by Naomi Klein
Behind every statistic was a story of wrenching sacrifice and degraded decisions. As is always the case, women and children suffered the worst of the crisis. Many rural families in the Philippines and South Korea sold their daughters to human traffickers who took them to work in the sex trade in Australia, Europe and North America. In Thailand, public health officials reported a 20 percent increase in child prostitution in just one year—the year after the IMF reforms. The Philippines tracked the same trend. “It was the rich who benefited from the boom, but we the poor pay the price of the crisis,” said Khun Bunjan, a community leader in northeast Thailand who was forced to send her children to work as scavengers after her husband lost his factory job. “Even our limited access to schools and health [care] is now beginning to disappear.”35
It was in this context that the U.S. secretary of state, Madeleine Albright, visited Thailand in March 1999 and saw fit to scold the Thai public for turning to prostitution and the “dead end of drugs.” It is “essential that girls not be exploited and abused and exposed to AIDS. It’s very important to fight back,” Albright said, filled with moral resolve. She apparently saw no connection between the fact that so many Thai girls were being forced into the sex trade and the austerity policies for which she expressed her “strong support” on the same trip. It was the Asian financial crisis’s equivalent of Milton Friedman expressing his displeasure with Pinochet’s or Deng Xiaoping’s human rights violations while praising their bold embrace of economic shock therapy.36
Feeding Off the Ruins
The story of Asia’s crisis usually ends there—the IMF tried to help; it didn’t work. Even the IMF’s own internal audit came to that conclusion. The fund’s Independent Evaluation Office concluded that the structural adjustment demands were “ill-advised” and “broader than seemed necessary” as well as “not critical to resolving the crisis.” It also warned that “crisis should not be used as an opportunity to seek a long agenda of reforms just because leverage is high, irrespective of how justifiable they may be on merits.”* A particularly forceful section of the internal report accused the fund of being so blinded by free-market ideology that even considering capital controls was institutionally unimaginable. “If it was heresy to suggest that financial markets were not distributing world capital in a rational and stable way, then it was a mortal sin to contemplate” capital controls.37
What few were willing to admit at the time is that, while the IMF certainly failed the people of Asia, it did not fail Wall Street—far from it. The hot money may have been spooked by the IMF’s drastic measures, but the large investment houses and multinational firms were emboldened. “Of course these markets are highly volatile,” said Jerome Booth, head of research at London’s Ashmore Investment Management. “That’s what makes them fun.”38 These fun-seeking firms understood that as a result of the IMF’s “adjustments,” pretty much everything in Asia was now up for sale—and the more the market panicked, the more desperate Asian companies would be to sell, pushing their prices through the floor. Morgan Stanley’s Jay Pelosky had said that what Asia needed was “more bad news to continue to put pressure on these corporates to sell their companies”—and that’s exactly what happened, thanks to the IMF.
Whether the IMF planned the deepening of Asia’s crisis or was merely recklessly indifferent remains a subject of debate. Perhaps the most charitable interpretation is that the fund knew it could not lose: if its adjustments inflated another bubble in emerging-market stocks, that would be a boon; if they sparked more capital flight, it would be a bonanza for vulture capitalists. Either way, the IMF was comfortable enough with the possibility of total meltdown to be willing to roll the dice. It’s now clear who won the gamble.
Two months after the IMF came to its final agreement with South Korea, The Wall Street Journal ran an article headlined “Wall Street Scavenging in Asia-Pacific.” It reported that Pelosky’s firm, as well as several other prominent houses, had “dispatched armies of bankers to the Asia-Pacific region to scout for brokerage firms, asset management firms and even banks that they can snap up at bargain prices. The hunt for Asian acquisitions is urgent because many U.S. securities firms, led by Merrill Lynch & Co. and Morgan Stanley, have made overseas expansion their priority.”39 In short order, several major sales went through: Merrill Lynch bought Japan’s Yamaichi Securities as well as Thailand’s largest securities firm, while AIG bought Bangkok Investment for a fraction of its worth. JP Morgan bought a stake in Kia Motors, while Travelers Group and Salomon Smith Barney bought one of Korea’s largest textile companies as well as several other companies. Interestingly, the chair of Salomon Smith Barney’s International Advisory Board, which was providing advice to the company on mergers and acquisitions in this period, was Donald Rumsfeld (appointed in May 1999). Dick Cheney was also on the board. Another winner was the Carlyle Group, the secretive Washington-based firm known for being the preferred soft landing for expresidents and ministers, from former secretary of state James Baker, to former U.K. prime minister John Major, to Bush Sr., who served as a consultant. Carlyle used its top-level connections to snap up Daewoo’s telecom division, Ssangyong Information and Communication (one of Korea’s largest high-tech firms), and it became a major shareholder in one of Korea’s largest banks.40
Jeffrey Garten, former U.S. undersecretary of commerce, had predicted that when the IMF was finished, “there is going to be a significantly different Asia, and it will be an Asia in which American firms have achieved much deeper penetration, much greater access.”41 He wasn’t kidding. Within two years, the face of much of Asia was utterly transformed, with hundreds of local brands replaced by multinational giants. It was dubbed “the world’s biggest going-out-of-business sale,” by The New York Times, and a “business-buying bazaar” by BusinessWeek.42 In fact, it was a preview of the kind of disaster capitalism that would become the market norm after September 11: a terrible tragedy was exploited to allow foreign firms to storm Asia. They were there not to build their own businesses and compete but to snap up the entire apparatus, workforce, customer base and brand value built over decades by Korean companies, often to break them apart, downsize them or shut them completely in order to eliminate competition for their imports.
The Korean titan Samsung, for instance, was broken up and sold for parts: Volvo got its heavy industry division, SC Johnson & Son its pharmaceutical arm, General Electric its lighting division. A few years later, Daewoo’s once-mighty car division, which the company had valued at $6 billion, was sold off to GM for just $400 million—a steal worthy of Russia’s shock therapy. But this time, unlike what happened in Russia, local firms were getting wiped out by the multinationals.43
Other big players who got a piece of the Asian distress sale included Seagram’s, Hewlett-Packard, Nestlé, Interbrew and Novartis, Carrefour, Tesco and Ericsson. Coca-Cola bought a Korean bottling company for half a billion dollars; Procter and Gamble bought a Korean packaging company; Nissan bought one of Indonesia’s largest car companies. General Electric acquired a controlling stake in Korea’s refrigerator manufacturer LG; and Britain’s Powergen nabbed LG Energy, a large Korean electricity-and-gas company. According to BusinessWeek, the Saudi prince Alwaleed bin Talal was “jetting across Asia in his cream-colored Boeing 727, collecting bargains”—including a stake in Daewoo.44
Fittingly, Morgan Stanley, which had been the loudest in calling for a deepening of the crisis, inserted itself into many of these deals, collecting huge commissions. It acted as Daewoo’s adviser on the sale of its automotive division and on brokering the privatization of several South Korean banks.45
It wasn’t only private Asian firms that were being sold to foreigners. Like earlier crises in Latin America and Eastern Europe, this one also forced governments to sell public services to raise badly needed capital. The U.S. government eagerly anticipated this effect early on. In arguing why Congress should authorize billions to the IMF for the Asia makeover, the U.S. trade representative Charlene Barshefsk
y offered assurances that the agreements would “create new business opportunities for US firms”: Asia would be forced to “accelerate privatization of certain key sectors—including energy, transportation, utilities and communications.”46
Sure enough, the crisis set off a wave of privatizations, and foreign multinationals cleaned up. Bechtel got the contract to privatize the water and sewage systems in eastern Manila, as well as one to build an oil refinery in Sulawesi, Indonesia. Motorola got full control over Korea’s Appeal Telecom. The New York–based energy giant Sithe got a large stake in Thailand’s public gas company, the Cogeneration. Indonesia’s water systems were split between Britain’s Thames Water and France’s Lyonnaise des Eaux. Canada’s Westcoast Energy snapped up a huge Indonesian power plant project. British Telecom purchased a large stake in both Malaysia’s and Korea’s postal services. Bell Canada got a piece of Korea’s telecom Hansol.47
All told, there were 186 major mergers and acquisitions of firms in Indonesia, Thailand, South Korea, Malaysia and the Philippines by foreign multinationals in a span of only twenty months. Watching this sale unfold, Robert Wade, an LSE economist, and Frank Veneroso, an economic consultant, predicted that the IMF program “may even precipitate the biggest peacetime transfer of assets from domestic to foreign owners in the past fifty years anywhere in the world.”48
The IMF, while admitting some errors in its early responses to the crisis, claims that it quickly corrected them and that the “stabilization” programs were successful. It’s true that Asia’s markets eventually calmed down, but at a tremendous and ongoing cost. Milton Friedman, at the height of the crisis, had cautioned against panic, insisting that “it will be over…. As they get this financial mess settled, you can see a return to growth in Asia, but whether it will be one year, two years, three years, nobody can tell you.”49
The truth is that Asia’s crisis is still not over, a decade later. When 24 million people lose their jobs in a span of two years, a new desperation takes root that no culture can easily absorb. It expresses itself in different forms across the region, from a significant rise in religious extremism in Indonesia and Thailand to the explosive growth in the child sex trade.
Employment rates have still not reached pre-1997 levels in Indonesia, Malaysia and South Korea. And it’s not just that workers who lost their jobs during the crisis never got them back. The layoffs have continued, with new foreign owners demanding ever-higher profits for their investments. The suicides have also continued: in South Korea, suicide is now the fourth most common cause of death, more than double the pre-crisis rate, with thirty-eight people taking their own lives every day.50
That is the untold story of the policies that the IMF calls “stabilization programs,” as if countries were ships being tossed around on the market’s high seas. They do, eventually, stabilize, but that new equilibrium is achieved by throwing millions of people overboard: public sector workers, small-business owners, subsistence farmers, trade unionists. The ugly secret of “stabilization” is that the vast majority never climb back aboard. They end up in slums, now home to 1 billion people; they end up in brothels or in cargo ship containers. They are the disinherited, those described by the German poet Rainer Maria Rilke as “ones to whom neither the past nor the future belongs.”51
These people weren’t the only victims of the IMF’s demand for perfect orthodoxy in Asia. In Indonesia, the anti-Chinese sentiment I witnessed in the summer of 1997 continued to build, stoked by a political class happy to deflect attention away from itself. It got much worse after Suharto raised the price of basic survival items. Riots broke out across the country, and many of them targeted the Chinese minority; approximately twelve hundred people were killed, and dozens of Chinese women were gang-raped.52 They too should be counted among the victims of Chicago School ideology.
Anger in Indonesia did, finally, direct itself at Suharto and the presidential palace. For three decades, Indonesians had been kept more or less in line by the memory of the bloodbath that brought Suharto to power, a memory that was refreshed by periodic massacres in the provinces and in East Timor. Anti-Suharto rage had burned under the surface all this time, but it took the IMF to pour the gasoline—which it did, ironically, by demanding that he raise the price of gasoline. After that, Indonesians rose up and pushed Suharto from power.
Like a prison interrogator, the IMF used the extreme pain of the crisis to break the Asian Tigers’ will, to reduce the countries to total compliance. But the CIA’s interrogation manuals warn that this process can go too far—apply too much direct pain and, instead of regression and compliance, the interrogators face confidence and defiance. In Indonesia that line was crossed, a reminder that it is possible to take shock therapy too far, provoking a kind of blowback that was about to become very familiar, from Bolivia to Iraq.
Free-market crusaders are, however, slow learners when it comes to the unintended consequences of their policies. The only lesson learned from the enormously lucrative Asian sell-off appears to have been yet more confirmation for the shock doctrine, more evidence (as if any more was needed) that there is nothing like a true disaster, a genuine churning of society, to open up a new frontier. A few years after the peak of the crisis, several prominent commentators were even willing to go so far as to say that what happened in Asia, despite all the devastation, was a blessing in disguise. The Economist noted that “it took a national crisis for South Korea to turn from an inward-looking nation to one that embraced foreign capital, change and competition.” And Thomas Friedman, in his best-selling book The Lexus and the Olive Tree, declared that what happened in Asia wasn’t a crisis at all. “I believe globalization did us all a favor by melting down the economies of Thailand, Korea, Malaysia, Indonesia, Mexico, Russia, and Brazil in the 1990s, because it laid bare a lot of rotten practices and institutions,” he wrote, adding that “exposing the crony capitalism in Korea was no crisis in my book.”53 In his New York Times columns supporting the invasion of Iraq, a similar logic would be on display, except that the melting down would be done with cruise missiles, not currency trades.
The Asian crisis certainly showed how well disaster exploitation worked. At the same time, the destructiveness of the market crash and the cynicism of the West’s response sparked powerful countermovements.
The forces of multinational capital got their way in Asia, but they provoked new levels of public rage, with the rage eventually directed squarely at the institutions advancing the ideology of unfettered capitalism. As an unusually balanced Financial Times editorial put it, Asia was a “warning signal that public unease with capitalism and the forces of globalization is reaching a worrying level. The Asian crisis showed the world how even the most successful countries could be brought to their knees by a sudden outflow of capital. People were outraged at how the whims of secretive hedge funds could apparently cause mass poverty on the other side of the world.”54
Unlike in the former Soviet Union, where the planned misery of shock therapy could be passed off as part of the “painful transition” from Communism to market democracy, Asia’s crisis was plainly a creation of the global markets. Yet when the high priests of globalization sent missions to the disaster zone, all they wanted to do was deepen the pain.
The result was that these missions lost the comfortable anonymity they had enjoyed previously. The IMF’s Stanley Fischer recalled the “circus atmosphere” around the Seoul Hilton when he visited South Korea at the start of the negotiations. “I got imprisoned in my hotel room—couldn’t move out because [if] I opened the door, there were 10,000 photographers.” According to another account, in order to reach the banquet room where the negotiations were taking place, IMF representatives were forced “to take a circuitous route to a back entrance that involved going up and down flights of stairs and through the Hilton’s vast kitchen.”55 At the time, IMF officials were unaccustomed to such attention. The experience of being prisoners in five-star hotels and conference centers would become familiar for emiss
aries of the Washington Consensus in the years to come, as mass protests started to greet their gatherings around the world.
After 1998, it became increasingly difficult to impose the shock therapy-style makeovers by peaceful means—through the usual IMF bullying or arm-twisting at trade summits. The defiant new mood coming from the South made its global debut when the World Trade Organization talks collapsed in Seattle in 1999. Though the college-age protesters received the bulk of the media coverage, the real rebellion took place inside the conference center, when developing countries formed a voting bloc and rejected demands for deeper trade concessions as long as Europe and the U.S. continued to subsidize and protect their domestic industries.
At the time, it was still possible to dismiss the Seattle breakdown as a minor pause in the steady advance of corporatism. Within a few years, however, the depth of the shift would be undeniable: the U.S. government’s ambitious dream of creating a unified free-trade zone encompassing all of Asia-Pacific was abandoned, as were a global investors’ treaty and plans for a Free Trade Area of the Americas, stretching from Alaska to Chile.