The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

  John Maynard Keynes, who headed the U.K. delegation, was convinced that the world had finally recognized the political perils of leaving the market to regulate itself. “Few believed it possible,” Keynes said at the conference’s end. But if the institutions stayed true to their founding principles, “the brotherhood of man will have become more than a phrase.”24

  The IMF and the World Bank did not live up to that universal vision; from the start they allocated power not on the basis of “one country, one vote,” like the UN General Assembly, but rather on the size of each country’s economy—an arrangement that gives the United States an effective veto over all major decisions, with Europe and Japan controlling most of the rest. That meant that when Reagan and Thatcher came to power in the eighties, their highly ideological administrations were essentially able to harness the two institutions for their own ends, rapidly increasing their power and turning them into the primary vehicles for the advancement of the corporatist crusade.

  The colonization of the World Bank and the IMF by the Chicago School was a largely unspoken process, but it became official in 1989 when John Williamson unveiled what he called “the Washington Consensus.” It was a list of economic policies that he said both institutions now considered the bare minimum for economic health—“the common core of wisdom embraced by all serious economists.”25 These policies, masquerading as technical and uncontentious, included such bald ideological claims as all “state enterprises should be privatized” and “barriers impeding the entry of foreign firms should be abolished.”26 When the list was complete, it made up nothing less than Friedman’s neoliberal triumvirate of privatization, deregulation/free trade and drastic cuts to government spending. These were the policies, Williamson said, “that were being urged on Latin America by the powers-that-be in Washington.”27 Joseph Stiglitz, former chief economist of the World Bank and one of the last holdouts against the new orthodoxy, wrote that “Keynes would be rolling over in his grave were he to see what has happened to his child.”28

  Officials with the World Bank and the IMF had always made policy recommendations when they handed out loans, but in the early eighties, emboldened by the desperation of developing countries, those recommendations morphed into radical free-market demands. When crisis-struck countries came to the IMF seeking debt relief and emergency loans, the fund responded with sweeping shock therapy programs, equivalent in scope to “The Brick” drafted by the Chicago Boys for Pinochet and the 220-law decree cooked up in Goni’s living room in Bolivia.

  The IMF issued its first full-fledged “structural adjustment” program in 1983. For the next two decades, every country that came to the fund for a major loan was informed that it needed to revamp its economy from top to bottom. Davison Budhoo, an IMF senior economist who designed structural adjustment programs in Latin America and Africa throughout the eighties, admitted later that “everything we did from 1983 onward was based on our new sense of mission to have the south ‘privatised’ or die; towards this end we ignominiously created economic bedlam in Latin America and Africa in 1983–88.”29

  Despite this radical (and highly profitable) new mission, the IMF and the bank always claimed that everything they did was in the interest of stabilization. The fund’s official mandate was still crisis prevention—not social engineering or ideological transformation—so stabilization needed to be the official rationale. The reality was that in country after country, the international debt crisis was being methodically leveraged to advance the Chicago School agenda, based on a ruthless application of Friedman’s shock doctrine.

  Economists at the World Bank and the IMF admitted this at the time, although the admissions were generally made in coded economic language and restricted to specialized forums and publications for fellow “technocrats.” Dani Rodrik, a renowned Harvard economist who worked extensively with the World Bank, described the entire construct of “structural adjustment” as an ingenious marketing strategy. “The World Bank must be given credit,” Rodrik wrote in 1994, “for having invented and successfully marketed the concept of ‘structural adjustment,’ a concept that packaged together microeconomic and macroeconomic reforms. Structural adjustment was sold as the process that countries needed to undergo in order to save their economies from the crisis. For governments that bought into the package, the distinction between sound macroeconomic policies that maintain external balance and stable prices, on the one hand, and policies that determine openness [like free trade], on the other, was obfuscated.”30

  The principle was simple: countries in crisis desperately need emergency aid to stabilize their currencies. When privatization and free-trade policies are packaged together with a financial bailout, countries have little choice but to accept the whole package. The really clever part was that the economists themselves knew that free trade had nothing to do with ending a crisis, but that information was expertly “obfuscated.” Rodrik meant his comment as a compliment. Not only did this bundling work in getting poor countries to accept the policies selected for them by Washington, but it was the only thing that worked—and Rodrik had the numbers to back up his claim. He had studied all the countries that adopted radical free-trade policies in the eighties and found that “no significant case of trade reform in a developing country in the 1980s took place outside the context of a serious economic crisis.”31

  It was a staggering admission. At this point in history, the bank and the fund were publicly insisting that governments the world over had seen the light and realized that the Washington Consensus policies were the only recipe for stability, and therefore democracy. Yet here was an acknowledgment, made inside the Washington establishment, that developing countries were submitting to them only through a combination of false pretenses and bald extortion: Want to save your country? Sell it off. Rodrik even conceded that privatization and free trade—two central pieces of the structural adjustment package—had no direct link with creating stability. To argue otherwise, according to Rodrik, was “bad economics.”32

  Argentina—the “model student” of the IMF in this period—once again offers a clear window into the mechanics of the new order. After the hyperinflation crisis forced President Alfonsín to resign, he was replaced by Carlos Menem, a Peronist governor from a small province who wore leather jackets, had muttonchop sideburns and seemed tough enough to stand up to both the still-ominous military and the creditors. After all the violent attempts that had been made to erase the Peronist party and the trade union movement, Argentina now had a president who had run a pro-union campaign promising to revive Juan Perón’s nationalist economic policies. It was a moment with many of the same emotional echoes as Paz’s inauguration in Bolivia.

  Too many, as it turned out. After a year in office, and under intense pressure from the IMF, Menem embarked on a defiant course of “voodoo politics.” Elected as the symbol of the party that had opposed the dictatorship, Menem appointed Domingo Cavallo as his economy minister, bringing back to power the junta-era official responsible for bailing out the debts of the corporate sector—the dictatorship’s parting gift.33 His appointment was what economists call “a signal”—an unmistakable indication, in this case, that the new government would pick up and continue the corporatist experiment started by the junta. The Buenos Aires stock market responded with the equivalent of a standing ovation: a 30 percent spike in trading on the day Cavallo’s name was announced.34

  Cavallo immediately called for ideological reinforcements, stacking the government with former students of Milton Friedman and Arnold Harberger. Virtually all the country’s top economic posts were filled by Chicago Boys: president of the central bank was Roque Fernández, who had worked at both the IMF and the World Bank; vice president of the central bank was Pedro Pou, a Chicago Boy who had worked for the dictatorship; the chief central bank adviser was the Pablo Guidotti, who came directly from his job working at the IMF under another former University of Chicago professor, Michael Mussa.

  Argentina was not unique in this r
egard. By 1999, the Chicago School international alumni included more than twenty-five government ministers and more than a dozen central bank presidents from Israel to Costa Rica, an extraordinary level of influence for one university department.35 In Argentina, as in so many other countries, the Chicago Boys formed a kind of ideological pincer around the elected government, one group squeezing from within, another exerting its pressure from Washington. For instance, the IMF delegations to Buenos Aires were often led by Claudio Loser, the Argentine Chicago Boy, which meant that when he met with the finance ministry and the central bank, the meetings were not adversarial negotiations but collegial discussions among friends, former classmates at the University of Chicago and recent coworkers on Nineteenth Street. A book published in Argentina about the effect of this global economic fraternity is aptly titled Buenos Muchachos, a reference to Martin Scorsese’s mafia classic, Goodfellas.36

  The members of this fraternity were in enthusiastic agreement about what needed to be done with Argentina’s economy—and how to pull it off. The Cavallo Plan, as it came to be called, was based on the clever packaging trick that both the World Bank and the IMF had perfected: harnessing the chaos and desperation of a hyperinflation crisis to pass privatization off as an integral part of the rescue mission. So, to stabilize the money system, Cavallo quickly made massive cuts to public spending and launched another new currency, the Argentine peso, pegged to the U.S. dollar. Within a year, inflation was down to 17.5 percent and was virtually eliminated a few years later.37 This dealt with the runaway currency but “obfuscated” the other half of the program.

  Argentina’s dictatorship, for all its commitment to pleasing foreign investors, had left large and desirable pieces of the economy in state hands, from the national airline to Patagonia’s impressive oil reserves. As far as Cavallo and his Chicago Boys were concerned, the revolution was only half finished, and they were determined to use the economic crisis to complete their work.

  In the early nineties, the Argentine state sold off the riches of the country so rapidly and so completely that the project far surpassed what had taken place in Chile a decade earlier. By 1994, 90 percent of all state enterprises had been sold to private companies, including Citibank, Bank Boston, France’s Suez and Vivendi, Spain’s Repsol and Telefónica. Before making the sales, Menem and Cavallo had generously performed a valuable service for the new owners: they had fired roughly 700,000 of their workers, according to Cavallo’s own estimates; some put the number much higher. The oil company alone lost 27,000 workers during the Menem years. An admirer of Jeffrey Sachs, Cavallo called this process “shock therapy.” Menem had an even more brutal phrase for it: in a country still traumatized by mass torture, he called it “major surgery without anesthetic.”*38

  In the midst of the transformation, Time magazine put Menem on its cover, his face grinning out of the middle of a sunflower, under the headline “Menem’s Miracle.”39 And it was a miracle—Menem and Cavallo had pulled off a radical and painful privatization program without sparking a national revolt. How had they done it?

  Years later, Cavallo explained. “At the time of hyperinflation it’s terrible for the people, particularly for low-income people and small savers, because they see that in a few hours or in a few days they are being told their salaries got destroyed by the price increases, which take place at an incredible speed. That is why the people ask the government, ‘Please do something.’ And if the government comes with a good stabilization plan, that is the opportunity to also accompany that plan with other reforms…the most important reforms were related to the opening up of the economy and to the deregulation and the privatization process. But the only way to implement all those reforms was, at that time, to take advantage of the situation created by hyperinflation, because the population was ready to accept drastic changes in order to eliminate hyperinflation and to go back to normality.”40

  In the long term, Cavallo’s program in its entirety would prove disastrous for Argentina. His method of stabilizing the currency—pegging the peso to the U.S. dollar—made it so expensive to produce goods inside the country that local factories could not compete with the cheap imports flooding the country. So many jobs were lost that well over half the country would eventually be pushed below the poverty line. In the short term, however, the plan worked brilliantly: Cavallo and Menem had smuggled privatization in while the country was in shock from hyperinflation. Crisis had done its job.

  What Argentina’s leaders pulled off in this period was a psychological more than an economic technique. As Cavallo, a junta veteran, well understood, in moments of crisis, people are willing to hand over a great deal of power to anyone who claims to have a magic cure—whether the crisis is a financial meltdown or, as the Bush administration would later show, a terrorist attack.

  And that is how the crusade that Friedman began managed to survive the dreaded transition to democracy—not by its proponents persuading electorates of the wisdom of their worldview, but by moving deftly from crisis to crisis, expertly exploiting the desperation of economic emergencies to push through policies that would tie the hands of fragile new democracies. Once the tactic was perfected, opportunities just seemed to multiply. The Volcker Shock would be followed by the Mexican Tequila Crisis in 1994, the Asian Contagion in 1997 and the Russian Collapse in 1998, which was followed shortly afterward by one in Brazil. When these shocks and crises started to lose their power, even more cataclysmic ones would appear: tsunamis, hurricanes, wars and terrorist attacks. Disaster capitalism was taking shape.

  PART 4

  LOST IN TRANSITION

  WHILE WE WEPT, WHILE WE TREMBLED, WHILE WE DANCED

  These worst of times give rise to the best of opportunities for those who understand the need for fundamental economic reform.

  —Stephan Haggard and John Williamson, The Political Economy of Policy Reform, 1994

  CHAPTER 9

  SLAMMING THE DOOR ON HISTORY

  A CRISIS IN POLAND, A MASSACRE IN CHINA

  I live in a Poland that is now free, and I consider Milton Friedman to be one of the main intellectual architects of my country’s liberty.

  —Leszek Balcerowicz, former finance minister of Poland, November 20061

  There’s a certain chemical that gets released in your stomach when you make ten times your money. And it’s addictive.

  —William Browder, a U.S. money manager, on investing in Poland in the early days of capitalism2

  We certainly must not stop eating for fear of choking.

  —People’s Daily, the official state newspaper, on the need to continue free-market reforms after the Tiananmen Square massacre3

  Before the Berlin Wall fell, becoming the defining symbol of the collapse of Communism, there was another image that held out the promise of Soviet barriers coming down. It was Lech Walesa, a laid-off electrician with a handlebar moustache and disheveled hair, climbing over a steel fence festooned with flowers and flags in Gdańsk, Poland. The fence protected the Lenin shipyards and the thousands of workers who had barricaded themselves inside to protest a Communist Party decision to raise the price of meat.

  The workers’ strike was an unprecedented show of defiance against the Moscow-controlled government, which had ruled Poland for thirty-five years. No one knew what would happen: Would Moscow send tanks? Would they fire on the strikers and force them to work? As the strike wore on, the shipyard became a pocket of popular democracy within an authoritarian country, and the workers expanded their demands. They no longer wanted their work lives controlled by party apparatchiks claiming to speak for the working class. They wanted their own independent trade union, and they wanted the right to negotiate, bargain and strike. Not waiting for permission, they voted to form that union and called it Solidarność, Solidarity.4 That was 1980, the year the world fell in love with Solidarity and with its leader, Lech Walesa.

  Walesa, then thirty-six, was so in tune with the aspirations of Poland’s workers that they seemed in spiritual com
munion. “We eat the same bread!” he bellowed into the microphone in the Gdańsk shipyard. It was a reference not only to Walesa’s own unassailable blue-collar credentials but also to the powerful role that Catholicism played in this trail-blazing new movement. With religion frowned upon by party officials, the workers wore their faith as a badge of courage, lining up to take Communion behind the barricades. Walesa, a bracing mix of bawdy and pious, opened the Solidarity office with a wooden crucifix in one hand and a bouquet of flowers in the other. When it came time to sign the first landmark labor agreement between Solidarity and the government, Walesa marked his name with “a giant souvenir pen bearing the likeness of John Paul II.” The admiration was mutual; the Polish pope told Walesa that his prayers were with Solidarity.5

  Solidarity spread through the country’s mines, shipyards and factories with ferocious speed. Within a year, it had 10 million members—almost half of Poland’s working-age population. Having won the right to bargain, Solidarity started making concrete headway: a five-day work week instead of six, and more say in the running of factories. Tired of living in a country that worshipped an idealized working class but abused actual workers, Solidarity members denounced the corruption and brutality of the party functionaries who answered not to the people of Poland but to remote and isolated bureaucrats in Moscow. All the desire for democracy and self-determination suppressed by one-party rule was being poured into local Solidarity unions, sparking a mass exodus of members from the Communist Party.