The effects of shock therapy on transitional economies – A comparison between Russia and Poland

Abstract

This thesis examines Russia and Poland and why they experienced different economic outcomes in the 1990s when transitioning from a centrally planned system to a market-based one. They both used a set of economic policies which is often called “Shock therapy”. Using a comparative literature-based approach focusing on transition and institutional economics, the thesis analyses the differences in initial conditions, the economic policiesimplemented and the amount of external support in the two countries.

In brief, the analysis suggests that the divergent outcomes cannot be explained by the policy design nor the speed of reforms. Institutional capacity, political legitimacy and the amount of external support also played a crucial role in how the policies functioned in practice. The two key findings highlight that the existing literature perhaps overlooks external support as a key factor intransition success and that there is no one-size-fits all approach to economic reform. The optimal reform strategy is rather contingent on country-specific conditions.