The collapse of the second world of the Soviet Union and the socialist systems in eastern Europe had profound consequences for world politics. Three broad kinds of enduring changes that resulted from it. Each of these had a number of effects.

The collapse of communism was followed in most of these countries by a painful process of transition from an authoritarian socialist system to a democratic capitalist system. The model of transition in Russia, Central Asia and east Europe that was influenced by the World Bank and the IMF came to be known as ‘shock therapy’. Shock therapy varied in intensity and speed amongst the former second world countries, but its direction and features were quite similar.

What was considered essential in the economic transition model of shock therapy?

A complete switch to free trade and openness to foreign investment

In the economic transition model of shock therapy, a complete switch to free trade and openness to foreign investment was considered essential, rather than gradual changes or state-controlled socialism.

Shock therapy also involved a drastic change in the external orientation of these economies. Development was now envisaged through more trade, and thus a sudden and complete switch to free trade was considered essential. The free trade regime and foreign direct investment (FDI) were to be the main engines of change. This also involved openness to foreign investment, financial opening up or deregulation, and currency convertibility. Finally, the transition also involved a break up of the existing trade alliances among the countries of the Soviet bloc. Each state from this bloc was now linked directly to the West and not to each other in the region. These states were thus to be gradually absorbed into the Western economic system. The Western capitalist states now became the leaders and thus guided and controlled the development of the region through various agencies and organisations.