Shock Therapy versus Gradualism in Central and Eastern Europe and the Former Soviet Union

Abstract

Abstract The transition from a centrally administered economy to an economy based on market relations in Central and Eastern Europe and the former Soviet Union (CEE/FSU) took two alternate approaches: the “shock therapy,” or “big bang,” approach and gradualism, or the evolutionary approach. To comprehend and shape a supposition concerning the speed of the transition process, this chapter considers the transition process within a broader social science setting, integrating institutions. It identifies the different transition speeds—shock therapy and gradualism—and alternate institutional processes associated with these speeds. The shock therapy process of transition utilizes market incentives to internalize the developmental process of institutions, instead of relying on the government, an external actor to the whole process. In contrast, gradualism argues that the development of the institutional structure requires government action. Gradualism recommends active state intervention in institutional development. Subsequently, the shock therapy approach recommends a gradual development of institutions, whereas the gradualism recommends a shock therapy approach to institutional development. This chapter suggests that a combination of the two methods would produce the most optimal speed sequence in CEE/FSU. As a result, at least in the case of institutional development, this article argues that there is no clash between shock therapy and gradualism; rather, the two approaches are interconnected.