Post Keynesian economic analysis recommended a different reform program for transition economies than the orthodox model in the form of shock therapy implemented and imposed by the Washington consensus. In contrast to the dominant view, Post Keynesians recommended gradual price liberalization, which involved maintaining fixed prices and wages and subsidies, the establishment and maintenance of buffer stocks, government intervention to stimulate investment and incomes, and industry-incomes policies. With regard to monetary policy, Post Keynesians argued that a discretionary monetary policy was essential to reduce unemployment. With respect to fiscal policy, budget deficits were essential to maintain full employment.
A radical economic change, such as moving from a centrally administered economy to an economy based on market relations, also requires reform of the institutional structure. The shock-therapy process of transition utilises market incentives to internalise the developmental process of institutions instead of relying on the government, an actor external to the whole process. In contrast, gradualists argue that the development of the institutional structure requires government action. Gradualists recommend active state intervention in institutional development. Empirical evidence is inconclusive as to the more appropriate method. It is argued that a combination of the two methods would produce an optimal sequence. (JEL: P 2, P 3).