Assertion: 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’.

Reason: Shock therapy did not involve any change in the external orientation of these economies.

The Assertion is true, but the Reason is false

The correct answer is Option 2 - The Assertion is true, but the Reason is false

Assertion: 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’.

Reason: Shock therapy did not involve any change in the external orientation of these economies.

The assertion is true but the reason is false because shock therapy indeed involved significant changes in the external orientation of the economies transitioning from centrally planned systems to market-based systems.

CORRECTION IN REASON: Shock therapy also involved a drastic change in the external orientation of these economies. 

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. Each of these countries was required to make a total shift to a capitalist economy, which meant rooting out completely any structures evolved during the Soviet period.

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.