The Shock Doctrine: The Rise of Disaster Capitalism
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So what happened at the G7 meeting in 1991 was totally unexpected. The nearly unanimous message that Gorbachev received from his fellow heads of state was that, if he did not embrace radical economic shock therapy immediately, they would sever the rope and let him fall. “Their suggestions as to the tempo and methods of transition were astonishing,” Gorbachev wrote of the event.6
Poland had just completed its first round of shock therapy under the IMF’s and Jeffrey Sachs’s tutelage, and the consensus among British prime minister John Major, U.S. president George H. W. Bush, Canadian prime minister Brian Mulroney and Japanese prime minister Toshiki Kaifu was that the Soviet Union had to follow Poland’s lead on an even faster timetable. After the meeting, Gorbachev got the same marching orders from the IMF, the World Bank and every other major lending institution. Later that year, when Russia asked for debt forgiveness to weather a catastrophic economic crisis, the stern answer was that the debts had to be honored.7 Since the time when Sachs had marshaled aid and debt relief for Poland, the political mood had changed—it was meaner.
What happened next—the dissolution of the Soviet Union, Gorbachev’s eclipse by Yeltsin, and the tumultuous course of economic shock therapy in Russia—is a well-documented chapter of contemporary history. It is, however, a story too often told in the bland language of “reform,” a narrative so generic that it has hidden one of the greatest crimes committed against a democracy in modern history. Russia, like China, was forced to choose between a Chicago School economic program and an authentic democratic revolution. Faced with that choice, China’s leaders had attacked their own people in order to prevent democracy from disturbing their free-market plans. Russia was different: the democratic revolution was already well under way—in order to push through a Chicago School economic program, that peaceful and hopeful process that Gorbachev began had to be violently interrupted, then radically reversed.
Gorbachev knew that the only way to impose the kind of shock therapy being advocated by the G7 and the IMF was with force—as did many in the West pushing for these policies. The Economist magazine, in an influential 1990 piece, urged Gorbachev to adopt “strong-man rule…to smash the resistance that has blocked serious economic reform.”8 Only two weeks after the Nobel Committee had declared an end to the Cold War, The Economist was urging Gorbachev to model himself after one of the Cold War’s most notorious killers. Under the heading “Mikhail Sergeevich Pinochet?” the article concluded that even though following its advice could cause “possible blood-letting…it might, just might, be the Soviet Union’s turn for what could be called the Pinochet approach to liberal economics.” The Washington Post was willing to go further. In August 1991, the paper ran a commentary under the headline “Pinochet’s Chile a Pragmatic Model for Soviet Economy.” The article supported the idea of a coup for getting rid of the slow-going Gorbachev, but the author, Michael Schrage, worried that the Soviet president’s opponents “had neither the savvy nor the support to seize the Pinochet option.” They should model themselves, Schrage wrote, after “a despot who really knew how to run a coup: retired Chilean general Augusto Pinochet.”9
Gorbachev soon found himself facing an adversary who was more than willing to play the role of a Russian Pinochet. Boris Yeltsin, though holding the post of Russian president, had a much lower profile than Gorbachev, who headed all the Soviet Union. That was to change dramatically on August 19, 1991, one month after the G7 Summit. A group from the Communist old guard drove tanks up to the White House, as the Russian parliament building is called. In a bid to halt the democratization process, they threatened to attack the country’s first elected parliament. Amid a crowd of Russians determined to defend their new democracy, Yeltsin stood on one of the tanks and denounced the aggression as “a cynical, right-wing coup attempt.”10 The tanks retreated, and Yeltsin emerged as a courageous defender of democracy. One demonstrator who stood in the streets that day described it as “the first time I felt that I could really affect the situation in my country. Our souls soared. It was such a feeling of unity. We felt invincible.”11
And so did Yeltsin. As a leader, he had always been a kind of anti-Gorbachev. Where Gorbachev had projected propriety and sobriety (one of his most controversial measures was an aggressive anti-vodka-drinking campaign), Yeltsin was a notorious glutton and a heavy drinker. Prior to the coup, many Russians harbored reservations about Yeltsin, but he had helped save democracy from a Communist coup, and that made him, at least for the time being, a people’s hero.
Yeltsin immediately parlayed his triumphant showdown into increased political power. As long as the Soviet Union remained intact, he would always have less control than Gorbachev, but in December 1991, four months after the aborted coup, Yeltsin pulled off a political masterstroke. He formed an alliance with two other Soviet republics, a move that had the effect of abruptly dissolving the Soviet Union, thereby forcing Gorbachev’s resignation. The abolition of the Soviet Union, “the only country most Russians had ever known,” was a powerful shock to the Russian psyche—and as the political scientist Stephen Cohen put it, it was the first of “three traumatic shocks” that Russians would endure over the next three years.12
Jeffrey Sachs was in the room at the Kremlin on the day Yeltsin announced that the Soviet Union was no more. Sachs recalled the Russian president saying, “‘Gentlemen, I just want to announce that the Soviet Union has ended….’ And I said, ‘Gee, you know, this is once in a century. This is the most incredible thing you can imagine; this is a true liberation; let’s help these people.’”13 Yeltsin had invited Sachs to come to Russia to serve as an adviser, and Sachs was more than game: “If Poland can do it, so can Russia,” he declared.14
But Yeltsin didn’t just want advice, he wanted the kind of gold-plated fund-raising that Sachs had pulled off for Poland. “The only hope,” Yeltsin said, “was the promises of the Group of Seven quickly to grant us large sums of financial aid.”15 Sachs told Yeltsin he was confident that if Moscow was willing to go with the “big bang” approach to establishing a capitalist economy, he could raise something in the area of $15 billion.16 They would need to be ambitious, and they would need to move fast. What Yeltsin did not know was that Sachs’s luck was about to run out.
Russia’s conversion to capitalism had much in common with the corrupt approach that had sparked the Tiananmen Square protests in China two years earlier. Moscow’s mayor, Gavriil Popov, has claimed that there were really only two options for how to break up the centrally controlled economy: “Property can be divided among all members of society, or the best pieces can be given to the leaders…. In a word, there’s the democratic approach, and there’s the nomenklatura, apparatchik approach.”17 Yeltsin took the latter approach—and he was in a hurry. In late 1991, he went to the parliament and made an unorthodox proposal: if they gave him one year of special powers, under which he could issue laws by decree rather than bring them to parliament for a vote, he would solve the economic crisis and give them back a thriving, healthy system. What Yeltsin was asking for was the kind of executive power enjoyed by dictators, not democrats, but the parliament was still grateful to the president for his role during the attempted coup, and the country was desperate for foreign aid. The answer was yes: Yeltsin could have one year of absolute power to remake Russia’s economy.
He immediately assembled a team of economists, many of whom, in the final years of Communism, had formed a kind of free-market book club, reading the basic texts of the Chicago School thinkers and discussing how the theories could be applied in Russia. Though they had never studied in the U.S., they were such devoted fans of Milton Friedman that the Russian press took to calling Yeltsin’s team “the Chicago Boys,” a knock-off of the original title, and fitting in the context of Russia’s thriving black market economy. In the West they were dubbed “the young reformers.” The group’s figurehead was Yegor Gaidar, whom Yeltsin named as one of his two deputy prime ministers. Pyotr Aven, a Yeltsin minister in 1991–92 who was part of this
inner circle, said of his former clique, “Their identification of themselves with God, which flowed naturally from their belief in their all-round superiority, was, unfortunately, typical of our reformers.”18
Surveying the group that had suddenly ascended to power in Moscow, the Russian newspaper Nezavisimaya Gazeta observed the rather astonishing development that “for the first time Russia will get in its government a team of liberals who consider themselves followers of Friedrich von Hayek and the ‘Chicago school’ of Milton Friedman.” Their policies were “quite clear—‘strict financial stabilization’ according to ‘shock therapy’ recipes.” At the same time as Yeltsin made these appointments, the newspaper noted, he had also put the notorious strongman Yury Skokov “in charge of the defense and repressive departments: the Army, the Ministry of Internal Affairs and the State Security Committee.” The decisions were clearly connected: “Probably the ‘strong’ Skokov can ‘ensure’ strict stabilization in politics while the ‘strong’ economists guarantee it in the economy.” The article ended with a prediction: “It will come as no surprise if they attempt to construct something like a homegrown Pinochet system, in which the role of the ‘Chicago boys’ will be played by Gaidar’s team.”19
To provide ideological and technical backup for Yeltsin’s Chicago Boys, the U.S. government funded its own transition experts whose jobs ranged from writing privatization decrees, to launching a New York–style stock exchange, to designing a Russian mutual fund market. In the fall of 1992, USAID awarded a $2.1 million contract to the Harvard Institute for International Development, which sent teams of young lawyers and economists to shadow the Gaidar team. In May 1995, Harvard named Sachs director of the Harvard Institute for International Development, which meant that he played two roles in Russia’s reform period: he began as a freelance adviser to Yeltsin, then moved on to overseeing Harvard’s large Russia outpost, funded by the U.S. government.
Once again a group of self-described revolutionaries huddled in secret to write a radical economic program. As Dimitry Vasiliev, one of the key reformers, recalled, “At the start, we didn’t have a single employee, not even a secretary. We didn’t have any equipment, not even a fax machine. And in those conditions, in just a month and a half, we had to write a comprehensive privatization program, we had to write twenty normative laws…. It was a really romantic period.”20
On October 28, 1991, Yeltsin announced the lifting of price controls, predicting that “the liberalization of prices will put everything in its right place.”21 The “reformers” waited only one week after Gorbachev resigned to launch their economic shock therapy program—the second of the three traumatic shocks. The shock therapy program also included free-trade policies and the first phase of the rapid-fire privatization of the country’s approximately 225,000 state-owned companies.22
“The country was taken by surprise by the ‘Chicago School’ program,” one of Yeltsin’s original economic advisers recalled.23 That surprise was deliberate, part of Gaidar’s strategy of unleashing change so suddenly and quickly that resistance would be impossible. The problem his team was up against was the usual one: the threat of democracy obstructing their plans. Russians did not want their economy organized by a Communist central committee, but most still believed firmly in wealth redistribution and in an activist role for government. Like the Polish supporters of Solidarity, 67 percent of Russians told pollsters in 1992 they believed workers’ cooperatives were the most equitable way to privatize the assets of the Communist state, and 79 percent said they considered maintaining full employment to be a core function of government.24 That meant that if Yeltsin’s team had submitted their plans to democratic debate, rather than launching a stealth attack on an already deeply disoriented public, the Chicago School revolution would not have stood a chance.
Vladimir Mau, an adviser to Boris Yeltsin in this period, explained that “the most favorable condition for reform” is a “weary public, exhausted by the previous political struggle…. That is why the government was confident, on the eve of price liberalization, that a drastic social clash was impossible, that the government would not be overthrown by a popular revolt.” The vast majority of Russians—70 percent—were opposed to lifting price controls, he explained, but “we could see that the people, then and now, were concentrating on the yields of their private [garden] plots and in general on their individual economic circumstances.”25
Joseph Stiglitz, who at the time was serving as chief economist at the World Bank, summarized the mentality that guided the shock therapists. His metaphors should by now be familiar: “Only a blitzkrieg approach during the ‘window of opportunity’ provided by the ‘fog of transition’ would get the changes made before the population had a chance to organize to protect its previous vested interests.”26 In other words, the shock doctrine.
Stiglitz called Russia’s reformers “market Bolsheviks” for their fondness for cataclysmic revolution.27 However, where the original Bolsheviks fully intended to build their centrally planned state in the ashes of the old, the market Bolsheviks believed in a kind of magic: if the optimal conditions for profit making were created, the country would rebuild itself, no planning required. (It was a faith that would reemerge, a decade later, in Iraq.)
Yeltsin made wild promises that “for approximately six months, things will be worse,” but then the recovery would begin, and soon enough Russia would be an economic titan, one of the top four economies in the world.28 This logic of so-called creative destruction resulted in scarce creation and spiraling destruction. After only one year, shock therapy had taken a devastating toll: millions of middle-class Russians had lost their life savings when money lost its value, and abrupt cuts to subsidies meant millions of workers had not been paid in months.29 The average Russian consumed 40 percent less in 1992 than in 1991, and a third of the population fell below the poverty line.30 The middle class was forced to sell personal belongings from card tables on the streets—desperate acts that the Chicago School economists praised as “entrepreneurial,” proof that a capitalist renaissance was indeed under way, one family heirloom and second-hand blazer at a time.31
As in Poland, Russians did, eventually, regain their bearings and began to demand an end to the sadistic economic adventure (“no more experiments” was a popular piece of graffiti in Moscow at the time). Under pressure from voters, the country’s elected parliament—the same body that had supported Yeltsin’s rise to power—decided it was time to rein in the president and his ersatz Chicago Boys. In December 1992, they voted to unseat Yegor Gaidar, and three months later, in March 1993, the parliamentarians voted to repeal the special powers they had given to Yeltsin to impose his economic laws by decree. The grace period had expired, and the results were abysmal; from now on, laws had to go through parliament, a standard measure in any liberal democracy and following the procedures set out in Russia’s constitution.
The deputies were acting within their rights, but Yeltsin had grown accustomed to his augmented powers and had come to think of himself less as a president and more as a monarch (he had taken to calling himself Boris I). He retaliated against the parliament’s “mutiny” by going on television and declaring a state of emergency, which conveniently restored his imperial powers. Three days later, Russia’s independent Constitutional Court (the creation of which was one of Gorbachev’s most significant democratic breakthroughs) ruled 9–3 that Yeltsin’s power grab violated, on eight different counts, the constitution he had sworn to uphold.
Until this point, it had still been possible to present “economic reform” and democratic reform as part of the same project in Russia. But once Yeltsin declared a state of emergency, the two projects were on a collision course, with Yeltsin and his shock therapists in direct opposition to the elected parliament and the constitution.
Nevertheless, the West threw its weight behind Yeltsin, who was still cast in the role of a progressive “genuinely committed to freedom and democracy, genuinely committed to reform,” in the word
s of then U.S. president Bill Clinton.32 The majority of the Western press also sided with Yeltsin against the entire parliament, whose members were dismissed as “communist hardliners” trying to roll back democratic reforms.33 They suffered, according to the New York Times Moscow bureau chief, from “a Soviet mentality—suspicious of reform, ignorant of democracy, disdainful of intellectuals or ‘democrats.’”34
In fact, these were the same politicians, for all their flaws (and with 1,041 deputies there were plenty), who had stood with Yeltsin and Gorbachev against the coup by the hardliners in 1991, who had voted to dissolve the Soviet Union and who had, until recently, thrown their support behind Yeltsin. Yet The Washington Post opted to cast Russia’s parliamentarians as “antigovernment”—as if they were interlopers and not themselves part of the government.35
In the spring of 1993, the collision drew closer when parliament brought forward a budget bill that did not follow IMF demands for strict austerity. Yeltsin responded by trying to eliminate the parliament. He hastily threw together a referendum, supported in Orwellian fashion by the press, which asked voters if they agreed to dissolve parliament and hold snap elections. Not enough voters turned out to give Yeltsin the mandate he needed. He still claimed victory, however, maintaining that the exercise proved the country was behind him, because he had slipped in an entirely non-binding question about whether voters supported his reforms. A slim majority said yes.36
In Russia, the referendum was widely seen as a propaganda exercise, and a failed one at that. The reality was that Yeltsin and Washington were still stuck with a parliament that had the constitutional right to do what it was doing: slowing down the shock therapy transformation. An intense pressure campaign began. Lawrence Summers, then U.S. Treasury undersecretary, warned that “the momentum for Russian reform must be reinvigorated and intensified to ensure sustained multilateral support.”37 The IMF got the message, and an unnamed official leaked to the press that a promised $1.5 billion loan was being rescinded because the IMF was “unhappy with Russia’s backtracking on reforms.”38 Pyotr Aven, the former Yeltsin minister, said, “The maniacal obsession of the IMF with budgetary and monetary policy, and its absolutely superficial and formal attitude to everything else…played not a small role in what happened.”39