by Naomi Klein
Asian governments were forced to drain their reserve banks in an effort to prop up their currencies, turning the original fear into a reality: now these countries really were going broke. The market responded with more panic. In one year, $600 billion had disappeared from the stock markets of Asia—wealth that had taken decades to build.5
The crisis provoked desperate measures. In Indonesia, impoverished citizens stormed urban stores and took what they could carry. In one particularly horrific incident, a Jakarta shopping mall caught fire while it was being looted, and hundreds of people were burned alive.6
In South Korea, television stations ran a massive campaign calling on citizens to donate their gold jewelry so that it could be melted down and used to pay off the country’s debts. In just a few weeks, 3 million people had handed over necklaces, earrings, sports medals and trophies. At least one woman donated her wedding ring, and a cardinal donated his golden cross. The television stations ran kitschy give-away-your-gold game shows, but even with two hundred tons of gold collected, enough to drive down the world price, Korea’s currency continued to plummet.7
As had happened during the Great Depression, the crisis led to a wave of suicides as families saw their life savings disappear and tens of thousands of small businesses shut their doors. In South Korea, the suicide rate went up by 50 percent in 1998. The spike was steepest among people over sixty, with older parents attempting to lessen the economic burden on their struggling children. The Korean press also reported an alarming increase in family suicide pacts in which fathers led their debt-ridden households in group hangings. Authorities pointed out that since “only the [family] leader’s death is classified as suicide while the rest are listed as murders, the actual number of suicides is far higher than the statistics released.”8
Asia’s crisis was caused by a classic fear cycle, and the only move that might have arrested it was the same one that had rescued Mexico’s currency during the so-called Tequila Crisis of 1994: a quick, decisive loan—proof to the market that the U.S. Treasury would simply not let Mexico fail.9 No such timely move was forthcoming for Asia. In fact, as soon as the crisis hit, a surprising array of heavy hitters from the financial establishment stepped forward with a unified message: Don’t help Asia.
Milton Friedman himself, now in his mid-eighties, made a rare appearance on CNN to tell the news anchor Lou Dobbs that he opposed any kind of bailout and that the market should be left to correct itself. “Well, Professor, I can’t tell you what it means to have your support in this semantic discussion,” said an embarassingly starstruck Dobbs. The let-them-sink position was echoed by Friedman’s old friend Walter Wriston, former head of Citibank, and George Shultz, now working alongside Friedman at the right-wing Hoover Institution and a board member at the brokerage house Charles Schwab.10
The view was openly shared by one of Wall Street’s premier investment banks, Morgan Stanley. Jay Pelosky, the firm’s hotshot emerging-market strategist, told a conference in Los Angeles hosted by the Milken Institute (of junk bonds fame) that it was imperative that the IMF and the U.S. Treasury do nothing to lessen the pain of a crisis of 1930s proportions. “What we need now in Asia is more bad news. Bad news is needed to keep stimulating the adjustment process,” Pelosky said.11
The Clinton administration took its cue from Wall Street. When the Asia Pacific Economic Cooperation Summit was held in November 1997 in Vancouver, four months into the crash, Bill Clinton enraged his Asian counterparts by dismissing what they viewed as an economic apocalypse as “a few little glitches in the road.”12 The message was clear: the U.S. Treasury was in no rush to stop the pain. As for the IMF, the world body created to prevent crashes like this one, it took the do-nothing approach that had become its trademark since Russia. It did, eventually, respond—but not with the sort of fast, emergency stabilization loan that a purely financial crisis demanded. Instead, it came up with a long list of demands, pumped up by the Chicago School certainty that Asia’s catastrophe was an opportunity in disguise.
Back in the early nineties, whenever advocates of free trade wanted a persuasive success story to invoke in debates, they invariably pointed to the Asian Tigers. These were the miracle economies that were growing by leaps and bounds, supposedly because they had flung open their borders to unrestricted globalization. It was a useful story—the Tigers were certainly developing with whirlwind speed—but to suggest that their expansion was based on free trade was fiction. Malaysia, South Korea and Thailand still had highly protectionist policies that barred foreigners from owning land and from buying out national firms. They had also maintained a significant role for the state, keeping sectors like energy and transportation in public hands. The Tigers had also blocked many foreign imports from Japan, Europe and North America, as they built up their own domestic markets. They were economic success stories unquestionably, but ones that proved that mixed, managed economies grew faster and more equitably than those following the Wild West Washington Consensus.
The situation did not please Western and Japanese investment banks and multinational firms; watching Asia’s consumer market explode, they understandably longed for unfettered access to the region to sell their products. They also wanted the right to buy up the best of the Tigers’ corporations—particularly Korea’s impressive conglomerates like Daewoo, Hyundai, Samsung and LG. In the mid-nineties, under pressure from the IMF and the newly created World Trade Organization, Asian governments agreed to split the difference: they would maintain the laws that protected national firms from foreign ownership and resist pressure to privatize their key state companies, but they would lift barriers to their financial sectors, allowing a surge of paper investing and currency trading.
In 1997, when the flood of hot money suddenly reversed current in Asia, it was a direct result of this kind of speculative investment, which was legalized only because of Western pressure. Wall Street, of course, didn’t see it that way. Top investment analysts instantly recognized the crisis as the chance to level the remaining barriers protecting Asia’s markets once and for all. Pelosky, the Morgan Stanley strategist, was particularly forthright about the logic: if the crisis was left to worsen, all foreign currency would be drained from the region and Asian-owned companies would have either to close down or to sell themselves to Western firms—both beneficial outcomes for Morgan Stanley. “I’d like to see closure of companies and asset sales…. Asset sales are very difficult; typically owners don’t want to sell unless they’re forced to. Therefore, we need more bad news to continue to put the pressure on these corporates to sell their companies.”13
Some saw the breaking of Asia in even grander terms. José Piñera, Pinochet’s star minister who was now working at the Cato Institute in Washington, D.C., greeted the crisis with undisguised glee, pronouncing that “the day of reckoning has arrived.” In Piñera’s eyes, the crisis was the latest chapter in the war that he and his fellow Chicago Boys had started in Chile in the seventies. The fall of the Tigers, he said, represented nothing less than “the fall of a second Berlin Wall,” the collapse of “the notion that there is a ‘Third Way’ between free-market democratic capitalism and socialist statism.”14
Piñera’s was not a fringe perspective. It was openly shared by Alan Greenspan, chairman of the U.S. Federal Reserve and probably the single most powerful economic policy maker in the world. Greenspan described the crisis as “a very dramatic event towards a consensus of the type of market system which we have in this country.” He also observed that “the current crisis is likely to accelerate the dismantling in many Asian countries of the remnants of a system with large elements of government-directed investment.”15 In other words, the destruction of Asia’s managed economy was actually a process of creating a new American-style economy—birth pangs for a new Asia, to borrow a phrase that would be used in an even more violent context a few years later.
Michel Camdessus, who as head of the IMF was arguably the world’s second most powerful monetary policy maker, expressed
a similar view. In a rare interview, he spoke of the crisis as an opportunity for Asia to shed its old skin and be born anew. “Economic models are not eternal,” he said. “There are times when they are useful and other times…where they become outdated and must be abandoned.”16 The crisis sparked by a rumor that turned fiction into fact apparently provided such a time.
Eager not to let this opportunity slip by, the IMF—after months of doing nothing while the emergency worsened—finally entered into negotiations with the ailing governments of Asia. The only country to resist the fund in this period was Malaysia, thanks to its relatively small debt. Malaysia’s controversial prime minister, Mahathir Mohamad, said that he did not think he should have to “destroy the economy in order that it should become better,” which was enough to brand him as a raving radical at the time.17 The rest of Asia’s crisis-struck economies were too desperate for foreign currency to refuse the possibility of tens of billions in IMF loans: Thailand, the Philippines, Indonesia and South Korea all came to the table. “You can’t force a country to ask you for help. It has to ask. But when it’s out of money, it hasn’t got many places to turn,” said Stanley Fischer, who was in charge of the talks for the IMF.18
Fischer had been one of the most vocal advocates of shock therapy in Russia, and despite the harrowing human costs there, his attitude was just as unyielding in Asia. Several governments suggested that since the crisis was caused by the ease with which money could gush in and out of their countries with nothing to slow down the flow, perhaps it made sense to put some barriers back up—the dreaded “capital controls.” China had kept its controls up (ignoring Friedman’s advice in this regard), and it was the only country in the region that was not being ravaged by the crisis. And Malaysia had put controls back up, and they seemed to be working.
Fischer and the rest of the IMF team dismissed the idea out of hand.19 The IMF displayed no interest in what had actually caused the crisis. Instead, like a prison interrogator looking for a weakness, the fund was exclusively focused on how the crisis could be used as leverage. The meltdown had forced a group of strong-willed countries to beg for mercy; to fail to take advantage of that window of opportunity was, for the Chicago School economists running the IMF, tantamount to professional negligence.
With their treasuries empty, the Tigers were, as far as the IMF was concerned, broken; now they were primed to be remade. The first stage of this process was to strip the countries of all the “trade and investment protectionism and activist state intervention that were the key ingredients of the ‘Asian miracle,’” as the political scientist Walden Bello put it.20 The IMF also demanded that the governments make deep budget cuts, leading to mass layoffs of public sector workers in countries where people were already taking their own lives in record numbers. Fischer admitted after the fact that the IMF had concluded that in Korea and Indonesia, the crisis was unrelated to government overspending. Nonetheless, he used the extraordinary leverage granted by the crisis to extract these painful austerity measures. As one New York Times reporter wrote, the IMF’s actions were “like a heart surgeon who, in the middle of an operation, decides to do some work on the lungs and kidneys, too.”*21
After the IMF had stripped the Tigers of their old habits and ways, they were now ready to be reborn, Chicago-style: privatized basic services, independent central banks, “flexible” workforces, low social spending and, of course, total free trade. According to the new agreements, Thailand would allow foreigners to own large stakes in its banks, Indonesia would cut food subsidies, and Korea would lift its law protecting workers against mass layoffs.22 The IMF even set strict layoff targets in Korea: in order to get the loan, the country’s banking sector needed to shed 50 percent of its workforce (later lowered to 30 percent).23 This kind of demand was crucial for many Western multinationals who wanted assurances that they could radically downsize the Asian firms they were about to buy. Piñera’s “Berlin Wall” was falling down.
Such measures would have been unthinkable a year before the crisis hit, when South Korea’s trade unions had been at their peak of militancy. They had greeted a proposed new labor law that would have reduced job security with the largest and most radical series of strikes in South Korea’s history. But, thanks to the crisis, the rules of the game had changed. The economic meltdown was so dire that it gave governments the license (as similar crises had from Bolivia to Russia) to declare temporary authoritarian rule; it didn’t last long—just long enough to impose the IMF decrees.
Thailand’s shock therapy package, for instance, was pushed through the National Assembly not in a normal process of debate but as a result of four emergency decrees. “We have lost our autonomy, our ability to determine our macroeconomic policy. This is unfortunate,” conceded Thailand’s deputy premier, Supachai Panitchpakdi (later rewarded for this kind of cooperative attitude by being named head of the WTO).24 In South Korea, the IMF subversion of democracy was even more overt. There, the end of the IMF negotiations coincided with scheduled presidential elections in which two of the candidates were running on anti-IMF platforms. In an extraordinary act of interference with a sovereign nation’s political process, the IMF refused to release the money until it had commitments from all four main candidates that they would stick to the new rules if they won. With the country effectively held at ransom, the IMF was triumphant: each candidate pledged his support in writing.25 Never before had the central Chicago School mission to protect economic matters from the reach of democracy been more explicit: you can vote, South Koreans were told, but your vote can have no bearing on the managing and organization of the economy. (The day the deal was signed was instantly dubbed Korea’s “National Humiliation Day.”)26
In one of the worst-hit countries, such acts of democracy containment were not required. Indonesia, first in the region to fling open its doors to deregulated foreign investment, was still under the control of General Suharto, after more than thirty years. Suharto, however, had become less compliant with the West in his old age (as dictators often do). After decades of selling off Indonesia’s oil and mineral wealth to foreign corporations, he had grown bored with enriching others and had spent the previous decade or so taking care of himself, his children and his golfing buddies. For instance, the general had given heavy subsidies to a car company—owned by his son Tommy—much to the consternation of Ford and Toyota, who saw no reason why they should have to compete with what analysts called “Tommy’s toys.”27
For a few months, Suharto tried to resist the IMF, issuing a budget that did not contain the massive cuts it was demanding. The fund fought back by increasing the pain levels. Officially, IMF representatives are not allowed to talk to the press during a negotiation since the slightest indication of how talks are going can dramatically influence the market. That didn’t stop an unnamed “senior IMF official” from telling The Washington Post that “the markets are asking themselves the question of just how much the senior Indonesian leadership is committed to this program, and particularly to the major reform measures.” The article went on to predict that the IMF would punish Indonesia by withholding billions in promised loans. As soon as it appeared, Indonesia’s currency fell through the floor, losing 25 percent of its value in a single day.28
With that massive blow, Suharto gave in. “Can someone find me an economist who knows what’s going on?” Indonesia’s foreign minister reportedly pleaded.29 Suharto found such an economist; in fact, he found several. Guaranteeing that the final IMF negotiations would go smoothly, he brought back the Berkeley Mafia who, after playing such a central role in the early days of his regime, had lost their influence with the aging general. After years in the political wilderness, they were once again in charge, with Widjojo Nitisastro, now seventy years old and known in Indonesia as “the dean of the Berkeley Mafia,” heading up the negotiations. “When times are good, Widjojo and the economists are put in an obscure corner and President Suharto speaks to the cronies,” explained Mohammad Sadli, a former Suharto minist
er. “The technocrat group is at its best in times of crisis. Suharto listens to them more for the time being and he orders the other ministers to shut up.”30 Talks with the IMF now took a distinctly more collegial tone, more “like intellectual discussions. No pressure from one side on the other,” explained a member of Widjojo’s team. Naturally, the IMF got almost everything it wanted—140 “adjustments” in all.31
The Reveal
As far as the IMF was concerned, the crisis was going extremely well. In less than a year, it had negotiated the economic equivalent of extreme makeovers for Thailand, Indonesia, South Korea and the Philippines.32 It was finally ready for the defining moment in every makeover drama: the Reveal, the moment when the nipped-and-tucked, coached-and-buffed subject is unveiled to the awestruck public—in this case, the global stock and currency markets. If all had gone smoothly, when the IMF pulled back the curtain on its newest creations, the hot money that had fled Asia the previous year would have come rushing back in to buy up the Tigers’ now irresistible stocks, bonds and currencies. Something else happened; the market panicked. The reasoning went like this: if the fund thought that the Tigers were such hopeless cases that they needed to be remade from scratch, then Asia was obviously in much worse shape than anyone had previously feared.
So rather than rushing back, traders responded to the IMF’s big Reveal by promptly yanking out even more money and further attacking Asia’s currencies. Korea was losing $1 billion a day and its debt was downgraded to junk bond status. The IMF’s “help” had turned crisis into catastrophe. Or, as Jeffrey Sachs, now in open warfare with the international financial institutions, put it, “Instead of dousing the fire, the IMF in effect screamed fire in the theatre.”33
The human costs of the IMF’s opportunism were nearly as devastating in Asia as in Russia. The International Labor Organization estimates that a staggering 24 million people lost their jobs in this period and that Indonesia’s unemployment rate increased from 4 to 12 percent. Thailand was losing 2,000 jobs a day at the height of the “reforms”—60,000 a month. In South Korea, 300,000 workers were fired every month—largely the result of the IMF’s totally unnecessary demands to slash government budgets and hike interest rates. By 1999, South Korea’s and Indonesia’s unemployment rates had nearly tripled in only two years. As in Latin America in the seventies, what disappeared in these parts of Asia was what was so remarkable about the region’s “miracle” in the first place: its large and growing middle class. In 1996, 63.7 percent of South Koreans identified as middle class; by 1999 that number was down to 38.4 percent. According to the World Bank, 20 million Asians were thrown into poverty in this period of what Rodolfo Walsh would have called “planned misery.”34