by Naomi Klein
It was 1992, the year of the U.S. election in which Bill Clinton was about to defeat Bush Sr. The core of Clinton’s campaign was that Bush had neglected economic hardship at home to pursue glory abroad (“It’s the economy, stupid”). Sachs believes that Russia was a casualty of that domestic battle. And, he says, he now sees that there was something else at work: many of Washington’s power brokers were still fighting the Cold War. They saw Russia’s economic collapse as a geopolitical victory, the decisive one that ensured U.S. supremacy. “I had none of that mind-set,” Sachs told me, sounding, as he often does, like a Boy Scout who has stumbled into an episode of The Sopranos. “For me it was just, ‘Great, this is the final end of this abominable regime. Now, let’s really help [the Russians]. Let’s throw everything into it….’ I’m sure that in retrospect, in the minds of the policy planners, that was viewed as crazy.”
Despite his failure, Sachs does not feel that the policy toward Russia in this period was driven by free-market ideology. It was mostly, he said, characterized by “sheer laziness.” He would have welcomed a heated debate about whether to offer aid to Russia or leave it all to the market. Instead, there was a collective shrug. He said he was amazed by the absence of serious research and debate informing momentous decisions. “To me, it was just the lack of effort that was the dominant thing. Let’s at least spend two days and debate this—well, we never even did that! I never saw the hard work of ‘Roll up your sleeves, let’s get down and solve these problems, let’s figure out what’s really going on.’”
When Sachs talks passionately about “hard work,” he is harking back to the days of the New Deal, the Great Society and the Marshall Plan, when young men from Ivy League schools sat around commanding tables in their shirt sleeves, surrounded by empty coffee cups and piles of policy papers, having heated debates about the interest rate and the price of wheat. That is how policy makers behaved in the heyday of Keynesianism, and that is the kind of “seriousness” that Russia’s catastrophe clearly deserved.
But attributing the abandonment of Russia to a bout of collective laziness in Washington offers little by way of explanation. Perhaps a better way to understand the episode is through the lens favored by free-market economists: competition in the market. When the Cold War was in full swing and the Soviet Union was intact, the people of the world could choose (at least theoretically) which ideology they wanted to consume; there were the two poles, and there was much in between. That meant capitalism had to win customers; it needed to offer incentives; it needed a good product. Keynesianism was always an expression of that need for capitalism to compete. President Roosevelt brought in the New Deal not only to address the desperation of the Great Depression but to undercut a powerful movement of U.S. citizens who, having been dealt a savage blow by the unregulated free market, were demanding a different economic model. Some wanted a radically different one: in the 1932 presidential elections, one million Americans voted for Socialist or Communist candidates. Growing numbers of Americans were also paying close attention to Huey Long, the populist senator from Louisiana who believed that all Americans should receive a guaranteed annual income of $2,500. Explaining why he had added more social welfare benefits to the New Deal in 1935, FDR said he wanted to “steal Long’s thunder.”6
It was in this context that American industrialists grudgingly accepted FDR’s New Deal. The edges of the market needed to be softened with public sector jobs and by making sure no one went hungry—the very future of capitalism was at stake. During the Cold War, no country in the free world was immune to this pressure. In fact, the achievements of mid-century capitalism, or what Sachs calls “normal” capitalism—workers’ protections, pensions, public health care and state support for the poorest citizens in North America—all grew out of the same pragmatic need to make major concessions in the face of a powerful left.
The Marshall Plan was the ultimate weapon deployed on this economic front. After the war, the German economy was in crisis, threatening to bring down the rest of Western Europe. Meanwhile, so many Germans were drawn to socialism that the U.S. government opted to split Germany into two parts rather than risk losing it all, either to collapse or to the left. In West Germany, the U.S. government used the Marshall Plan to build a capitalist system that was not meant to create fast and easy new markets for Ford and Sears but, rather, to be so successful on its own terms that Europe’s market economy would thrive and socialism would be drained of its appeal.
By 1949, that meant tolerating from the West German government all kinds of policies that were positively uncapitalist: direct job creation by the state, huge investment in the public sector, subsidies for German firms and strong labour unions. In a move that would have been unthinkable in Russia in the 1990s or Iraq under U.S. occupation, the U.S. government infuriated its own corporate sector by imposing a moratorium on foreign investment so that war-battered German companies would not be forced to compete before they had recovered. “The feeling was that letting foreign companies come in at that point would have been like piracy,” I was told by Carolyn Eisenberg, author of an acclaimed history of the Marshall Plan.7 “The main difference between now and then is that the U.S. government did not see Germany as a cash cow. They didn’t want to antagonize people. The belief was that if you come in and start pillaging the place, you interfere with the recovery of Europe as a whole.”
This approach, Eisenberg points out, was not born of altruism. “The Soviet Union was like a loaded gun. The economy was in crisis, there was a substantial German left, and they [the West] had to win the allegiance of the German people fast. They really saw themselves battling for the soul of Germany.”
Eisenberg’s account of the battle of ideologies that created the Marshall Plan points to a persistent blind spot in Sachs’s work, including his recent laudable efforts to dramatically increase aid spending for Africa. Rarely are mass popular movements even mentioned. For Sachs, the making of history is a purely elite affair, a matter of getting the right technocrats settled on the right policies. Just as shock therapy programs are drafted in secret bunkers in La Paz and Moscow, so, apparently, should a $30 billion aid program for the Soviet republics have materialized based solely on the commonsense arguments he was making in Washington. As Eisenberg notes, however, the original Marshall Plan came about not out of benevolence, or even reasoned argument, but fear of popular revolt.
Sachs admires Keynes, but he seems uninterested in what made Keynesianism finally possible in his own country: the messy, militant demands of trade unionists and socialists whose growing strength turned a more radical solution into a credible threat, which in turn made the New Deal look like an acceptable compromise. This unwillingness to recognize the role of mass movements in pressuring reluctant governments to embrace the very ideas he advocates has had serious ramifications. For one, it meant that Sachs could not see the most glaring political reality confronting him in Russia: there was never going to be a Marshall Plan for Russia because there was only ever a Marshall Plan because of Russia. When Yeltsin abolished the Soviet Union, the “loaded gun” that had forced the development of the original plan was disarmed. Without it, capitalism was suddenly free to lapse into its most savage form, not just in Russia but around the world. With the Soviet collapse, the free market now had a global monopoly, which meant all the “distortions” that had been interfering with its perfect equilibrium were no longer required.
This was the real tragedy of the promise made to the Poles and Russians—that if they followed shock therapy they would suddenly wake up in a “normal European country.” Those normal European countries (with their strong social safety nets, workers’ protections, powerful trade unions and socialized health care) emerged as a compromise between Communism and capitalism. Now that there was no need for compromise, all those moderating social policies were under siege in Western Europe, just as they were under siege in Canada, Australia and the U.S. Such policies were not about to be introduced in Russia, certainly not subsidized
with Western funds.
This liberation from all constraints is, in essence, Chicago School economics (otherwise known as neoliberalism or, in the U.S., neoconservatism): not some new invention but capitalism stripped of its Keynesian appendages, capitalism in its monopoly phase, a system that has let itself go—that no longer has to work to keep us as customers, that can be as antisocial, antidemocratic and boorish as it wants. As long as Communism was a threat, the gentlemen’s agreement that was Keynesianism would live on; once that system lost ground, all traces of compromise could finally be eradicated, thereby fulfilling the purist goal Friedman had set out for his movement a half century earlier.
That was the real point of Fukuyama’s dramatic “end of history” announcement at the University of Chicago lecture in 1989: he wasn’t actually claiming that there were no other ideas in the world, but merely that, with Communism collapsing, there were no other ideas sufficiently powerful to constitute a head-to-head competitor.
So while Sachs saw the collapse of the Soviet Union as a liberation from authoritarian rule and was ready to roll up his sleeves and start helping, his Chicago School colleagues saw it as a freedom of a different sort—as the final liberation from Keynesianism and the do-gooder ideas of men like Jeffrey Sachs. Seen in that light, the do-nothing attitude that so infuriated Sachs when it came to Russia was not “sheer laziness” but laissez-faire in action: let it go, do nothing. By not lifting a finger to help, all the men charged with Russian policy—from Dick Cheney, as Bush Sr.’s defense secretary, to Lawrence Summers, Treasury undersecretary, to Stanley Fischer at the IMF—were indeed doing something: they were practicing pure Chicago School ideology, letting the market do its worst. Russia, even more than Chile, was what this ideology looked like in practice, a foreshadowing of the get-rich-or-die-trying dystopia that many of these same players would create a decade later in Iraq.
The new rules of the game were on display in Washington, D.C., on January 13, 1993. The occasion was a small but important conference, by invitation only, on the tenth floor of the Carnegie Conference Center on Dupont Circle, a seven-minute drive from the White House and a stone’s throw from the headquarters of the IMF and the World Bank. John Williamson, the powerful economist known for shaping the missions of both the bank and the fund, had convened the event as a historic gathering of the neoliberal tribe. In attendance was an impressive array of the star “technopols” who were at the forefront of the campaign to spread the Chicago doctrine throughout the world. There were present and former finance ministers from Spain, Brazil and Poland, central bank heads from Turkey and Peru, the chief of staff for the president of Mexico and a former president of Panama. There was Sachs’s old friend and hero, Leszek Balcerowicz, architect of Poland’s shock therapy, as well as his Harvard colleague Dani Rodrik, the economist who had proven that every country that had accepted neoliberal restructuring had been in deep crisis. Anne Krueger, future first deputy managing director of the IMF, was there, and although José Piñera, Pinochet’s most evangelical minister, couldn’t make it because he was trailing in Chile’s presidential election, he sent a detailed paper in his place. Sachs, who was still advising Yeltsin at the time, was to deliver the keynote address.
All day long, the conference participants had been indulging in that favorite economists’ pastime of strategizing how to get reluctant politicians to embrace policies that are unpopular with voters. How soon after elections should shock therapy be launched? Are center-left parties more effective than right-wing ones because the attack is unexpected? Is it better to warn the public or take people by surprise with “voodoo politics”? Though the conference was called “The Political Economy of Policy Reform”—so willfully bland a title that it seemed designed to deflect media interest—one participant remarked slyly that what it was really about was “Machiavellian economics.”8
Sachs listened to all this talk for several hours, and after dinner he went to the podium to give his address, titled, in true Sachsian fashion, “Life in the Economic Emergency Room.”9 He was visibly agitated. The crowd was ready to hear a speech from one of their idols, the man who had carried the torch of shock therapy into the democratic era. Sachs was in no mood for self-congratulation. Instead, he was determined to use the speech, he later explained to me, to try to get this powerful crowd to grasp the gravity of what was unfolding in Russia.
He reminded his audience of the infusions of aid that had gone to Europe and Japan after the Second World War, “vital for Japan’s later magnificent success.” He told a story about getting a letter from an analyst at the Heritage Foundation—ground zero of Friedmanism—who “believed strongly in Russia’s reforms but not in foreign aid for Russia. This is a common view of free-market ideologues—of which I am one,” Sachs said. “It is plausible but it is mistaken. The market cannot do it all by itself; international help is crucial.” The laissez-faire obsession was taking Russia into catastrophe, where, he said, “no matter how valiant, brilliant, and lucky are Russia’s reformers, they won’t make it without large-scale external assistance…we are close to missing a historic opportunity.”
Sachs got a round of applause, of course, but the response was tepid. Why was he praising such lavish social spending? This crowd was on a global crusade to dismantle the New Deal, not to forge a new one. In the conference sessions that followed, not a single participant supported Sachs’s challenge, and several spoke out against it.
What he was trying to do with the speech, Sachs told me, was “explain what a real crisis was like…to convey a sense of urgency.” People who make policy from Washington, he said, often “don’t understand what economic chaos is. They don’t understand the disarray that comes.” He wanted to confront them with the reality that “there’s also a dynamic that things get farther and farther out of control, until you have other disasters, until Hitler comes back in power, until you have civil war, or mass famine or whatever it is…. You need to do emergency things to help, because an unstable situation definitely has a path of increasing instability, not just a path to normal equilibrium.”
I couldn’t help thinking that Sachs wasn’t giving his audience enough credit. The people in that room were well versed in Milton Friedman’s crisis theory, and many had applied it in their own countries. Most understood perfectly how wrenching and volatile an economic meltdown could be, but they were taking a different lession from Russia: that a painful and disorienting political situation was forcing Yeltsin to rapidly auction off the riches of the state, a distinctly favorable outcome.
It was left to John Williamson, the host of the conference, to steer the discussion back to those pragmatic priorities. Sachs was the one with the star power at the event, but it was Williamson who was the crowd’s real guru. Balding and untelegenic but thrillingly politically incorrect, Williamson was the one who coined the phrase “the Washington Consensus”—perhaps the most quoted and contentious three words in modern economics. He is famous for his tightly structured closed-door conferences and seminars, each designed to test one of his bold hypotheses. At the conference in January, he had a pressing agenda: he wanted to test what he called the “crisis hypothesis” once and for all.10
In his lecture, Williamson offered no warnings of the imperative to save any country from crisis; in fact, he spoke rhapsodically of cataclysmic events. He reminded his audience of the indisputable evidence that only when countries are truly suffering do they agree to swallow their bitter market medicine; only when they are in shock do they lie down for shock therapy. “These worst of times give rise to the best of opportunities for those who understand the need for fundamental economic reform,” he declared.11
With his unparalleled knack for verbalizing the subconscious of the financial world, Williamson casually pointed out that this raised some intriguing questions:
One will have to ask whether it could conceivably make sense to think of deliberately provoking a crisis so as to remove the political logjam to reform. For example, it has sometime
s been suggested in Brazil that it would be worthwhile stoking up a hyperinflation so as to scare everyone into accepting those changes…. Presumably no one with historical foresight would have advocated in the mid-1930s that Germany or Japan go to war in order to get the benefits of the supergrowth that followed their defeat. But could a lesser crisis have served the same function? Is it possible to conceive of a pseudo-crisis that could serve the same positive function without the cost of a real crisis?12
Williamson’s remarks represented a major leap forward for the shock doctrine. In a room filled with enough finance ministers and central bank chiefs to hold a major trade summit, the idea of actively creating a serious crisis so that shock therapy could be pushed through was now being openly discussed.
At least one conference participant felt obliged to distance himself in his own speech from these risqué ideas. “Williamson’s suggestion that it might be a good move to provoke an artificial crisis in order to trigger reform should best be read as an idea designed to provoke and tease,” said John Toye, a British economist from the University of Sussex.13 There was no evidence that Williamson was teasing. In fact, there was plenty of evidence that his ideas were already being acted on at the highest levels of financial decision making in Washington and beyond.
The month after Williamson’s conference in Washington, we caught a glimpse of the new enthusiasm for “pseudo crisis” in my country, although few understood it as part of a global strategy at the time. In February 1993, Canada was in the midst of financial catastrophe, or so one would have concluded by reading the newspapers and watching TV. “Debt Crisis Looms,” screamed a banner front-page headline in the national newspaper, the Globe and Mail. A major national television special reported that “economists are predicting that sometime in the next year, maybe two years, the deputy minister of finance is going to walk into cabinet and announce that Canada’s credit has run out…. Our lives will change dramatically.”14