excerpted from the book
The Shock Doctrine
The Rise of Disaster Capitalism
by Naomi Klein
Picador, 2007, paperback
M. K. Gandhi, Non-Violence - The Greatest Force," 1926
An armed conflict between nations horrifies
us. But the economic war is no better than an armed conflict.
This is like a surgical operation. An economic war is prolonged
torture. And its ravages are no less terrible than those depicted
in the literature on war property so called. We think nothing
of the other because we are used to its deadly effects .... The
movement against war is sound. I pray for its success. But I cannot
help the gnawing fear that the movement will fail if it does not
touch the root of all evil-human greed.
Across the Atlantic, '[Margaret] Thatcher was attempting an English
version of Friedmanism by championing what has become known as
"the ownership society." The effort centered on Britain's
public housing, or council estates, which Thatcher opposed on
philosophical grounds, believing that the state had no role to
play in the housing market. The council estates were filled with
the type of people who wouldn't vote Tory because it wasn't in
their economic self-interest; Thatcher was convinced that if they
could be brought into the market, they would start to identify
with the interests of the wealthier people who opposed redistribution.
With that in mind, she offered strong incentives to the residents
of public housing to buy their flats at reduced rates. Those who
could became homeowners, while those who couldn't faced rents
that were almost twice as high as before. It was a divide-and-conquer
strategy, and it worked: the renters continued to oppose Thatcher,
the streets of Britain's large cities saw a visible increase in
homelessness, but polls showed that more than half of the new
owners did switch their party affiliation to the Tories.
Although the estate sales offered a glimmer
of hope for the possibility of hard-right economics in a democracy,
Thatcher still looked poised to lose her job after just one term.
In 1979, she had run on the slogan "Labor isn't working,"
but by 1982, the number of unemployed had doubled under her watch,
as had the inflation rate." She had tried to take on one
of the most powerful unions in the country, the coal miners, and
had failed. After three years in office, Thatcher saw her personal
approval rating drop to only 25 percent-lower than George W. Bush
at his lowest point and lower than any British prime minister
in the history of opinion polls. Approval for her government as
a whole had sunk to 18 percent. With a general election looming,
Thatcherism was about to come to an early and inglorious close,
well before the Tories had achieved their most ambitious goals
of mass privatization and breaking the blue-collar unions. It
was in those trying circumstances that Thatcher wrote to Hayek,
politely informing him that a Chilean-style transformation was
"quite unacceptable" in the U.K.
Thatcher's catastrophic first term seemed
to further confirm the lessons of the Nixon years: that the radical
and highly profitable policies of the Chicago School couldn't
survive in a democratic system. It seemed clear that the successful
imposition of economic shock therapy required some other sort
of shock-whether of a coup, or of the torture chamber delivered
by a repressive regime.
On April 2, 1982, Argentina invaded the Falkland Islands, a relic
of British colonial rule. The Falklands War, or the Malvinas War
if you are Argentine, went down in history as a vicious but fairly
minor battle. At the time, the Falklands appeared to have no strategic
importance. The cluster of islands off the Argentine coast was
thousands of miles from Britain and costly to guard and maintain.
Argentina, too, had little use for them, though having a British
outpost in its waters was regarded as an affront to national pride.
The legendary Argentine writer Jorge Luis Borges scathingly described
the land dispute as "a fight between two bald men over a
From a military standpoint, the eleven-week
battle appears to have almost no historic significance. Overlooked,
however, was the war's impact on the free-market project, which
was enormous: it was the Falklands War that gave Thatcher the
political cover she needed to bring a program of radical capitalist
transformation to a Western liberal democracy for the first time.
Both sides in the conflict had good reasons
to want a war. In 1982, Argentina's economy was collapsing under
the weight of its debt and corruption, and human rights campaigns
were gaining momentum. A new junta government, led by General
Leopoldo Galtieri, calculated that the only thing more powerful
than the anger at its continued suppression of democracy was anti-imperialist
sentiment, which Galtieri expertly unleashed on the British for
their refusal to give up the islands. Soon enough, the junta had
Argentina's blue-and-white flag planted on that rocky outpost,
and the country cheered on cue.
'When news arrived that Argentina had
laid claim to the Falklands, Thatcher recognized it as a last-ditch
hope to turn around her political fortunes and immediately went
into Churchillian battle mode. Until this point, she had shown
only disdain for the financial burden that the Falklands placed
on government coffers. She had cut grants to the islands and announced
major cutbacks to the navy, including the armed ships that guarded
the Falklands - moves read by the Argentine generals as clear
indications that Britain was ready to cede the territory. (One
of Thatcher's biographers characterized her Falklands policy as
"practically an invitation to Argentina to invade.")
In the lead-up to the war, critics across the political spectrum
accused Thatcher of using the military for her own political goals.
The Labour MP Tony Benn said, "It looks more and more as
if what is at stake is Mrs. Thatcher's reputation, not the Falkland
Islands at all," while the conservative Financial Times noted,
"What is deplorable is that the issue is rapidly becoming
mixed up with political differences within Britain itself which
have nothing to do with the matter in hand. Not only the pride
of the Argentine Government is involved. So is the standing, perhaps
even the survival, of the Tory Government in Britain."
Yet even with all of this healthy cynicism
in the run-up, as soon as troops were deployed, the country was
swept up in what a draft Labour Party resolution described as
a "jingoistic, militaristic frame of mind," embracing
the Falkland Islands as a last blast of glory for Britain's faded
Thatcher was fighting for her political future-and she succeeded
spectacularly. After the Falklands victory, which took the lives
of 255 British soldiers and 655 Argentines, the prime minister
was heralded as a war hero, her moniker "Iron Lady"
transformed from insult to high praise. 25 Her poll numbers were
similarly transformed. Thatcher's personal approval rating more
than doubled over the course of the battle, from 25 percent at
the start to 59 percent at the end, paving the way for La decisive
victory in the following year's election.
The British military's counter-invasion
of the Falklands was codenamed Operation Corporate, and though
it was an odd name for a military campaign, it proved prescient.
Thatcher used the enormous popularity afforded her by the victory
to launch the very corporatist revolution she had told Hayek was
impossible before the war. When the coal miners went on strike
in 1984, Thatcher cast the standoff as a continuation of the war
with Argentina, calling for similarly brutal resolve. She famously
declared, "We had to fight the enemy without in the Falklands
and now we have to fight the enemy within, which is much more
difficult but just as dangerous to liberty. With British workers
now categorized as "the enemy within," Thatcher unleashed
the full force of the state on the strikers...
By 1985, Thatcher had won this war too: workers were going hungry
and couldn't hold out; in the end 966 people were fired."
It was a devastating setback for Britain's most powerful union,
and it sent a clear message to the others: if Thatcher was willing
to go to the wall to break the coal miners, on whom the country
depended for its lights and warmth, it would be suicide for weaker
unions producing less crucial products and services to take on
her new economic order. Better just to accept whatever was on
offer. It was a message very similar to the one Ronald Reagan
had sent a few months after he took office with his response to
a strike by the air-traffic controllers. By not showing up to
work, they had "forfeited their jobs and will be terminated,"
Reagan said. Then he fired 11,400 of the country's most essential
workers in a single blow-a shock from which the U.S. labor movement
has yet to fully recover.
In Britain, Thatcher parlayed her victory
in the Falklands and over the miners into a major leap forward
for her radical economic agenda. Between 1984 and 1988, the government
privatized, among others, British Telecom, British Gas, British
Airways, British Airport Authority and British Steel, while it
sold its shares in British Petroleum.
Much as the terrorist attacks of September
11, 2001, would take an unpopular president and hand him an opportunity
to launch a massive privatization initiative (in Bush's case,
the privatization of security, warfare and reconstruction), Thatcher
used her war to launch the mass privatization auction in a Western
it was in 1982 that Milton Friedman wrote the highly influential
passage that best summarizes the shock doctrine: "Only a
crisis-actual or perceived-produces real change. When that crisis
occurs, the actions that are taken depend on the ideas that are
lying around. That, I believe, is our basic function: to develop
alternatives to existing policies, to keep them alive and available
until the politically impossible becomes politically inevitable.
It was to become a kind of mantra for his movement in the new
democratic era. Allan Meltzer elaborated on the philosophy: "Ideas
are alternatives waiting on a crisis to serve as the catalyst
of change. Friedman's model of influence was to legitimize ideas,
to make them bearable, and worth trying when the opportunity comes."
The kind of crisis Friedman had in mind
was not military but economic. What he understood was that in
normal circumstances, economic decisions are made based on the
push and pull of competing ( interests-workers want jobs and raises,
owners want low taxes and relaxed regulation, and politicians
have to strike a balance between these competing forces. However,
if an economic crisis hits and is severe enough-a currency meltdown,
a market crash, a major recession-it blows everything else out
of the water, and leaders are liberated to do whatever is necessary
(or said to be necessary) in the f name of responding to a national
In 1984, Ronald Reagan's administration pushed [Bolivia] over
the edge by funding an unprecedented attack on its coca farmers,
who grow the green leaf that can be refined into cocaine. The
siege, which turned a large section of Bolivia into a military
zone, didn't just choke the coca trade, but cut off the source
of roughly half of the country's export revenues, triggering an
economic meltdown. As The New York Times reported, "When
the army marched into the Chapare in August, closing the narcodollar
pipeline part way, the shock wave immediately hit the thriving
black market in dollars ... less than a week after the Chapare
occupation, the Government was forced to drop the peso's official
value by more than half." A few months later, inflation had
increased tenfold, and thousands were leaving the country in search
of jobs in Argentina, Brazil, Spain and the United States.
It was in those volatile circumstances,
with inflation up to 14,000 percent, that Bolivia entered its
historic 1985 national elections. The election was a race between
two familiar figures for Bolivians-their former dictator, Hugo
Banzer, and their former elected president, VIctor Paz Estenssoro.
The vote was very close, and the final decision would be left
to Bolivia's Congress, but Banzer's team was sure it had won.
Before the results were announced, the party enlisted the help
of a little-known thirty-year-old economist named Jeffrey _Sachs
to help develop an anti-inflation economic plan. Sachs was the
rising star of Harvard's economics department, raking in academic
awards and becoming one of the university's youngest tenured professors.
A few months earlier, a delegation of Bolivian politicians had
visited Harvard and seen Sachs in action; they had been impressed
by his bravado-he had told them that he could turn around their
inflationary crisis in a day. Sachs had no experience in development
economics, but, by his own admission, "I thought that I knew
just about everything that needed to be known" about inflation.
John Maynard Keynes
'There is no subtler, no surer means of
overturning the existing basis of society than to debauch the
currency. The process engages all the hidden forces of economic
law on the side of destruction.
[In Bolivia, Jeffery Sachs advocated] government austerity and
price increases in the midst of the crisis - the same recipe for
contraction that Business Week had described in Chile as a "Dr.
Strangelove world of deliberately induced depression."'
Sachs's advice to Banzer was straightforward:
only sudden shock therapy would cure Bolivia's hyperinflation
crisis. He proposed raising the price of oil tenfold and a range
of other price deregulations and budget cuts.
Just as Friedman had promised in Chile, freer trade [in Bolivia]
was supposed to create jobs for the newly jobless. It didn't,
and the unemployment rate increased from 20 percent at the time
of the elections to between 25 and 30 percent two years later.
The state mining corporation alone-the same one that Paz had nationalized
in the 1950s-was downsized from twenty-eight thousand employees
to just six thousand.
The minimum wage never recovered its value,
and two years into the program, real wages were down 40 percent;
at one point they would drop 70 percent. In 1985, the year of
shock therapy, the per capita average income in Bolivia was $845;
two years later it had fallen to $789. This is the measure used
by Sachs and the government, and despite the lack of progress
it conveys, it does not begin to capture the degradation of daily
life for many Bolivians. Average income is derived by adding up
the country's total income and dividing by the number of people
in the country; it glosses over the fact that shock therapy in
Bolivia had the same effects that it had in the rest of the region:
a small elite grew far wealthier while large portions of what
had been the working class were discarded from the economy altogether
and turned into surplus people. In 1987, Bolivian peasants, known
as campesinos, were earning, on average, just $140 year, less
than one-fifth of the "average income.
... One immediate result of this resolve
was that many of Bolivia's desperately poor were pushed to become
coca growers, because it paid roughly ten times as much as other
crops (somewhat of an irony since the original economic crisis
was set off by the U.S.-funded siege on the coca farmers.)29 By
1989, an estimated one in ten workers was turning to work in some
aspect of the coca or cocaine industries. These workers would
include the family of Evo Morales, future president of Bolivia
and a former leader of the militant coca growers' union.
The coca industry played a significant
role in resuscitating Bolivia's economy and beating inflation
(a fact now recognized by historians but never mentioned by Sachs
in explanations of how his reforms triumphed over inflation).31
Just two years after the "atomic bomb," illegal drug
exports were generating more income for Bolivia than all its legal
exports combined, and an estimated 350,000 people were earning
a living in some facet of the drug trade.
... In the immediate aftermath of shock
therapy, few outside Bolivia were talking about such complex repercussions.
They were telling a far simpler story: about a bold, boyish professor
from Harvard who had, virtually single-handedly, "salvaged
the inflation-wracked economy of Bolivia," according to Boston
Magazine. The victory over inflation that Sachs had helped engineer
was enough to qualify Bolivia as a stunning free-market success
story, "the most remarkable of modern times," as The
Economist described it. "Bolivia's Miracle" gave Sachs
immediate star status in powerful financial circles and launched
his career as the leading expert on crisis-struck economies, sending
him on to Argentina, Peru, Brazil, Ecuador and Venezuela in the
The praise heaped on Sachs was not just
about beating inflation in a poor country. It was that he had
achieved what so many had claimed was impossible: he had helped
stage a radical neoliberal transformation within the confines
of a democracy and without a war, a change far more sweeping than
those attempted by either Thatcher or Reagan.
... The story of the Bolivian miracle
has been told and retold, in newspaper and magazine articles,
in profiles of Sachs, in Sachs's own best-selling book, and in
documentary productions such as PBS's three-part series Commanding
Heights: The Battle for the World Economy. There is one major
problem: it isn't true. Bolivia did show that shock therapy could
be imposed in a country that had just had elections, but it did
not show that it could be imposed democratically or without repression-in
fact, it proved, once again, that the opposite was still the case.
First, there was the obvious problem that
President Paz had no mandate from Bolivian voters to remake the
entire economic architecture of the country. He had run on a nationalist
platform, which the abruptly abandoned in a backroom deal.
... Predictably, many of the voters who
elected Paz were furious at his betrayal, and as soon as the decree
was handed down, tens of thousands took to the streets to try
to block a plan that would mean layoffs and deepening hunger.
The major opposition came from the country's main labor federation,
which called a general strike that brought industry to a halt.
Paz's response made Thatcher's treatment of the miners seem tame:
He immediately declared a "state of siege," and army
tanks rolled through the streets of the capital, which was placed
under a strict curfew. To travel through their own country, Bolivian
citizens now needed special passes. Riot police raided union halls,
a university and a radio station, as well as several factories.
Political assemblies and marches were forbidden, and state permission
was required to hold meetings. Oppositional politics was effectively
banned - just as it had been during the Banzer dictatorship.
... This extraordinary state of siege
stayed in place for three months and since the plan was pushed
through in one hundred days, that meant the country was under
lockdown during the decisive shock therapy period. One year later,
when the Paz government moved ahead with mass layoffs in the tin
mines, the unions once again took to the streets, and the same
series of dramatic events unfolded: a state of siege was declared,
and two Bolivian Air Force planes carried one hundred of the country's
top labor leaders to internment camps in Bolivia's tropical flatlands.
... It was a kind of junta lite. In order
for the regime to impose economic shock therapy, certain people
needed to disappear-if only temporarily. Though certainly less
brutal, these disappearances served the same purpose as they had
in the seventies. Interning Bolivia's trade unionists so that
they could not resist the reforms cleared the path for the economic
erasure of whole sectors of workers; their jobs were soon lost,
and they ended up warehoused in the shantytowns and slums surrounding
Sachs had gone to Bolivia quoting Keynes's
warning about economic collapse breeding fascism, but he had proceeded
to prescribe measures so painful that quasi-fascist measures were
required for their m enforcement.
By the mid-eighties, several economists had observed that a true
hyperinflation crisis simulates the effects of a military war-spreading
fear and confusion, creating refugees and causing large loss of
life. It was strikingly clear that in Bolivia, hyperinflation
had played the same role as had Pinochet's "war" in
Chile and the Falklands War for Margaret Thatcher-it had created
the context for emergency measures, a state of exception during
which the rules of democracy could be suspended and economic control
could be temporarily handed over to the team of experts...
... There was no shortage of such opportunities
in the eighties. fact, much of the developing world, but particularly
Latin America, was at that very moment spiraling into hyperinflation.
The crisis was the result of two main factors, both with roots
in Washington financial institutions. The first was their insistence
on passing on illegitimate debts accumulated under dictatorships
to new democracies. The second was the Friedman-inspired decision
at the U.S. Federal Reserve to allow interest rates to soar, which
massively increased the size of those debts overnight.
In 1983, when the junta collapsed after the Falklands War, Argentines
elected Raul AlfonsIn as their new president. The newly liberated
country was rigged to detonate, thanks to the planting of a so-called
debt bomb. As part of what the outgoing junta had termed a "dignified
transition" to democracy, Washington insisted that the new
government agree to pay off the debts amassed by the generals.
During junta rule, Argentina's external debt had ballooned from
$7.9 billion the year before the coup to $45 billion at the time
of the handover-debts owed to the international Monetary Fund,
the World Bank, the U.S. Export-Import Bank and private banks
based in the U.S. It was much the same across the region. In Uruguay,
the junta took a debt of half a billion dollars when it seized
power and expanded it to $5 billion, a huge load in a country
of only 3 million people. In Brazil, the most dramatic case, the
generals, who came to power in 1964 promising financial order,
managed to take the debt from $3 billion to $103 billion in 1985.
At the time of the transitions to democracy,
powerful arguments were made, both moral and legal, that these
debts were "odious" and that newly liberated people
should not be forced to pay the bills of their oppressors and
tormentors. The case was especially strong in the Southern Cone
because so much of the foreign credit had gone straight to the
military and police during the dictatorship years-to pay for guns,
water cannons and state-of-the-art torture camps. In Chile, for
instance, the loans bankrolled a tripling in military spending,
enlarging Chile's army from forty-seven thousand in 1973 to eighty-five
thousand in 1980. In Argentina, the World Bank estimates that
roughly $10 billion of the money borrowed by the generals went
to military purchases.
Much of what wasn't spent on weapons simply
vanished. A culture of corruption permeated junta rule-a glimpse
of the debauched future to come when the same free-wheeling economic
policies spread to Russia, China and the "free fraud zone"
of occupied Iraq (to borrow a phrase from a disaffected U.S. adviser).'
According to a 2005 U.S. Senate report, Pinochet maintained a
Byzantine web of at least 125 secret foreign bank accounts listed
under the names of various family members and combinations of
his own name. The accounts, the most notorious of which were at
the Washington, D.C.-based Riggs Bank, hid an estimated $27 million.
In Argentina, the junta has been accused
of being even more acquisitive. In 1984, José Martinez
de Hoz, architect of the economic program, was arrested on fraud
charges relating to a massive state subsidy to one of the companies
he used to head (the case was later dismissed).' The World Bank,
meanwhile, later tracked what happened to $35 billion in foreign
loans borrowed by the junta and found that $19 billion-54 percent
of the total-was moved offshore. Swiss officials have confirmed
that much of it ended up in numbered accounts. The U.S. Federal
Reserve observed that in 1980 alone, Argentina's debt expanded
by $9 billion; in that same year, the amount of money deposited
abroad by Argentine citizens increased by $6.7 billion. Larry
Sjaastad, a famed University of Chicago professor who personally
trained many of Argentina's Chicago Boys, has described these
missing billions (stolen under the noses of his students) as "the
greatest fraud of the twentieth century."
Those who favored defaulting on these illegitimately accumulated
debts argued that the lenders knew, or ought to have known, that
the money was being spent on repression and corruption. This case
was bolstered recently when the State Department declassified
the transcript of a meeting held on October 7, 1976, between Henry
Kissinger, then secretary of state, and Argentina's foreign minister
under the military dictatorship, the admiral César Augusto
Guzzetti. After discussing the international human rights outcry
following the coup, Kissinger said, "Look, our basic attitude
is that we would like you to succeed. I have an old-fashioned
view that friends ought to be supported .... The quicker you succeed,
the better." Kissinger then moved on to the topic of loans,
encouraging Guzzetti to apply for as much foreign assistance as
possible and fast, before Argentina's "human rights problem"
tied the hands of the U.S. administration. "There are two
loans in the bank," Kissinger said, referring to the Inter-American
Development Bank. "We have no intention of voting against
them." He also instructed the minister, "Proceed with
your Export-Import Bank requests. We would like your economic
program to succeed and we will do our best to help you."
The transcript proves that the U.S. government
approved loans to the junta knowing they were being used in the
midst of a campaign of terror. In the early eighties, it was these
odious debts that Washington insisted Argentina's new democratic
government had to repay.
On their own, the debts would have been an enormous burden on
the new democracies, but that burden was about to get much heavier.
A new kind of shock was in the news: the
Volcker Shock. Economists used this term to describe the impact
of the decision made by Federal Reserve chairman Paul Volcker
when he dramatically increased interest rates in the United States,
letting them rise as high as 21 percent, reaching a peak in 1981
and lasting through the mid-eighties. In the U.S., rising interest
rates led to a wave of bankruptcies, and in 1983 the number of
people who defaulted on their mortgages tripled."
The deepest pain, however, was felt outside
the US In developing countries carrying heavy debt loads, the
Volcker Shock-also known as the "debt shock" or the
"debt crisis"-was like a giant Taser gun fired from
Washington, sending the developing world into convulsions. Soaring
interest rates meant higher interest payments on foreign debts,
and often the higher payments could only be met by taking on more
loans. The debt spiral was born. In Argentina, the already huge
debt of $45 billion passed on by the junta grew rapidly until
it reached $65 billion in 1989, a situation reproduced in poor
countries around the world. 17 It was after the Volcker Shock
that Brazil's debt exploded, doubling from $50 billion to $100
billion in six years. Many African countries, having borrowed
heavily in the seventies, found themselves in similar straits:
Nigeria's debt in the same short time period went from $9 billion
to $29 billion.
... This is where Friedman's crisis theory
became self-reinforcing. The more the global economy followed
his prescriptions, with floating interest rates, deregulated prices
and export-oriented economies, the more crisis-prone the system
became, producing more and more of precisely the type of meltdowns
he had identified as the only circumstances under which governments
would take more of his radical advice.
In this way, crisis is built into the
Chicago School model. When limitless sums of money are free to
travel the globe at great speed, and speculators are able to bet
on the value of everything from cocoa to currencies, the result
is enormous volatility. And, since free-trade policies encourage
poor countries to continue to rely on the export of raw resources
such as coffee, copper, oil or wheat, they are particularly vulnerable
to getting trapped in a vicious circle of continuing crisis. A
sudden drop in the price of coffee sends entire economies into
depression, which is then deepened by currency traders who, seeing
a country's financial downturn, respond by betting against its
currency, causing its value to plummet. When soaring interest
rates are added, and national debts balloon overnight, you have
a recipe for potential economic mayhem.
In the eighties and nineties, much of the developing world was
in the grip of a kind of terror hangover, free on paper but still
cautious and wary. Having finally escaped the darkness of dictatorship,
few elected politicians were willing to risk inviting another
round of U. S.-supported coups d'etat by pushing the very policies
that had provoked the coups of the seventies-especially when the
military officials who had staged them were, for the most part,
not in prison but, having negotiated immunity, in their barracks,
Understandably unwilling to go to war
with the Washington institutions that owned their debts, crisis-struck
new democracies had little choice but to play by Washington's
rules. And then, in the early
eighties, Washington's rules got a great deal stricter. That's
because the debt shock coincided precisely, and not coincidentally,
with a new era in North-South relations, one that would make military
dictatorships largely unnecessary. It was the dawn of the era
of "structural adjustment"-otherwise known as the dictatorship
Philosophically, Milton Friedman did not believe in the IMF or
the World Bank: they were classic examples of government interference
with the delicate signals of the free market. So it was ironic
that there was a virtual conveyor belt delivering Chicago Boys
to the two institutions' hulking headquarters on Nineteenth Street
in Washington, 'D.C., where they took up many of the top positions.
... Friedman may have opposed the institutions
on philosophical grounds, but practically, there were no institutions
better positioned to implement his crisis theory. When countries
were sent spiraling into crisis in the eighties, they had nowhere
else to turn but the World Bank and the IMF. When they did, they
hit a wall of orthodox Chicago Boys, trained to see their economic
catastrophes not as problems to solve but as precious opportunities
to leverage in order to secure a new free-market frontier. Crisis
opportunism was now the guiding logic of the world's most powerful
financial institutions. It was also a fundamental betrayal of
their founding principles.
Like the UN, the World Bank and the IMF
were created in direct response to the horror of the Second World
War. With the goal of never again repeating the mistakes that
had allowed fascism to rise in the heart of Europe, the world
powers came together in 1944 in Bretton Woods, New Hampshire,
to create a new economic architecture. The World Bank and the
IMF, financed through contributions by their initial forty-three
member countries, were given the explicit mandate to prevent future
economic shocks and crashes like the ones that had so destabilized
Weimar Germany. The World Bank would make long-term investments
in development to pull countries out of poverty, while the IMF
would act as a kind of global shock absorber, promoting economic
policies that reduced financial speculation and market volatility.
When a country looked as though it was falling into crisis, the
IMF would leap in with stabilizing grants and loans, thereby preventing
crises before they occurred. The two institutions, located across
the street from each other in Washington, would coordinate their
... The IMF and the World Bank did not
live up to that universal vision; from the start they allocated
power not on the basis of "one country, one vote," like
the UN General Assembly, but rather on the size of each country's
economy-an arrangement that gives the United States an effective
veto over all major decisions, with Europe and Japan controlling
most of the rest. That meant that when Reagan and Thatcher came
to power in the eighties, their highly ideological administrations
were essentially able to harness the two institutions for their
own ends, rapidly increasing their power and turning them into
the primary vehicles for the advancement of the corporatist crusade.
The colonization of the World Bank and
the IMF by the Chicago School was a largely unspoken process,
but it became official in 1989 when John Williamson unveiled what
he called "the Washington Consensus." It was a list
of economic policies that he said both institutions now considered
the bare minimum for economic health" - the common core of
wisdom embraced by all serious economists." These policies,
masquerading as technical and uncontentious, included such bald
ideological claims as all "state enterprises should be privatized"
and "barriers impeding the entry of foreign firms should
be abolished. 'When the list was complete, it made up nothing
less than Friedman's neoliberal triumvirate of privatization,
deregulation - free trade and drastic cuts to government spending
... When crisis-struck countries came
to the IMF seeking debt relief and emergency loans, the fund responded
with sweeping shock therapy programs...
The IMF issued its first full-fledged
"structural adjustment" program in 1983. For the next
two decades, every country that came to the fund for a major loan
was informed that it needed to revamp its economy from top to
bottom. Davison Budhoo, an IMF senior economist who designed structural
adjustment programs in Latin America and Africa throughout the
eighties, admitted later that "everything we did from 1983
onward was based on our new sense of mission to have the south
'privatised' or die; towards this end we ignominiously created
economic bedlam in Latin America and Africa in 1983-88.
Despite this radical (and highly profitable)
new mission, the IMF and the bank always claimed that everything
they did was in the interest of stabilization. The fund's official
mandate was still crisis prevention-not social engineering or
ideological transformation - so stabilization needed to be the
official rationale. The reality was that country after country,
the international debt crisis was being methodically leveraged
to advance the Chicago School agenda, based on a ruthless application
of Friedman's shock doctrine.
The principle was simple: countries in crisis desperately need
emergency aid to stabilize their currencies. When privatization
and free-trade policies are packaged together with a financial
bailout, countries have little choice but to accept the whole
In the early nineties, the Argentine state sold off the riches
of the country so rapidly and so completely that the project far
surpassed what had taken place in Chile a decade earlier. By 1994,
90 percent of all state enterprises had been sold to private companies,
including Citibank, Bank Boston, France's Suez and Vivendi, Spain's
Repsol, and Telefónica.
In moments of crisis, people are willing to hand over a great
deal of power to anyone who claims to have a magic cure - whether
the crisis is a financial meltdown ... or a terrorist attack.
And that is how the crusade that Friedman
began managed to survive the dreaded transition to democracy-not
by its proponents persuading electorates of the wisdom of their
worldview, but by moving deftly from crisis to crisis, expertly
exploiting the desperation of economic emergencies to push through
policies that would tie the hands of fragile new democracies.
Once the tactic was perfected, opportunities just seemed to multiply.
The Volcker Shock would be followed by the Mexican Tequila Crisis
in 1994, the Asian Contagion in 1997 and the Russian Collapse
in 1998, which was followed shortly afterward by one in Brazil.
When these shocks and crises started to lose their power, even
more cataclysmic ones would appear: tsunamis, hurricanes, wars
and terrorist attacks. Disaster capitalism was taking shape.
The Shock Doctrine