What is shock therapy in economics and how was it applied to the former DDR during the reunion with West-Germany?


Recently I listened to a podcast where it was mentioned that during the reunion of Germany shock therapy was applied to East-Germany through the Treuhand organization. I tried to google about this and learned that shock therapy seems to be a technical in economics but I don’t understand what it means and how this was applied in East Germany through the Treuhand.

In: 7

Shock therapy referred to kindof a *rapid* approach to dismantling socialism and reintroducing the capitalist market economy to former Soviet satellite states. Privatizing nearly all-state-owned industries overnight, laying off the enormous government workforce, ending subsidies and trade restrictions, sometimes slashing social welfare and government services.

The idea was that it would be painful in the short term but necessary and beneficial in the long run.

Shock therapy was the policy applied to the USSR and other Eastern Bloc countries after the collapse of their socialist economic system, and was a method of rapidly privatizing the economy.

There were two justifications of shock therapy over a slower transition to capitalism. One is contextual. At the time shock therapy was being considered, socialist countries (or their successor states) were dead broke. And with most state controlled industries being money losers, slowly privatizing them would not have been financially possible. On the other hand this gets us into arguments about why Western nations didn’t provide loans to make this possible, but that brings us into the second reason.

Many of the people who operated these government run industries were powerful bureaucrats who were very protective of their power base, and would have (and did) resist any attempt to privatize them. The assumption was that a slow and gradual process would have given them the opportunity to delay or sabotage the privatization.

Disclaimer that I know most about shock therapy in its application in the Former Soviet Union and Russia especially. Each country experienced it differently.