How “Shock Therapy” Economics Have Been a Resounding Success – And What it Could Mean for Credit Unions
The economic model commonly known as “shock therapy” represents large scale privatization and economic liberalization within a relatively short period of time. Throughout the course of history, when this policy has been implemented, it frequently has been successful.
The first notable example within the past 50 years was the utilization of deregulatory policies in Chile in the 1970s. Protectionist trade barriers were removed, and foreign investment was heavily encouraged, increasing competition in the economy. It was, ultimately, successful, as Chile’s economy recovered from the slump it was in at the time, and to this day it is one of the wealthiest countries in South America, slightly behind Uruguay for the highest GDP per capita on the continent.
In 1985, Bolivia was experiencing significant hyperinflation and was in international debt. Subsequently, President Victor Paz Estenssoro issued the Supreme Decree 21060. This decreased the state influence in the economy, drastically reduced the size of the nationalized oil and tin industries by two-thirds. Many sectors of the economy formerly operated by the state were privatized, including some of Bolivia’s largest state enterprises. Import quotas and prohibitions were eliminated, freeing up the country to increase foreign commerce. The result of these changes overwhelmingly were positive, as inflation rates dropped in a period of a few months from 20,000% to just about 10%.
Additionally, the fall of Soviet eastern bloc communism was one of the most drastic shifts in the international landscape in the past 50 years. With the Soviet Union breaking apart and the puppet dictatorships across eastern Europe losing power, the drastic shift in political conditions resulted in great economic instability and turmoil. However, now, 30 years after the fall of eastern bloc communism, eastern Europe is in the best economic situation it has ever been, in large part due to the result of shock therapy economic policy. After some incredibly harsh economic conditions throughout the 1990s, various economic policies across different countries were implemented which vastly increased privatization of industry and liberalization of the economy. The impact of this is evident. Many of the countries with the highest home-ownership rates are former eastern bloc countries. Romania, Hungary, Slovakia, Lithuania, and Croatia all have home ownership rates above 89%, according to the European Statistical Office. Compare this to America, which only has a home ownership rate of 65%, or to Nigeria, where a mere 25% of people own homes. When you look at GDP growth, countries like Romania, Hungary and Slovakia, have quintupled their GDP from 1991, a rate of growth even faster than the United States.
What does this mean for credit unions here in the U.S.? The faster the government stops stimulus handouts and increases rates to curb inflation, the sooner we can all get back to life and business as usual. Lending and investing at improved rates that increase income at credit unions, higher homeownership rates for which mortgages will be needed, and more jobs hard-working Americans actually want. Less government intervention is almost always preferred in free-market societies.
