by Naomi Klein
When the members of the emergency team had finished drafting the new laws, they still weren’t ready to share them with Bolivia’s elected representatives, let alone its voters, who had never cast their ballots for such a plan. They had one more task to complete. As a group, they drove over to the office of the International Monetary Fund’s representative in Bolivia and told him what they were planning to do. His response was at once encouraging and harrowing: “This is what every official at the IMF has dreamed about. But if it doesn’t work, luckily I have diplomatic immunity and I can catch a plane and flee.”18
The Bolivians proposing the plan had no such escape hatch, and several were terrified of how the public was going to react. “They are going to kill us,” predicted Fernando Prado, the youngest member of the group. Bedregal, the plan’s main author, attempted to stiffen spines by comparing the team to fighter pilots attacking an enemy. “We have to be like the pilot of Hiroshima. When he dropped the atomic bomb he didn’t know what he was doing, but when he saw the smoke he said: ‘Oops, sorry!’ And that’s exactly what we have to do, launch the measures and then: Oops, sorry!”19
The idea that policy change should be like launching a surprise military attack is a recurring theme for economic shock therapists. In Shock and Awe: Achieving Rapid Dominance, the U.S. military doctrine published in 1996 that eventually formed the basis of the 2003 invasion of Iraq, the authors state that the invading force should “seize control of the environment and paralyze or so overload an adversary’s perceptions and understanding of events so that the enemy would be incapable of resistance.”20 Economic shock works according to a similar theory: the premise is that people can develop responses to gradual change—a slashed health program here, a trade deal there—but if dozens of changes come from all directions at once, a feeling of futility sets in, and populations go limp.
Hoping to induce that sense of hopelessness, the Bolivian planners required all of their radical measures to be adopted at the same time, and all within the first hundred days of the new government. Rather than presenting each section of the plan as its own individual law (the new tax code, the new pricing law and so on), Paz’s team insisted on bundling the entire revolution into a single executive decree, D.S. 21060. It contained 220 separate laws and covered every aspect of economic life in the country, making it the equivalent, in scope and ambition, to “The Brick,” the hefty blueprint written by the Chicago Boys in preparation for Pinochet’s coup. According to its authors, the entire program had to be accepted or rejected; it couldn’t be amended. It was the economic equivalent of Shock and Awe.
When the document was complete, the team made five copies: one for Paz, one for Goni and one for the treasury minister. The destination of the other two copies revealed how certain Paz and his team were that many Bolivians would regard the plan as an act of war: one was for the head of the army and the other was for the chief of police. Paz’s cabinet, however, was still in the dark. They continued to be under the mistaken impression that they were working for the same man who had nationalized the mines and redistributed land all those years ago.
Three weeks after being sworn in as president, Paz finally called his cabinet together to let them in on the surprise he had in store. He ordered the doors closed to the governing chambers and “instructed the secretaries to hold all of the ministers’ telephone calls.” Bedregal read the full sixty pages to the stunned audience. He was so nervous, he confessed, that he “even got a nosebleed only minutes later.” Paz informed his cabinet members that the decree was not up for debate; in yet another backroom deal, he had already secured support from Banzer’s right-wing opposition party. If they disagreed, he said, they could resign.
“I don’t agree,” announced the minister of industry.
“Please leave,” Paz replied. The minister stayed. With inflation still soaring and strong hints that a shock therapy approach would be rewarded with significant financial aid from Washington, no one dared leave. Two days later, in a televised presidential address titled “Bolivia Is Dying,” Paz dropped Bolivia’s “Brick” on a completely unsuspecting public.
Sachs was correct in predicting that price increases would end hyperinflation. Within two years, inflation was down to 10 percent, impressive by any standard.21 The broader legacy of Bolivia’s neoliberal revolution is far more contentious. All economists agree that rapid inflation is enormously damaging, unsustainable and must be controlled—a process that imposes significant pain during the adjustment. The debate is over how a credible program can be achieved, as well as who, in any given society, is forced to bear the brunt of that pain. Ricardo Grinspun, a professor of economics specializing in Latin America at York University, explains that an approach in the Keynesian or developmentalist tradition seeks to mobilize support and share the burden through “a negotiated process involving key stakeholders—government, employers, farmers, unions and so on. In this way, the parties come to agreements over income policies, like wages and prices, at the same time that stabilization measures are implemented.” In sharp contrast, says Grinspun, “the orthodox approach is to shift all the social cost onto the poor through shock therapy.” That, he told me, is precisely what happened in Bolivia.
Just as Friedman had promised in Chile, freer trade was supposed to create jobs for the newly jobless. It didn’t, and the unemployment rate increased from 20 percent at the time of the elections to between 25 and 30 percent two years later.22 The state mining corporation alone—the same one that Paz had nationalized in the 1950s—was downsized from twenty-eight thousand employees to just six thousand.23
The minimum wage never recovered its value, and two years into the program, real wages were down 40 percent; at one point they would drop 70 percent.24 In 1985, the year of shock therapy, the per capita average income in Bolivia was $845; two years later it had fallen to $789. This is the measure used by Sachs and the government, and despite the lack of progress it conveys, it does not begin to capture the degradation of daily life for many Bolivians. Average income is derived by adding up the country’s total income and dividing by the number of people in the country; it glosses over the fact that shock therapy in Bolivia had the same effects that it had in the rest of the region: a small elite grew far wealthier while large portions of what had been the working class were discarded from the economy altogether and turned into surplus people. In 1987, Bolivian peasants, known as campesinos, were earning, on average, just $140 a year, less than one-fifth of the “average income.”25 That is the problem with measuring only the “average”: it effectively erases these sharp divisions.
A leader of the peasants’ union explained that “the government’s statistics don’t reflect the growing number of families forced to live in tents; the thousands of malnourished kids who get only a piece of bread and a cup of tea a day; the hundreds of campesinos who have come to the capital in search of work and end up begging on the streets.”26 That was the hidden story of Bolivia’s shock therapy: hundreds of thousands of full-time jobs with pensions were eliminated, replaced with precarious ones with no protections at all. Between 1983 and 1988, the number of Bolivians eligible for social security dropped by 61 percent.27
Sachs, who returned to Bolivia as an adviser in the midst of the transition, opposed raising salaries to keep up with the price of food and gasoline and instead favored an emergency fund to help the hardest hit—a Band-Aid on what had become a gaping wound. Sachs returned to Bolivia at Paz Estenssoro’s request and was working directly for the president. He is remembered as an unyielding presence. According to Goni (who would later become president of Bolivia), Sachs helped to stiffen the resolve of policy makers when public pressure was building against the human cost of shock therapy. “In his visits [Sachs] said, ‘Look, all this gradualist stuff, it just doesn’t work. When it really gets out of control you’ve got to stop it, like a medicine. You’ve got to take some radical steps; otherwise your patient is going to die.”28
One immediate result of this
resolve was that many of Bolivia’s desperately poor were pushed to become coca growers, because it paid roughly ten times as much as other crops (somewhat of an irony since the original economic crisis was set off by the U.S.-funded siege on the coca farmers.)29 By 1989, an estimated one in ten workers was turning to work in some aspect of the coca or cocaine industries.30 These workers would include the family of Evo Morales, future president of Bolivia and a former leader of the militant coca growers’ union.
The coca industry played a significant role in resuscitating Bolivia’s economy and beating inflation (a fact now recognized by historians but never mentioned by Sachs in explanations of how his reforms triumphed over inflation).31 Just two years after the “atomic bomb,” illegal drug exports were generating more income for Bolivia than all its legal exports combined, and an estimated 350,000 people were earning a living in some facet of the drug trade. “For now,” a foreign banker observed, “the Bolivian economy is hooked on cocaine.”32
In the immediate aftermath of shock therapy, few outside Bolivia were talking about such complex repercussions. They were telling a far simpler story: about a bold, boyish professor from Harvard who had, virtually single-handedly, “salvaged the inflation-wracked economy of Bolivia,” according to Boston Magazine.33 The victory over inflation that Sachs had helped engineer was enough to qualify Bolivia as a stunning free-market success story, “the most remarkable of modern times,” as The Economist described it.34 “Bolivia’s Miracle” gave Sachs immediate star status in powerful financial circles and launched his career as the leading expert on crisis-struck economies, sending him on to Argentina, Peru, Brazil, Ecuador and Venezuela in the coming years.
The praise heaped on Sachs was not just about beating inflation in a poor country. It was that he had achieved what so many had claimed was impossible: he had helped stage a radical neoliberal transformation within the confines of a democracy and without a war, a change far more sweeping than those attempted by either Thatcher or Reagan. Sachs was fully aware of the historical significance of what he had accomplished. “Bolivia was really the first, in my view, combination of democratic reform combined with economic institutional change,” he said years later. “And Bolivia much more than Chile showed that you could combine political liberalization and democracy with economic liberalization. That’s an extremely important lesson, to have both of those working in parallel and each one reinforcing the other.”35
The comparison with Chile was not incidental. Thanks to Sachs—“evangelist for democratic capitalism,” as The New York Times described him—shock therapy had finally shaken off the stench of dictatorships and death camps that had been clinging to it ever since Friedman made his fateful trip to Santiago a decade earlier.36 Sachs had proven, contrary to what the critics claimed, that the free-market crusade could not only survive but ride the democratic wave now sweeping the world. And Sachs, with his praise for Keynes and his unabashedly idealistic commitment to improving the lot of the developing world, was the perfect man to steer the crusade into this kinder, more peaceful era.
The Bolivian left had taken to calling Paz’s decree pinochetismo económico—economic Pinochetism.37 As far as the business community was concerned, both inside and outside Bolivia, that was the whole point: Bolivia had brought in Pinochet-style shock therapy, without a Pinochet—and under a center-left government, no less. As one Bolivian banker put it with admiration, “The things Pinochet did with a bayonet, Paz has done within a democratic system.”38
The story of the Bolivian miracle has been told and retold, in newspaper and magazine articles, in profiles of Sachs, in Sachs’s own best-selling book, and in documentary productions such as PBS’s three-part series Commanding Heights: The Battle for the World Economy. There is one major problem: it isn’t true. Bolivia did show that shock therapy could be imposed in a country that had just had elections, but it did not show that it could be imposed democratically or without repression—in fact, it proved, once again, that the opposite was still the case.
First, there was the obvious problem that President Paz had no mandate from Bolivian voters to remake the entire economic architecture of the country. He had run on a nationalist platform, which he abruptly abandoned in a backroom deal. Some years later, the influential free-market economist John Williamson coined a term for what Paz did: he called it “voodoo politics”; most people simply call it lying.39 That was by no means the only problem with the democracy narrative.
Predictably, many of the voters who elected Paz were furious at his betrayal, and as soon as the decree was handed down, tens of thousands took to the streets to try to block a plan that would mean layoffs and deepening hunger. The major opposition came from the country’s main labor federation, which called a general strike that brought industry to a halt. Paz’s response made Thatcher’s treatment of the miners seem tame. He immediately declared a “state of siege,” and army tanks rolled through the streets of the capital, which was placed under a strict curfew. To travel through their own country, Bolivian citizens now needed special passes. Riot police raided union halls, a university and a radio station, as well as several factories. Political assemblies and marches were forbidden, and state permission was required to hold meetings.40 Oppositional politics was effectively banned—just as it had been during the Banzer dictatorship.
To clear the streets, police arrested fifteen hundred demonstrators, dispersed crowds with tear gas and fired on strikers who they said had attacked their officers.41 Paz also took further measures to make sure that the protests stopped for good. With the leaders of the labor federation on a hunger strike, Paz directed the police and military to round up the country’s top two hundred union leaders, load them on planes and fly them to remote jails in the Amazon.42 According to Reuters, the detainees included “the leadership of the Bolivian Labor Federation and other senior trade union officials,” and they were taken “to isolated villages in the Amazon basin in northern Bolivia, where their movements [were] restricted.”43 It was a mass kidnapping, complete with a ransom demand: the prisoners would be released only if the unions called off their protests, which they eventually agreed to do. Filemon Escobar was a miner and labor activist on the streets in those years. In a recent telephone interview from Bolivia, he recalled that “they plucked the labor leaders from the streets and took them to the jungle to be eaten alive by the bugs. When they were released, the new economic plan was in place.” According to Escobar, “The government didn’t take people to the jungle to be tortured or killed, but so that they could go ahead with their economic plan.”
This extraordinary state of siege stayed in place for three months, and since the plan was pushed through in one hundred days, that meant the country was under lockdown during the decisive shock therapy period. One year later, when the Paz government moved ahead with mass layoffs in the tin mines, the unions once again took to the streets, and the same series of dramatic events unfolded: a state of siege was declared, and two Bolivian Air Force planes carried one hundred of the country’s top labor leaders to internment camps in Bolivia’s tropical flatlands. This time, the kidnapped leaders included two former labor ministers and a former senator—recalling Pinochet’s “VIP prison” in Southern Chile where Orlando Letelier had been taken. The leaders were held in the camps for two and half weeks until, once again, the unions agreed to call off their protests and hunger strike.44
It was a kind of junta lite. In order for the regime to impose economic shock therapy, certain people needed to disappear—if only temporarily. Though certainly less brutal, these disappearances served the same purpose as they had in the seventies. Interning Bolivia’s trade unionists so that they could not resist the reforms cleared the path for the economic erasure of whole sectors of workers; their jobs were soon lost, and they ended up warehoused in the shantytowns and slums surrounding La Paz.
Sachs had gone to Bolivia quoting Keynes’s warning about economic collapse breeding fascism, but he had proceeded to prescribe measure
s so painful that quasi-fascist measures were required for their enforcement.
The Paz government’s crackdown was covered in the international press at the time, but only as a one-or two-day news story about generic riots in Latin America. When it came time to tell the tale of the triumph of “free-market reforms” in Bolivia, however, the events did not make it into the narrative (much as the symbiosis of Pinochet’s violence and Chile’s “economic miracle” is so often omitted). Jeffrey Sachs, of course, is not the one who called in the riot police or declared the state of siege, but he does devote a chapter of his book The End of Poverty to Bolivia’s victory over inflation, and while he seems happy to take a share of the credit, he makes no mention of the repression required to carry out the plan. The closest he comes is an oblique reference to “tense moments in the early months of the stabilization program.”45
In other accounts, even that admission is erased. Goni went so far as to claim that “stabilization had been achieved in a democracy without going against people’s human liberties, letting people express themselves.”46 A less idealized assessment came from a minister in the Paz government, who said that they “behaved like authoritarian pigs.”47
That dissonance may be the most lasting legacy of Bolivia’s shock therapy experiment. Bolivia had shown that wrenching shock therapy still needed to be accompanied by shocking attacks on inconvenient social groups and on democratic institutions. It also showed that the corporatist crusade could advance by these baldly authoritarian means and still be applauded as democratic because elections had taken place, regardless of how completely civil liberties were suppressed in the aftermath or how fully democratic wishes were ignored. (It was a lesson that would prove particularly handy for Russia’s Boris Yeltsin, among other leaders, in the years to come.) In this way, Bolivia provided a blueprint for a new, more palatable kind of authoritarianism, a civilian coup d’état, one carried out by politicians and economists in business suits rather than soldiers in military uniforms—all unfolding within the official shell of a democratic regime.