Shock Therapy

Posted in Finance, Accounting and Economics Terms, Total Reads: 377
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Definition: Shock Therapy

Trade Liberalization, which is the removal of restrictions on free exchange of goods between nations and individuals, includes removing of all quotas, licensing rules, surcharges etc., and this leads to free trade.


An extremely instantaneous change in the economic policy of a nation which turns a controlled economy into a free-trade of a free market economy, is called "Shock Therapy". It is typical for it to be accompanied by the end of price controls, liberalization of trade, and privatization of organizations and entities previously publicly owned. Shock Therapy, or atleast the intention of it, is to cure issues of hyperinflation, shortage or excess of goods and resources, all this to improve economic production and reduce unemployment and improve standards of living.


The cons of a shock therapy is that in a very quick succession, prices might increase or fall, and a lot of jobs be cut from companies that are now privatized from publicly-owned. These may lead to an unrest - quite an opposite to what was initially intended.


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