Shock Therapy or Top Down Planning

Pratt notes the failure of so many development plans when those plans are imposed from above -- from agencies and other nations. It reminds me of the "shock therapy" that was central to the Commanding Heights book and video. You might recall that Jeff Sachs was intially invited to Bolivia to consult on stopping hyperinflation. He ended up helping Bolivia to implement a quick, drastic, move to freer markets and the end of hyper money supply growth. He went on to help other Latin American countries and then Poland and Russia. The shock therapy of stopping hyperinflation makes sense when a central bank and government have allowed the money supply to grow out of proportion. Paul Volker essentially did this in the early Reagan years following Carter's double digit inflation. While we could argue that allowing central banks to create money out of thin air is what the basic problem is, once this has been done, the solution is to cut the money supply.

What Sachs helped Bolcerowitz do in Poland was far more drastic. A plan of switching immediately from the centrally planned economy to free markets and capitalism was implemented with terrible results. The institutions of capitalism did not exist. The rule of law did not exist. Private property rights did not exist. There was no free market sector that could drive the economy forward while creative destruction did its work. The result in Poland and in Russia was a period of corruption, and a drastic reduction in output and employment. Poland saved itself by stopping the shock therapy and moving toward a more gradual or evolutionary program. Russia did not. The corruption was too large, the oligarchs took over the "commanding heights" of the economy and capitalism was not allowed to develop.

Top down imposition does not work. Central planning does not work.