events

Now let's find out what events in the economic and political life forced the government to use such a tool as shock therapy in Russia (1992).

The end of the 80's - the beginning of the 90's was marked by such a global event as the collapse of the Soviet Union. This phenomenon was provoked by a number of factors, both political and economic.

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 control. The need for changes Soviet government realized in the mid-80's. To this end, a complex 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 resolve the accumulated problems, but only aggravated the situation.

After the collapse of the Soviet Union, the economic situation in Russia began to aggravate even more, which was also facilitated by the breaking of ties between the former union republics. Some experts, such as the Deputy Prime Minister for Economic Policy Yegor Gaidar, believed that Russia was on the verge of starvation due to disruptions in the supply of food.

The government, headed by Boris Yeltsin, understood that the country immediately needs radical economic reforms, and half measures in the current state of things will not help. Only by taking drastic measures can the economy improve. Shock therapy in Russia in 1992 was just the tool that was designed to bring the state out of the crisis.

First steps

The first step, from which shock therapy began to be implemented in Russia (1992), was the liberalization of prices. This implied the formation of the value of goods and services through market mechanisms. The complexity of the situation was that until then, state regulation was applied to the formation of prices for the vast majority of products, so a sharp transition to free pricing proved to be quite a shock for the economy of the whole country.

Talk about the possibility of introducing free prices began to lead even at the end of the Soviet Union, in the late 80's, but it did not reach serious steps in this direction. The situation was complicated by the fact that the question arose about the very possibility of forming free prices under the conditions of the economic model that existed at that time in Russia.

Nevertheless, in December 1991, a resolution was adopted by the Government of the RSFSR on the liberalization of prices, which came into effect from the beginning of January 1992. This was in many ways a forced step, since the initial introduction of this measure was planned to be carried out in mid-1992. But problems with the supply of food, threatened with hunger, forced to hurry with the decision. Thus, a set of measures was launched, which became known as shock therapy in Russia (1992).

The problem with the deficit of food and other goods was overcome, but the introduction of free pricing gave rise to hyperinflation, which led to a significant reduction in real incomes of the population and even to the impoverishment of some segments of society.

Changes in foreign trade

The liberalization of prices was by no means the only innovation of the time. At the same time, liberalization of foreign trade was carried out. The imbalance of prices in the domestic and foreign markets led to the fact that organizations engaged in foreign trade began to receive super-profits. It was profitable not to invest money in production, but to resell raw materials. This led to an increase in corruption and the concentration of significant capital in the hands of individuals, who later were called oligarchs.

The growth of inflation, rampant banditry and corruption created the feeling that shock therapy in Russia (1992) is a path to the abyss.

Gaidar's government

The main driving force behind the reforms was the young politician Yegor Gaidar, who alternately held the posts of deputy prime minister for economic affairs, finance minister and first deputy chairman of the government. Since June 1992, due to the fact that the Russian president could not combine the post of head of government, Yegor Gaidar was appointed acting official. The cabinet included such reformers as Vladimir Shumeiko, Alexander Shokhin, Andrei Nechaev, Grigory Khizha, Anatoly Chubais, Peter Aven and others.

It was the government, whose tasks included carrying out the most important economic reforms for Russia.

The main steps of the government

Let us take a look at the main steps taken by the Russian government at that time to carry out reforms. In addition to price liberalization and foreign trade, the transition from a planned economy to a state order, the introduction of market principles for economic relations, the formation of a tax service, the provision of ruble convertibility, the guarantee of free trade, the reduction of budget expenditures, the introduction of a taxation system, and much more.

It can be said that at that time the main starting points for the development of modern economy were formed.

Privatization

One of the main principles of the shock therapy method is the privatization of state-owned enterprises. Although it massively unfolded only in 1993, after the resignation of Yegor Gaidar, but 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 since the beginning of the next year the methodology for implementing this process has been developed. The first cases of privatization of state property date back to the summer of 1992. The most extensive turnover it acquired in 1993-1995. At this time, the head of the State Property Committee was Anatoly Chubais, therefore it is with his name that privatization is connected, and, in the first place, its negative consequences. Why?

The peculiarity of Russian privatization was that all citizens of the country could take part in it, to whom a special type of securities was issued: privatization checks, or vouchers. It was assumed that any citizen would be able to redeem a part of the enterprise that was subject to exclusion from state property.

Privatization of state property was an integral part of the mechanism by which shock therapy was conducted in Russia (1992). The result was quite ambiguous. On the one hand, the state managed to get rid of most unprofitable enterprises, thereby freeing up budgetary money for other purposes, but at the same time a number of organizations were sold for a pittance, which, with skilful management, could bring a considerable profit. Most of these enterprises were concentrated in the hands of a small group of oligarchs.

Resignation of Gaidar's government

As reforms were carried out, inflation did not slow down its turnover, but the real standard of living of citizens invariably fell. This led to the fact that the government of Gaidar increasingly lost popularity among the population of the country.

There were many opponents of Gaidar's policy and among the political elite. This led to the fact that in December 1992 the Congress of People's Deputies actually expressed a lack of confidence in the head of government. President Boris Yeltsin was forced to resign from all posts held, 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 not all his plans, but he set the general course for the development of a market economy in the state.

Results of the shock therapy application

A rather ambiguous outcome for the country was the application of an economic mechanism, such as shock therapy in Russia (1992). Pros and cons in the short term clearly showed a predominance of negative consequences.

Among the main negative phenomena, it is necessary to highlight the significant growth of inflationary processes bordering on hyperinflation, the rapid reduction of real incomes of citizens and the impoverishment of the population, the widening gap between different layers of society, the fall in investment, the reduction 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 famine.

Causes of failure

The relative failure of the application of shock therapy in Russia is explained by the fact that not all elements of the classical scheme have been exactly observed. For example, the method of shock therapy implies a reduction in the level of inflation, while in the Russian Federation, on the contrary, it has reached unprecedented levels.

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 strategy of shock therapy.

Effects

But did the shock therapy completely fail in Russia (1992)? The consequences in the long run of these reforms still had a number of positive points. The foundation of the market mechanism was laid, which, although it did not begin to function as efficiently as possible, allowed to break with old command and administrative management methods that had long since outlived themselves.

In addition, the negative effect of the shortage of goods was almost completely overcome, and by the beginning of 1998 inflation had significantly decreased, which allowed the denomination of the ruble.

Many experts believe that timely delivery of shock therapy, even if not in its classical form, allowed to save the country's economy and created prerequisites for its growth at the beginning of the XXI century.