ABSTRACT
The aim of the neoclassical gradualist transition process was to initiate profound and unique changes, a 'transformational recession', to overcome the 'shortageflation' syndrome by initiating 'preventive therapy'. This chapter provides a set of primary and secondary elements of the shock therapy model of transition. The primary elements include the two neoclassical models differ in terms of their speed, political structure and the relevance of the initial conditions to the models. A democratic political structure was an absolute condition of the gradualist approach to successfully change an economic system, in contrast to the shock therapy approach. The secondary elements include the price controls were not a fruitless exercise, as the shock therapy supporters insisted. Stable domestic price-level permitted greater domestic financial deepening and higher real deposit rates, reducing risks and greatly simplifying the liberalization and stabilization of the real exchange rate. A proper institutional structure was 'the Achilles heel' of transition, because 'institutions matter'.
