The Shock Doctrine: The Rise of Disaster Capitalism
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One floor below, a team of doctors examined Mazowiecki and administered an electrocardiogram. It wasn’t a heart attack or poison. The prime minister was simply suffering from “acute fatigue,” from too little sleep and too much stress. After almost an hour of tense uncertainty, he reentered the parliamentary chamber, where he was greeted with thunderous applause. “Excuse me,” said the bookish Mazowiecki. “The state of my health is the same as the state of the Polish economy.”26
At long last, the verdict: the Polish economy would be treated for its own acute fatigue with shock therapy, a particularly radical course of it that would include “privatization of state industry, the creation of a stock exchange and capital markets, a convertible currency, and a shift from heavy industry to consumer goods production” as well as “budget cuts”—as fast as possible and all at once.27
If the dream of Solidarity began with Walesa’s energetic vault over the steel fence in Gdańsk, then Mazowiecki’s exhaustedly succumbing to shock therapy represented the end of that dream. Finally, the decision came down to money. Solidarity’s members did not decide that their vision for a cooperatively run economy was wrongheaded, but their leaders became convinced that all that mattered was winning relief from the Communist debts and immediately stabilizing the currency. As Henryk Wujec, one of Poland’s leading advocates of cooperatives, put it at the time, “If we had enough time, we might even be able to pull it off. But we don’t have time.”28 Sachs, meanwhile, could deliver the money. He helped Poland negotiate an agreement with the IMF and secured some debt relief and $1 billion to stabilize the currency—but all of it, particularly the IMF funds, was strictly conditional on Solidarity’s submitting to shock therapy.
Poland became a textbook example of Friedman’s crisis theory: the disorientation of rapid political change combined with the collective fear generated by an economic meltdown to make the promise of a quick and magical cure—however illusory—too seductive to turn down. Halina Bortnowska, a human rights activist, described the velocity of change in this period as “the difference between dog years and human years, the way we’re living these days…you start witnessing these semi-psychotic reactions. You can no longer expect people to act in their own best interests when they’re so disoriented they don’t know—or no longer care—what those interests are.”29
Balcerowicz, the finance minister, has since admitted that capitalizing on the emergency environment was a deliberate strategy—a way, like all shock tactics, to clear away the opposition. He explained that he was able to push through policies that were antithetical to the Solidarity vision in both content and form because Poland was in what he dubbed a period of “extraordinary politics.” He described that condition as a short-lived window in which the rules of “normal politics” (consultation, discussion, debate) do not apply—in other words, a democracy-free pocket within a democracy.30
“Extraordinary politics,” he said, “by definition is a period of very clear discontinuity in a country’s history. It could be a period of very deep economic crisis, of a breakdown of the previous institutional system, or of a liberation from external domination (or end of war). In Poland, all three phenomena converged in 1989.”31 Because of those extraordinary circumstances, he was able to shunt aside due process and force “a radical acceleration of the legislative process” to pass the shock therapy package.32
In the early nineties, Balcerowicz’s theory about periods of “extraordinary politics” attracted considerable interest among Washington economists. And no wonder: only two months after Poland announced that it would accept shock therapy, something happened that would change the course of history and invest Poland’s experiment with global significance. In November 1989, the Berlin Wall was joyously dismantled, the city was turned into a festival of possibility and the MTV flag was planted in the rubble, as if East Berlin were the face of the moon. Suddenly it seemed that the whole world was living the same kind of fast-forward existence as the Poles: the Soviet Union was on the verge of breaking apart, apartheid in South Africa seemed on its last legs, authoritarian regimes continued to crumble in Latin America, Eastern Europe and Asia, and long wars were coming to an end from Namibia to Lebanon. Everywhere, old regimes were collapsing, and the new ones rising in their place had yet to take shape.
Within a few years it seemed as if half the world was in a period of “extraordinary politics,” or “in transition,” as liberated countries came to be called in the nineties—suspended in an existential in-betweenness of past and future. According to Thomas Carothers, a leader in the U.S. government’s so-called democracy-promotion apparatus, “in the first half of the 1990s…the set of ‘transitional countries’ swelled dramatically, and nearly 100 countries (approximately 20 in Latin America, 25 in Eastern Europe and the former Soviet Union, 30 in sub-Saharan Africa, 10 in Asia, and 5 in the Middle East) were in some kind of dramatic transition from one model to another.”33
Many were claiming that all of this flux, and the fall of real and metaphorical walls, would lead to an end of ideological orthodoxy. Freed from the polarizing effects of dueling superpowers, countries would finally be able to choose the best of both worlds—some hybrid of political freedom and economic security. As Gorbachev put it, “Many decades of being mesmerized by dogma, by a rule-book approach, have had their effect. Today we want to introduce a genuinely creative spirit.”34
In Chicago School circles, such talk of mix-and-match ideologies was met with open contempt. Poland had clearly shown that this kind of chaotic transition opened up a window for decisive men, acting swiftly, to push through rapid change. Now was the moment to convert former Communist countries to pure Friedmanism, not some mongrel Keynesian compromise. The trick, as Friedman had said, was for Chicago School believers to be ready with their solutions when everyone else was still asking questions and regaining their bearings.
A sort of revival meeting for those who embraced this worldview was held in that eventful winter of 1989; the location, fittingly, was the University of Chicago. The occasion was a speech by Francis Fukuyama titled “Are We Approaching the End of History?”* For Fukuyama, then a senior policy maker at the U.S. State Department, the strategy for advocates of unfettered capitalism was clear: don’t debate with the third-way crowd; instead, preemptively declare victory. Fukuyama was convinced that there should be no abandonment of extremes, no best of both worlds, no splitting the difference. The collapse of Communism, he told his audience, was leading “not to an ‘end of ideology’ or a convergence between capitalism and socialism…but to an unabashed victory of economic and political liberalism.” It was not ideology that had ended but “history as such.”35
The talk was sponsored by John M. Olin, longtime funder of Milton Friedman’s ideological crusade and bankroller of the boom in right-wing think tanks.36 The synergy was fitting since Fukuyama was essentially restating Friedman’s claim that free markets and free people are part of an inseparable project. Fukuyama took that thesis into bold new terrain, arguing that deregulated markets in the economic sphere, combined with liberal democracy in the political sphere, represented “the end point of mankind’s ideological evolution and…final form of human government.”37 Democracy and radical capitalism were fused not only with each other but also with modernity, progress and reform. Those who objected to the merger were not just wrong but “still in history,” as Fukuyama put it, the equivalent of being left behind after the Rapture, since everyone else had already transcended to a celestial “posthistorical” plane.38
The argument was a magnificent example of the democracy avoidance honed by the Chicago School. Much as the IMF had sneaked privatization and “free trade” into Latin America and Africa under cover of emergency “stabilization” programs, Fukuyama was now trying to smuggle this same highly contested agenda into the pro-democracy wave rising up from Warsaw to Manila. It was true, as Fukuyama noted, that there was an emerging and irrepressible consensus that all people have the right to govern themselves demo
cratically, but only in the State Department’s most vivid fantasies was that desire for democracy accompanied by citizens’ clamoring for an economic system that would strip away job protections and cause mass layoffs.
If there was a genuine consensus about anything, it was that for people escaping both left-wing and right-wing dictatorships, democracy meant finally having a say in all major decisions rather than having somebody else’s ideology imposed unilaterally and with force. In other words, the universal principle that Fukuyama identified as “the sovereignty of the people” included the sovereignty of the people to choose how the wealth of their countries would be distributed, from the fate of state-owned companies to the level of funding for schools and hospitals. Around the world, citizens were ready to exercise their hard-won democratic powers to become the authors of their national destinies, at last.
In 1989, history was taking an exhilarating turn, entering a period of genuine openness and possibility. So it was no coincidence that Fukuyama, from his perch at the State Department, chose precisely that moment to attempt to slam the history book shut. Nor was it a coincidence that the World Bank and the IMF chose that same volatile year to unveil the Washington Consensus—a clear effort to halt all discussion and debate about any economic ideas outside the free-market lockbox. These were democracy-containment strategies, designed to undercut the kind of unscripted self-determination that was, and always had been, the greatest single threat to the Chicago School crusade.
The Shock of Tiananmen Square
One place where Fukuyama’s bold pronouncement came in for early discrediting was China. Fukuyama’s speech took place in February 1989; two months later, a pro-democracy movement exploded in Beijing, with mass protests and sit-ins in Tiananmen Square. Fukuyama had claimed that democratic and “free market reforms” were a twin process, impossible to pry apart. Yet in China, the government had done precisely that: it was pushing hard to deregulate wages and prices and expand the reach of the market—but it was fiercely determined to resist calls for elections and civil liberties. The demonstrators, on the other hand, demanded democracy, but many opposed the government’s moves toward unregulated capitalism, a fact largely left out of the coverage of the movement in the Western press. In China, democracy and Chicago School economics were not proceeding hand in hand; they were on opposite sides of the barricades surrounding Tiananmen Square.
In the early 1980s, the Chinese government, then led by Deng Xiaoping, was obsessed with avoiding a repeat of what had just happened in Poland, where workers had been allowed to form an independent movement that challenged the party’s monopoly hold on power. It was not that China’s leaders were committed to protecting the state-owned factories and farm communes that formed the foundation of the Communist state. In fact, Deng was enthusiastically committed to converting to a corporate-based economy—so committed that, in 1980, his government invited Milton Friedman to come to China and tutor hundreds of top-level civil servants, professors and party economists in the fundamentals of free-market theory. “All were invited guests, who had to show a ticket of invitation to attend,” Friedman recalled of his audiences in Beijing and Shanghai. His central message was “how much better ordinary people lived in capitalist than in communist countries.”39 The example he held up was Hong Kong, a zone of pure capitalism that Friedman had long admired for its “dynamic, innovative character that has been produced by personal liberty, free trade, low taxes, and minimal government intervention.” He claimed that Hong Kong, despite having no democracy, was freer than the United States, since its government participated less in the economy.40
Friedman’s definition of freedom, in which political freedoms were incidental, even unnecessary, compared with the freedom of unrestricted commerce, conformed nicely with the vision taking shape in the Chinese Politburo. The party wanted to open the economy to private ownership and consumerism while maintaining its own grip on power—a plan that ensured that once the assets of the state were auctioned off, party officials and their relatives would snap up the best deals and be first in line for the biggest profits. According to this version of “transition,” the same people who controlled the state under Communism would control it under capitalism, while enjoying a substantial upgrade in lifestyle. The model the Chinese government intended to emulate was not the United States but something much closer to Chile under Pinochet: free markets combined with authoritarian political control, enforced by iron-fisted repression.
From the start, Deng clearly understood that repression would be crucial. Under Mao, the Chinese state had exerted brutal control over the people, dispensing with opponents and sending dissidents for reeducation. But Mao’s repression took place in the name of the workers and against the bourgeoisie; now the party was going to launch its own counterrevolution and ask workers to give up many of their benefits and security so that a minority could collect huge profits. It was not going to be an easy task. So, in 1983, as Deng opened up the country to foreign investment and reduced protections for workers, he also ordered the creation of the 400,000-strong People’s Armed Police, a new, roving riot squad charged with quashing all signs of “economic crimes” (i.e., strikes and protests). According to the China historian Maurice Meisner, “The People’s Armed Police kept American helicopters and electric cattle prods in its arsenal.” And “several units were sent to Poland for anti-riot training”—where they studied the tactics that had been used against Solidarity during Poland’s period of martial law.41
Many of Deng’s reforms were successful and popular—farmers had more control over their lives, and commerce returned to the cities. But in the late eighties, Deng began introducing measures that were distinctly unpopular, particularly among workers in the cities—price controls were lifted, sending prices soaring; job security was eliminated, creating waves of unemployment; and deep inequalities were opening up between the winners and losers in the new China. By 1988, the party was confronting a powerful backlash and was forced to reverse some of its price deregulation. Outrage was also mounting in the face of the party’s defiant corruption and nepotism. Many Chinese citizens wanted more freedom in the market, but “reform” increasingly looked like code for party officials turning into business tycoons, as many illegally took posession of the assets they had previously managed as bureaucrats.
With the free-market experiment in peril, Milton Friedman was once again invited to pay a visit to China—much as the Chicago Boys and the piranhas had enlisted his help in 1975, when their program had sparked an internal revolt in Chile.42 A high-profile visit from the world-famous guru of capitalism was just the boost China’s “reformers” needed.
When Friedman and his wife, Rose, arrived in Shanghai in September 1988, they were dazzled by how quickly mainland China was beginning to look and feel like Hong Kong. Despite the rage simmering at the grass roots, everything they saw served to confirm “our faith in the power of free markets.” Friedman described this moment as “the most hopeful period of the Chinese experiment.”
In the presence of official state media, Friedman met for two hours with Zhao Ziyang, general secretary of the Communist Party, as well as with Jiang Zemin, then party secretary of the Shanghai Committee and the future Chinese president. Friedman’s message to Jiang echoed the advice he had given to Pinochet when the Chilean project was on the skids: don’t bow to the pressure and don’t blink. “I emphasized the importance of privatization and free markets, and of liberalizing at one fell stroke,” Friedman recalled. In a memo to the general secretary of the Communist Party, Friedman stressed that more, not less, shock therapy was needed. “China’s initial steps of reform have been dramatically successful. China can make further dramatic progress by placing still further reliance on free private markets.”43
Shortly after his return to the U.S., Friedman, remembering the heat he had taken for advising Pinochet, wrote “out of sheer devilry” a letter to the editor of a student newspaper, denouncing his critics for their double standards. He ex
plained that he had just spent twelve days in China, where “I was mostly the guest of governmental entities,” and had met with Communist Party officials at the highest level. Yet these meetings had provoked no human rights outcry on American university campuses, Friedman pointed out. “Incidentally, I gave precisely the same advice to both Chile and China.” He concluded by asking sarcastically, “Should I prepare myself for an avalanche of protests for having been willing to give advice to so evil a government?”44
A few months later, that devilish letter took on sinister overtones, as the Chinese government began to emulate many of Pinochet’s most infamous tactics.
Friedman’s trip did not have the desired results. The pictures in the official papers of the professor offering his blessing to party bureaucrats did not succeed in bringing the public onside. In subsequent months, protests grew more determined and radical. The most visible symbols of the opposition were the demonstrations by student strikers in Tiananmen Square. These historic protests were almost universally portrayed in the international media as a clash between modern, idealistic students who wanted Western-style democratic freedoms and old-guard authoritarians who wanted to protect the Communist state. Recently, another analysis of the meaning of Tiananmen has emerged, one that challenges the mainstream version while putting Friedmanism at the heart of the story. This alternative narrative is being advanced by, among others, Wang Hui, one of the organizers of the 1989 protests, and now a leading Chinese intellectual of what is known as China’s “New Left.” In his 2003 book, China’s New Order, Wang explains that the protesters spanned a huge range of Chinese society—not just elite university students but also factory workers, small entrepreneurs and teachers. What ignited the protests, he recalls, was popular discontent in the face of Deng’s “revolutionary” economic changes, which were lowering wages, raising prices and causing “a crisis of layoffs and unemployment.”45 According to Wang, “These changes were the catalyst for the 1989 social mobilization.”46