The medical term "shock therapy" was introduced into the economic field by American economist Jeffrey Sachs in the mid-1980s.
The concept of shock therapy was first proposed by Sachs during his tenure as an economic advisor to the Bolivian government.
Bolivia is a small, economically underdeveloped country in South America. Due to long-term political instability and repeated mistakes in government economic policies, a large number of economic problems have accumulated and remained unresolved, eventually leading to a severe economic crisis.
In 1985, the Bolivian government's budget deficit reached 485.9 trillion pesos, accounting for about 13% of the GDP, with an inflation rate as high as [missing information].
In 1984, China's foreign debt was $5 billion, with nearly $1 billion in interest payable, exceeding its export revenue.
Between 1980 and 1985, the standard of living of residents declined by 30%, and the national economy was on the verge of collapse.
Faced with such a perilous economic situation, Sachs, who was hired during a time of crisis, boldly put forward a whole set of economic programs and policies.
Its main contents are: to implement tight monetary and fiscal policies, reduce government spending, eliminate subsidies, liberalize prices, implement trade liberalization, stabilize the exchange rate through currency devaluation, and further reform the administrative and tax systems.
Privatizing some public sectors and enterprises, rearranging debt and accepting foreign aid...etc.
The implementation of this economic program and policy has a strong impact and may cause huge shocks to social economic life in the short term, or even lead to a "shock" state.
Therefore, people borrowed the medical term to refer to Sachs's economic program and policies for stabilizing the economy and controlling inflation as "shock therapy."
The initial implementation of shock therapy in Bolivia yielded incredibly positive results.
Within a week of implementing the treatment, hyperinflation was effectively curbed, and prices stabilized after a period of rapid increase.
The inflation rate was only 10%-15% in 1986-1987, 21.5% in 1988, and 16.6% in 1989.
The national economy has gradually recovered after a brief decline.
In the first year of implementing shock therapy, 1986, GDP fell by 2.9%, but in the following years it maintained a growth rate of around 2.5%.
At the same time, thanks to the effective measures taken, the debt problem was significantly alleviated, and Bolivia was finally able to overcome the severe debt crisis.
The initial success of shock therapy in Bolivia earned Sachs a high reputation.
The astonishing changes that occurred in Bolivia have been dubbed the "Bolivian Miracle," and Sachs himself has been hailed as the "Golden Boy of International Finance." Shock therapy has thus gained worldwide renown and attracted global attention.
In late 1991, Russia dissolved, and Russia became independent, inheriting most of Russia's assets.
A rich inheritance is certainly good, but it's hard to manage a poor household!
A large number of struggling businesses, coupled with 1 trillion rubles of domestic debt and 120 billion US dollars of foreign debt, have kept the newly appointed president up at night, restless and anxious.
Against this backdrop, shock therapy was introduced.
On January 2, 1992, the United States announced that it would deregulate 90% of consumer goods prices and 80% of production material prices.
At the same time, restrictions on income growth were lifted, public sector employees' salaries increased by 90%, retiree subsidies were raised to 900 rubles per month, and family allowances and unemployment benefits also increased accordingly.
The effects of price liberalization were immediate in the first three months.
The long queues for shopping are gone, and the shelves are full of goods. The Russians, who are used to rationing and long queues, seem to have seen spring again.
But before they could be happy for long, prices soared like a kite with a broken string.
In April of the same year, consumer prices had increased 65 times compared to the end of 1991.
The government originally intended to stabilize prices through state-run stores, but black market vendors colluded with state-run store employees to resell goods and make huge profits.
The government's wishful thinking failed, and the market order was thrown into chaos.
Due to the premature liberalization of fuel and raw material prices, enterprises' production costs surged, and by June, the wholesale prices of industrial products had increased 14 times.
Such high prices deterred buyers, the consumer market remained sluggish, and weak demand, in turn, suppressed supply. Businesses reduced production, and the market supply and demand entered a vicious cycle.
in other words.
Originally, a leather jacket cost 100 rubles, but due to factors such as rising raw material prices, the price of a leather jacket has increased to over 1,000 rubles, otherwise the company would lose money.
At such a high price, unless the Russians are stupid, they won't buy it!
You think that's the end? No, the second step of shock therapy is about to begin.
The fiscal and monetary "tightening" policies were introduced almost simultaneously with price reforms.
Fiscal austerity measures mainly involve increasing revenue and reducing expenditure.
Tax breaks and similar incentives should all be cancelled.
All goods, whether imported or exported, are subject to a 28% value-added tax. At the same time, the consumption tax on imported goods has also been increased.
Alongside revenue-generating measures, the government also cut public investment, military spending, and office expenses.
Incorporate off-budget funds into the federal budget and restrict local governments from using bank loans to cover deficits.
What are the consequences?
This chapter is not finished yet. Please click on the next page to continue reading the exciting content!
Continue read on readnovelmtl.com
