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The model of transition in Russia, Central Asia and East Europe that was influenced by the World Bank and the IMF came to be known as ‘shock therapy’. This was a painful process of transition from an authoritarian socialist system to a democratic capitalist system. Shock therapy varied in intensity and speed amongst the former second world countries, but its direction and features were quite similar.
This was not the best way to make a transition from communism to capitalism due to the following consequences:
- Russia, the large state-controlled industrial complex almost collapsed, as about 90% of its industries were put up for sale to private individuals and companies. Since the restructuring was carried out through market forces and not by Government directed industrial policies, it led to the virtual disappearance of entire industries. This was called ‘the largest garage sale in history’, as valuable industries were undervalued and sold at throwaway prices.
- Though all citizens were given vouchers to participate in the sales, most citizens sold their vouchers in the black market because they needed the money.
- The value of the ruble, the Russian currency, declined dramatically. The rate of inflation was so high that people lost all their savings. The collective farm system disintegrated leaving people without food security, and Russia started to import food. The real GDP of Russia in 1999 was below what it was in 1989.
- The old system of social welfare was systematically destroyed. The withdrawal of government subsidies pushed large sections of the people into poverty. The middle classes were pushed to the periphery of society, and the academic and intellectual manpower disintegrated or migrated.
- A mafia emerged in most of these countries and started controlling many economic activities. Privatisation led to new disparities. Post-Soviet states, especially Russia, were divided between rich and poor regions. Unlike the earlier system, there was now great economic inequality between people.
- The construction of democratic institutions was not given the same attention and priority as the demands of economic transformation. Dissent or opposition wasn’t allowed.