The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

  Moscow recognized the movement as the most serious threat yet to its Eastern empire. Inside the Soviet Union, opposition was still coming largely from human rights activists, many of whom were on the political right. But Solidarity’s members couldn’t easily be dismissed as stooges of capitalism—they were workers with hammers in their hands and coal dust in their pores, the people who should, according to Marxist rhetoric, have been the party’s base.* Even more threatening, Solidarity’s vision was everything the party was not: democratic where it was authoritarian; dispersed where it was centralized; participatory where it was bureaucratic. And its 10 million members had the power to bring Poland’s economy to a standstill. As Walesa taunted, they might lose their political battles, “but we will not be compelled to work. Because if people want us to build tanks, we will build streetcars. And trucks will go backward if we build them that way. We know how to beat the system. We are pupils of that system.”

  Solidarity’s commitment to democracy inspired even party insiders to rebel. “Once I was so naive as to think that a few evil men were responsible for the errors of the party,” Marian Arendt, a member of the Central Committee, told a Polish newspaper. “Now I no longer have such illusions. There is something wrong in our whole apparatus, in our entire structure.”6

  In September 1981, Solidarity’s members were ready to take their movement to the next stage. Nine hundred Polish workers gathered once again in Gdańsk for the union’s first national congress. There, Solidarity turned into a revolutionary movement with aspirations to take over the state, with its own alternative economic and political program for Poland. The Solidarity plan stated, “We demand a self-governing and democratic reform at every management level and a new socioeconomic system combining the plan, self-government and the market.” The centrepiece was a radical vision for the huge state-run companies, which employed millions of Solidarity members, to break away from governmental control and become democratic workers’ cooperatives. “The socialized enterprise,” the program stated, “should be the basic organizational unit in the economy. It should be controlled by the workers council representing the collective and should be operatively run by the director, appointed through competition and recalled by the council.”7 Walesa opposed this demand, fearing it was such a challenge to party control that it would provoke a crackdown. Others argued that the movement needed a goal, a positive hope for the future, not just an enemy. Walesa lost the debate, and the economic program became official Solidarity policy.

  Walesa’s fears of a crackdown turned out to be well founded. Solidarity’s mounting ambition frightened and infuriated Moscow. Under intense pressure, Poland’s leader, General Wojciech Jaruzelski, declared martial law in December 1981. Tanks rolled through the snow to surround factories and mines, Solidarity’s members were rounded up in the thousands, and its leaders, including Walesa, were arrested and imprisoned. As Time reported, “Soldiers and police used force to clear out resisting workers, leaving at least seven dead and hundreds injured when miners in Katowice fought back with axes and crowbars.”8

  Solidarity was forced underground, but during the eight years of police-state rule, the movement’s legend only grew. In 1983, Walesa was awarded the Nobel Peace Prize, although his activities were still restricted and he could not accept the prize in person. “The Peace Prize laureate’s seat is empty,” the representative from the Nobel Committee said at the ceremony. “Let us therefore try even harder to listen to the silent speech from his empty place.”

  The empty space was a fitting metaphor because, by that time, everyone seemed to see what they wanted in Solidarity: the Nobel Committee saw a man who “espoused no other weapon than the peaceful strike weapon.”9 The left saw redemption, a version of socialism that was not tainted by the crimes of Stalin or Mao. The right saw evidence that Communist states would meet even moderate expressions of dissent with brutal force. The human rights movement saw prisoners jailed for their beliefs. The Catholic Church saw an ally against Communist atheism. And Margaret Thatcher and Ronald Reagan saw an opening, a crack in the Soviet armor, even though Solidarity was fighting for the very rights that both leaders were doing their best to stamp out at home. The longer the ban lasted, the more powerful the Solidarity mythology became.

  By 1988, the terror of the initial crackdown had eased, and Polish workers were once again staging huge strikes. This time, with the economy in free fall, and the new, moderate regime of Mikhail Gorbachev in power in Moscow, the Communists gave in. They legalized Solidarity and agreed to hold snap elections. Solidarity split in two: there was now the union and a new wing, Citizens’ Committee Solidarity, that would participate in the elections. The two bodies were inextricably linked; Solidarity leaders were the candidates, and because the electoral platform was vague, the only specifics of what a Solidarity future might look like were provided by the union’s economic program. Walesa himself didn’t run, choosing to maintain his role as head of the union wing, but he was the face of the campaign, which ran under the slogan “With us, you’re safer.”10 The results were humiliating for the Communists and glorious for Solidarity: of the 261 seats in which Solidarity ran candidates, it won 260 of them.* Walesa, maneuvering behind the scenes, had the post of prime minister filled by Tadeusz Mazowiecki. He had little of Walesa’s charisma, but as the editor of the Solidarity weekly newspaper, he was considered one of the movement’s leading intellectuals.

  The Shock of Power

  As Latin Americans had just learned, authoritarian regimes have a habit of embracing democracy at the precise moment when their economic projects are about to implode. Poland was no exception. The Communists had been mismanaging the economy for decades, making one disastrous, expensive mistake after another, and it was at the point of collapse. “To our misfortune, we have won!” Walesa famously (and prophetically) declared. When Solidarity took office, debt was $40 billion, inflation was at 600 percent, there were severe food shortages and a thriving black market. Many factories were making products that, with no buyers in sight, were destined to rot in warehouses.11 For Poles, the situation made for a cruel entry into democracy. Freedom had finally come, but few had the time or the inclination to celebrate because their paychecks were worthless. They spent their days lining up for flour and butter if there happened to be any in the stores that week.

  All summer following its triumph at the polls, the Solidarity government was paralyzed by indecision. The speed of the collapse of the old order and the sudden election sweep had been shocks in themselves: in a matter of months, Solidarity activists went from hiding from the secret police to being responsible for paying the salaries of those same agents. And now they had the added shock of discovering that they barely had enough money to make the payroll. Rather than building the post-Communist economy they had dreamed of, the movement had the far more pressing task of avoiding a complete meltdown and potential mass starvation.

  Solidarity’s leaders knew they wanted to put an end to the state’s viselike grip on the economy, but they weren’t at all clear about what could replace it. For the movement’s militant rank and file, this was the chance to test their economic program: if the state-run factories were converted to workers’ cooperatives, there was a chance they could become economically viable again—worker management could be more efficient, especially without the added expense of party bureaucrats. Others argued for the same gradual approach to transition that Gorbachev was advocating at the time in Moscow—slow expansion of the areas in which supply-and-demand monetary rules apply (more legal shops and markets), combined with a strong public sector modeled on Scandinavian social democracy.

  But as had been the case in Latin America, before anything else could happen, Poland needed debt relief and some aid to get out of its immediate crisis. In theory, that’s the central mandate of the IMF: providing stabilizing funds to prevent economic catastrophes. If any government deserved that kind of lifeline it was the one headed by Solidarity, which had just pulled off the Easter
n Bloc’s first democratic ouster of a Communist regime in four decades. Surely, after all the Cold War railing against totalitarianism behind the Iron Curtain, Poland’s new rulers could have expected a little help.

  No such aid was on offer. Now in the grips of Chicago School economists, the IMF and the U.S. Treasury saw Poland’s problems through the prism of the shock doctrine. An economic meltdown and a heavy debt load, compounded by the disorientation of rapid regime change, meant that Poland was in the perfect weakened position to accept a radical shock therapy program. And the financial stakes were even higher than in Latin America: Eastern Europe was untouched by Western capitalism, with no consumer market to speak of. All of its most precious assets were still owned by the state—prime candidates for privatization. The potential for rapid profits for those who got in first was tremendous.

  Confident in the knowledge that the worse things got, the more likely the new government would be to accept a total conversion to unfettered capitalism, the IMF let the country fall deeper and deeper into debt and inflation. The White House, under George H. W. Bush, congratulated Solidarity on its triumph against Communism but made it clear that the U.S. administration expected Solidarity to pay the debts accumulated by the regime that had banned and jailed its members—and it offered only $119 million in aid, a pittance in a country facing economic collapse and in need of fundamental restructuring.

  It was in this context that Jeffrey Sachs, then thirty-four, started working as an adviser to Solidarity. Since his Bolivian exploits, the hype surrounding Sachs had reached feverish levels. Marveling at how he could serve as economic shock doctor to half a dozen countries and still hold down his teaching job, the Los Angeles Times pronounced Sachs—who still looked like a member of the Harvard debate team—the “Indiana Jones of Economics.”12

  Sachs’s work in Poland had begun before Solidarity’s election victory, at the request of the Communist government. It started with a one-day trip, during which he met with the Communist government and with Solidarity. It was George Soros, the billionaire financier and currency trader, who had enlisted Sachs to play a more hands-on role. Soros and Sachs traveled to Warsaw together, and as Sachs recalls, “I told the Solidarity group and the Polish government that I would be willing to become more involved to help address the deepening economic crisis.”13 Soros agreed to cover the costs for Sachs and his colleague David Lipton, a staunch free-market economist then working at the IMF, to set up an ongoing Poland mission. When Solidarity swept the elections, Sachs began working closely with the movement.

  Though he was a free agent, not on the payroll of either the IMF or the U.S. government, Sachs, in the eyes of many of Solidarity’s top officials, possessed almost messianic powers. With his high-level contacts in Washington and legendary reputation, he seemed to hold the key to unlocking the aid and debt relief that was the new government’s only chance. Sachs said at the time that Solidarity should simply refuse to pay the inherited debts, and he expressed confidence that he could mobilize $3 billion in support—a fortune compared with what Bush had offered.14 He had helped Bolivia land loans with the IMF and renegotiated its debts; there seemed no reason to doubt him.

  That help, however, came at a price: for Solidarity to get access to Sachs’s connections and powers of persuasion, the government first needed to adopt what became known in the Polish press as “the Sachs Plan” or “shock therapy.”

  It was an even more radical course than the one imposed on Bolivia: in addition to eliminating price controls overnight and slashing subsidies, the Sachs Plan advocated selling off the state mines, shipyards and factories to the private sector. It was a direct clash with Solidarity’s economic program of worker ownership, and though the movement’s national leaders had stopped talking about the controversial ideas in that plan, they remained articles of faith for many Solidarity members. Sachs and Lipton wrote the plan for Poland’s shock therapy transition in one night. It was fifteen pages long and, Sachs claimed, was “the first time, I believe, that anyone had written down a comprehensive plan for the transformation of a socialist economy to a market economy.”15

  Sachs was convinced that Poland had to take this “leap across the institutional chasm” right away because, in addition to all its other problems, it was on the verge of entering hyperinflation. Once that happened, he said, it would be “fundamental breakdown…just pure, unmitigated disaster.”16

  He gave several one-on-one seminars explaining the plan to key Solidarity officials, some lasting up to four hours, and he also addressed Poland’s elected officials as a group. Many of Solidarity’s leaders didn’t like Sachs’s ideas—the movement had formed in a revolt against drastic price increases imposed by the Communists—and now Sachs was telling them to do the same on a far more sweeping scale. He argued that they could get away with it precisely because “Solidarity had a reservoir of trust of the public, which was absolutely phenomenal and critical.”17

  Solidarity’s leaders hadn’t planned to expend that trust on policies that would cause extreme pain to their rank and file, but the years spent in the underground, in jail and in exile had also alienated them from their base. As the Polish editor Przemyslaw Wielgosz explains, the top tier of the movement “became effectively cut off…their support came not from the factories and industrial plants, but the church.”18 The leaders were also desperate for a quick fix, even if it was painful, and that was what Sachs was offering. “Will this work? That’s what I want to know. Will this work?” demanded Adam Michnik, one of Solidarity’s most celebrated intellectuals. Sachs did not waver: “This is good. This will work.”*19

  Sachs often held up Bolivia as the model that Poland should emulate, so often that the Poles grew tired of hearing about the place. “I would love to see Bolivia,” one Solidarity leader told a reporter at the time. “I’m sure it’s very lovely, very exotic. I just don’t want to see Bolivia here.” Lech Walesa developed a particularly acute antipathy to Bolivia, as he admitted to Gonzalo Sánchez de Lozada (Goni) when the two men met years later at a summit, when they were both presidents. “He came up to me,” Goni recalled, “and said, ‘I’ve always wanted to meet a Bolivian, especially a Bolivian president, because they’re always making us take this very bitter medicine, saying you have to do it because this is what the Bolivians did. Now I know you, you’re not that bad a guy, but I sure used to hate you.’”20

  In Sachs’s talk of Bolivia, he failed to mention that in order to push through the shock therapy program, the government had imposed a state of emergency and, on two separate occasions, kidnapped and interned the union leadership—much as the Communist Party secret police had snatched and imprisoned Solidarity’s leaders under a state of emergency not so long before.

  What was most persuasive, many now recall, was Sachs’s promise that if they followed his harsh advice, Poland would cease being exceptional and become “normal”—as in “a normal European country.” If Sachs was right, and they really could fast-forward to becoming a country like France or Germany simply by hacking off the structures of the old state, wasn’t the pain worth it? Why take an incremental route to change that could well fail—or pioneer a new third way—when this insta-Europe version was right there, calling out? Sachs predicted that shock therapy would cause “momentary dislocations” as prices spiked. “But then they’ll stabilize—people will know where they stand.”21

  He formed an alliance with Poland’s newly appointed finance minister, Leszek Balcerowicz, an economist at the Main School of Planning and Statistics in Warsaw. Little was known of Balcerowicz’s political leanings when he was appointed (all economists were officially socialist), but it would soon become clear that he saw himself as an honorary Chicago Boy, having pored over an illegal Polish edition of Friedman’s Free to Choose. It helped “to inspire me, and many others, to dream of a future of freedom during the darkest years of communist rule,” Balcerowicz later explained.22

  Friedman’s fundamentalist version of capitalism was a long w
ay from what Walesa had been promising the country that summer. He was still insisting that Poland was going to find that more generous third way, which he described in an interview with Barbara Walters as “a mixture…. It won’t be capitalism. It will be a system that is better than capitalism, that will reject everything that is evil in capitalism.”23

  Many did argue that the sudden fix that Sachs and Balcerowicz were selling was a myth, that, rather than jolting Poland into health and normalcy, shock therapy would create an even bigger mess of poverty and deindustrialization than before. “This is a poor, weak country. We simply cannot take the shock,” a leading doctor and health care advocate told the New Yorker journalist Lawrence Weschler.24

  For three months after their historic victory at the polls and their abrupt transition from outlaws to lawmakers, the Solidarity inner circle debated, paced, yelled and chain-smoked, unable to decide what to do. Every day, the country fell deeper into economic crisis.

  A Very Hesitant Embrace

  On September 12, 1989, the Polish prime minister, Tadeusz Mazowiecki, rose before the first elected parliament. The Solidarity caucus had at last decided what it was going to do about the economy, but only a handful of people knew the final decision—was it the Sachs Plan, the Gorbachev gradualist route or Solidarity’s platform of workers’ cooperatives?

  Mazowiecki was on the verge of announcing the verdict, but in the middle of his momentous speech, before he could confront the country’s most burning question, something went terribly wrong. He started to sway, clasped the lectern and, according to one witness, “grew pale, gasped for breath and was heard to mutter under his breath, ‘I’m not feeling too well.’”25 His aides whisked him out of the chamber, leaving the 415 deputies to trade rumors. Was it a heart attack? Had he been poisoned? By the Communists? By the Americans?