Soon after it first came out I discussed Naomi Klein's, "The Shock Doctrine", expressing my exasperation at what I consider to be a fictitious conspiracy theory. I'm now making revisions to a paper that touches upon Eastern European shock therapy, and so it's reminded my of Klein*.
Is gradualism a viable alternative?
It's wrong to think that 1989 was the first attempt at reform. From the New Economic Policy onwards the Soviets have a history of trying to improve the functioning of the economy, and it was the consistent failure of those measures that led Gorbachev to glasnost. Shock therapy was a consequence of the failure of gradual reforms. The attention then turns to China, which is somewhat widely conceived to be an example of the success of gradualism. There's plenty of reasons why the initial circumstances differ, and also the obfuscation due to the radical (but informal) reforms that have taken place in China. If Russia was rent-seeking trumpeted as capitalism, China is freer markets under the banner of Communism. But China as an example of successful gradualism seems to forget something quite important: despite the dramatic reduction of poverty over the last 20 years, 26.1 million people still live in poverty. We should not label it a success and sit back and wait another 20 years whilst children starve and people are tortured. Whereas the radical reformers had a coherent policy to adopt, those advocating gradualism had a plethora of contradictory plans. Even if you could distinguish between those who wanted genuine reforms and those using gradualism as a cover for non-reform, there was nothing on the table. The countries that adopted gradualism include Belarus, Turkmenistan and Uzbekistan, and they shouldn't be ignored. William Loyd Garrison sums things up "gradualism in theory is perpetuity in practice"
Did shock therapy work?
Yes, it did - the countries that reformed the (i) quickest; and (ii) deepest did better. Note that in a PBS interview, Gorbachev poors cold water by suggesting that Russia was treated differently by the IMF:
The International Monetary Fund and others also wrote off 50 percent of Poland's debts, so you can see that is also a factor.
And why was it that the IMF wrote off 50 percent of Poland's debts? Favoritism? Or because the reforms were more credible and thus more likely to actually work? It's like me saying that Reggae Reggae sauce has sold more than my own Krupnik sauce because Levi Rotts was given £50,000. True, but he was given that because he had a viable product to sell. It's hard to maintain that external assistance played a key role, given the massive amounts of money poured into East Germany (which did relatively badly through the transition process) and the general paucity and neglect made by the West.
What's the link between crisis and reform?
Here's a quote from Murray Rothbard:
For radical social change—a change to a different social system—to take place, there must be what is called a “crisis situation.” There must, in short, be a breakdown of the existing system which calls forth a general search for alternative solutions. When such a widespread search for social alternatives takes place, then activists of a dissenting movement must be available to supply that radical alternative, to relate the crisis to the inherent defects of the system itself, and to point out how the alternative system would solve the existing crisis and prevent any similar breakdowns in the future.
Murray Rothbard, For a New Liberty(.pdf)
Now, as Bryan Caplan points out in his paper, "The Idea Trap", Dani Rodrik has an important point on the link between crisis and reform:
[T]here is a strong element of tautology in the association of reform with crisis. Reform naturally becomes an issue only when current policies are perceived to be not working. A crisis is just an extreme instance of policy failure. That policy reform should follow crisis, then, is no more surprising than smoke following fire. Furthermore, the hypothesis is virtually nonfalsifiable: if an economy in crisis has not yet reformed, the frequently proffered explanation is that the crisis has not yet become ‘‘severe enough’’
Dani Rodrik, 1996 (p. 27).
So (Klein take note) almost by definition we should expect crises to give rise to reform, and historically this also gives rise to Communists ideas (from Caplan):
[A] man does not, as a rule, become a Communist because he is attracted to Communism, but because he is driven to despair by the crisis in history through which the world is passing... In the West, all intellectuals become Communists because they are seeking the answer to one of two problems: the problem of war or the problem of economic crisis.
Chambers, Whittaker. 1952. Witness. (NY: Random House), p.191.
Here's where the empirical aspect comes in, because I've taken Klein's accusations seriously and actually documented the neoliberal think tanks that operate in Eastern Europe. And guess what - they don't exist. What does exist, are example of "neoliberal" ideas but these emerge predominantly from within Eastern European countries. So the interesting thing is the historical novelty of crisis producing reforms that actually work. The "Idea Trap" emerges because:
bad ideas lead to bad policy, bad policy leads to bad growth, and bad growth cements bad ideas
Which isn't too radical when you think about what tends to happen during hyperinflation:
people are more likely to lash out at scapegoats—speculators and black marketeers—than to blame runaway monetary policy
Thus the novelty is when a populist (i.e. democratically popular) doesn't emerge, and successful reforms are made. What Caplan doesn't wade into (but I do) is the potential for these "good ideas" to be endogenous, and even preempt crisis. Whilst Klein goes against the grain to argue not that crisis leads to reform, but that free-market think tanks create crisis so that they can create reforms, I'm willing to play along. The problem is that the evidence is clear: shock therapy was a response to a crisis, and it wasn't a conspiracy of market fundamentalists.
Finally, lets just undermine who the bad guys are, according to Klein. "Market fundamentalists", right? A label I've been attached to at times, and understandably so. But note who were at the policy stage - Jeffrey Sachs, the IMF. I rest my case...
*In the principle of full disclosure I should confess that I do loathe Naomi Klein. I also loathe her husband Avi Lewis and if you want to know why set ten minutes aside and watch this stunningly patronising interview with Ayaan Hirsi Ali. Or even from 7:47 onwards.