The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

  PART 2

  THE FIRST TEST

  BIRTH PANGS

  The theories of Milton Friedman gave him the Nobel Prize; they gave Chile General Pinochet.

  —Eduardo Galeano, Days and Nights of Love and War, 1983

  I don’t think I was ever regarded as “evil.”

  —Milton Friedman, quoted in The Wall Street Journal, July 22, 2006

  CHAPTER 3

  STATES OF SHOCK

  THE BLOODY BIRTH OF THE COUNTERREVOLUTION

  For injuries ought to be done all at one time, so that, being tasted less, they offend less.

  —Niccolò Machiavelli, The Prince, 15131

  If this shock approach were adopted, I believe that it should be announced publicly in great detail, to take effect at a very close date. The more fully the public is informed, the more will its reactions facilitate the adjustment.

  —Milton Friedman in a letter to General Augusto Pinochet, April 21, 19752

  General Augusto Pinochet and his supporters consistently referred to the events of September 11, 1973, not as a coup d’état but as “a war.” Santiago certainly looked like a war zone: tanks fired as they rolled down the boulevards, and government buildings were under air assault by fighter jets. But there was something strange about this war. It had only one side.

  From the start, Pinochet had complete control of the army, navy, marines and police. Meanwhile, President Salvador Allende had refused to organize his supporters into armed defense leagues, so he had no army of his own. The only resistance came from the presidential palace, La Moneda, and the rooftops around it, where Allende and his inner circle made a valiant effort to defend the seat of democracy. It was hardly a fair fight: though there were just thirty-six Allende supporters inside, the military launched twenty-four rockets into the palace.3

  Pinochet, the operation’s vain and volatile commander (built like one of the tanks he rode in on), clearly wanted the event to be as dramatic and traumatic as possible. Even if the coup was not a war, it was designed to feel like one—a Chilean precursor to Shock and Awe. It could scarcely have been more shocking. Unlike neighboring Argentina, which had been ruled by six military governments in the previous four decades, Chile had no experience with this kind of violence; it had enjoyed 160 years of peaceful democratic rule, the past 41 uninterrupted.

  Now the presidential palace was in flames, the president’s shrouded body was being carried out on a stretcher, and his closest colleagues were lying facedown in the street at rifle point.* A few minutes’ drive from the presidential palace, Orlando Letelier, recently returned from Washington to take up a new post as Chile’s defense minister, had gone to his office that morning in the ministry. As soon as he walked through the front door, he was ambushed by twelve soldiers in combat uniform, all pointing their submachine guns at him.4

  In the years leading up to the coup, U.S. trainers, many from the CIA, had whipped the Chilean military into an anti-Communist frenzy, persuading them that socialists were de facto Russian spies, a force alien to Chilean society—a homegrown “enemy within.” In fact, it was the military that had become the true domestic enemy, ready to turn its weapons on the population it was sworn to protect.

  With Allende dead, his cabinet in captivity and no mass resistance in evidence, the junta’s grand battle was over by mid-afternoon. Letelier and the other “VIP” prisoners were eventually taken to freezing Dawson Island in the southern Strait of Magellan, Pinochet’s approximation of a Siberian work camp. Killing and locking up the government was not enough for Chile’s new junta government, however. The generals knew that their hold on power depended on Chileans being truly terrified, as the people had been in Indonesia. In the days that followed, roughly 13,500 civilians were arrested, loaded onto trucks and imprisoned, according to a declassified CIA report.5 Thousands ended up in the two main football stadiums in Santiago, the Chile Stadium and the huge National Stadium. Inside the National Stadium, death replaced football as the public spectacle. Soldiers prowled the bleachers with hooded collaborators who pointed out “subversives”; the ones who were selected were hauled off to locker rooms and skyboxes transformed into makeshift torture chambers. Hundreds were executed. Lifeless bodies started showing up on the side of major highways or floating in murky urban canals.

  To make sure that the terror extended beyond the capital city, Pinochet sent his most ruthless commander, General Sergio Arellano Stark, on a helicopter mission to the northern provinces to visit a string of prisons where “subversives” were being held. At each city and town, Stark and his roving death squad singled out the highest-profile prisoners, as many as twenty-six at a time, who were subsequently executed. The trail of blood left behind over those four days came to be known as the Caravan of Death.6 In short order, the entire country had gotten the message: resistance is deadly.

  Even though Pinochet’s battle was one-sided, its effects were as real as any civil war or foreign invasion: in all, more than 3,200 people were disappeared or executed, at least 80,000 were imprisoned, and 200,000 fled the country for political reasons.7

  The Economic Front

  For the Chicago Boys, September 11 was a day of giddy anticipation and deadline adrenalin. Sergio de Castro had been working down to the wire with his contact in the navy, getting the final sections of “The Brick” approved page by page. Now, on the day of the coup, several Chicago Boys were camped out at the printing presses of the right-wing El Mercurio newspaper. As shots were being fired in the streets outside, they frantically tried to get the document printed in time for the junta’s first day on the job. Arturo Fontaine, one of the newspaper’s editors, recalled that the machines “worked non-stop to duplicate copies of this long document.” And they made it—just barely. “Before midday on Wednesday, September 12, 1973, the General Officers of the Armed Forces who performed government duties had the Plan on their desks.”8

  The proposals in the final document bore a striking resemblance to those found in Milton Friedman’s Capitalism and Freedom: privatization, deregulation and cuts to social spending—the free-market trinity. Chile’s U.S.-trained economists had tried to introduce these ideas peacefully, within the confines of a democratic debate, but they had been overwhelmingly rejected. Now the Chicago Boys and their plans were back, in a climate distinctly more conducive to their radical vision. In this new era, no one besides a handful of men in uniform needed to agree with them. Their staunchest political opponents were either in jail, dead or fleeing for cover; the spectacle of fighter jets and caravans of death was keeping everyone else in line.

  “To us, it was a revolution,” said Cristián Larroulet, one of Pinochet’s economic aides.9 It was a fair description. September 11, 1973, was far more than the violent end of Allende’s peaceful socialist revolution; it was the beginning of what The Economist would later describe as a “counterrevolution”—the first concrete victory in the Chicago School campaign to seize back the gains that had been won under developmentalism and Keynesianism.10 Unlike Allende’s partial revolution, tempered and compromised by the push and pull of democracy, this revolt, imposed through brute force, was free to go all the way. In the coming years, the same policies laid out in “The Brick” would be imposed in dozens of other countries under cover of a wide range of crises. But Chile was the counterrevolution’s genesis—a genesis of terror.

  José Piñera, an alumnus of the economics department at the Catholic University and a self-described Chicago Boy, was doing graduate work at Harvard at the time of the coup. On hearing the good news, he returned home “to help found a new country, dedicated to liberty, from the ashes of the old one.” According to Piñera, who would eventually become Pinochet’s minister of labor and mining, this was “the real revolution…a radical, comprehensive, and sustained move toward free markets.”11

  Before the coup, Augusto Pinochet had a reputation for deference that bordered on the obsequious, forever flattering and agreeing with his civilian commanders. As a dictator, Pinoch
et found new facets of his character. He took to power with unseemly relish, adopting the airs of a monarch and claiming that “destiny” had given him the job. In short order, he staged a coup within a coup to unseat the other three military leaders with whom he had agreed to share power and named himself Supreme Chief of the Nation as well as president. He basked in pomp and ceremony, proof of his right to rule, never missing an opportunity to put on his Prussian dress uniform, complete with cape. To get around Santiago, he chose a caravan of gold bulletproof Mercedes-Benzes.12

  Pinochet had a knack for authoritarian rule, but, like Suharto, he knew next to nothing about economics. That was a problem because the campaign of corporate sabotage spearheaded by ITT had done an effective job of sending the economy into a tailspin, and Pinochet had a full-fledged crisis on his hands. From the start, there was a power struggle within the junta between those who simply wanted to reinstate the pre-Allende status quo and return quickly to democracy, and the Chicago Boys, who were pushing for a head-to-toe free-market makeover that would take years to impose. Pinochet, enjoying his new powers, intensely disliked the idea that his destiny was a mere cleanup operation—there to “restore order” and then get out. “We are not a vacuum cleaner that swept out Marxism to give back power to those Mr. Politicians,” he would say.13 It was the Chicago Boys’ vision of a total country overhaul that appealed to his newly unleashed ambition, and, like Suharto with his Berkeley Mafia, he immediately named several Chicago grads as senior economic advisers, including Sergio de Castro, the movement’s de facto leader and the main author of “The Brick.” He called them the technos—the technicians—which appealed to the Chicago pretension that fixing an economy was a matter of science, not of subjective human choices.

  Even if Pinochet understood little about inflation and interest rates, the technos spoke a language he did understand. Economics for them meant forces of nature that needed to be respected and obeyed because “to act against nature is counter-productive and self-deceiving,” as Piñera explained.14 Pinochet agreed: people, he once wrote, must submit to structure because “nature shows us basic order and hierarchy are necessary.”15 This mutual claim to be taking orders from higher natural laws formed the basis of the Pinochet-Chicago alliance.

  For the first year and a half, Pinochet faithfully followed the Chicago rules: he privatized some, though not all, state-owned companies (including several banks); he allowed cutting-edge new forms of speculative finance; he flung open the borders to foreign imports, tearing down the barriers that had long protected Chilean manufacturers; and he cut government spending by 10 percent—except the military, which received a significant increase.16 He also eliminated price controls—a radical move in a country that had been regulating the cost of necessities such as bread and cooking oil for decades.

  The Chicago Boys had confidently assured Pinochet that if he suddenly withdrew government involvement from these areas all at once, the “natural” laws of economics would rediscover their equilibrium, and inflation—which they viewed as a kind of economic fever indicating the presence of unhealthy organisms in the market—would magically go down. They were mistaken. In 1974, inflation reached 375 percent—the highest rate in the world and almost twice the top level under Allende.17 The cost of basics such as bread went through the roof. At the same time, Chileans were being thrown out of work because Pinochet’s experiment with “free trade” was flooding the country with cheap imports. Local businesses were closing, unable to compete, unemployment hit record levels and hunger became rampant. The Chicago School’s first laboratory was a debacle.

  Sergio de Castro and the other Chicago Boys argued (in true Chicago fashion) that the problem didn’t lie with their theory but with the fact that it wasn’t being applied with sufficient strictness. The economy had failed to correct itself and return to harmonious balance because there were still “distortions” left over from nearly half a century of government interference. For the experiment to work, Pinochet had to strip these distortions away—more cuts, more privatization, more speed.

  In that year and a half, many of the country’s business elite had had their fill of the Chicago Boys’ adventures in extreme capitalism. The only people benefiting were foreign companies and a small clique of financiers known as the “piranhas,” who were making a killing on speculation. The nuts-and-bolts manufacturers who had strongly supported the coup were getting wiped out. Orlando Sáenz—the president of the National Association of Manufacturers, who had brought the Chicago Boys into the coup plot in the first place—declared the results of the experiment “one of the greatest failures of our economic history.”18 The manufacturers hadn’t wanted Allende’s socialism but had liked a managed economy just fine. “It is not possible to continue with the financial chaos that dominates in Chile,” Sáenz said. “It is necessary to channel into productive investments the millions and millions of financial resources that are now being used in wild-cat speculative operations before the very eyes of those who don’t even have a job.”19

  Their agenda now in grave danger, the Chicago Boys and the piranhas (and there was a great deal of overlap between the two) decided it was time to call in the big guns. In March 1975, Milton Friedman and Arnold Harberger flew to Santiago at the invitation of a major bank to help save the experiment.

  Friedman was greeted by the junta-controlled press as something of a rock star, the guru of the new order. Each of his pronouncements made headlines, his academic lectures were broadcast on national television and he had the most important audience of all: a private meeting with General Pinochet.

  Throughout his stay, Friedman hammered at a single theme: the junta was off to a good start, but it needed to embrace the free market with greater abandon. In speeches and interviews, he used a term that had never before been publicly applied to a real-world economic crisis: he called for “shock treatment.” He said it was “the only medicine. Absolutely. There is no other. There is no other long-term solution.”20 When a Chilean reporter pointed out that even Richard Nixon, then president of the U.S., imposed controls to temper the free market, Friedman snapped, “I don’t approve of them. I believe we should not apply them. I am against economic intervention by the government, in my own country, as well as in Chile.”21

  After his meeting with Pinochet, Friedman made some personal notes about the encounter, which he reproduced decades later in his memoirs. He observed that the general “was sympathetically attracted to the idea of a shock treatment but was clearly distressed at the possible temporary unemployment that might be caused.”22 At this point, Pinochet was already notorious the world over for ordering massacres in football stadiums; that the dictator was “distressed” by the human cost of shock therapy might have given Friedman pause. Instead, he pressed the point in a follow-up letter in which he praised the general’s “extremely wise” decisions but urged Pinochet to cut government spending much further, “by 25 per cent within six months…across-the-board,” while simultaneously adopting a package of pro-business policies moving toward “complete free trade.” Friedman predicted that the hundreds of thousands of people who would be fired from the public sector would quickly get new jobs in the private sector, soon to be booming thanks to Pinochet’s removal of “as many obstacles as possible that now hinder the private market.”23

  Friedman assured the general that if he followed this advice, he would be able to take credit for an “economic miracle”; he “could end inflation in months” while the unemployment problem would be equally “brief—measured in months—and that subsequent recovery would be rapid.” Pinochet would need to act fast and decisively; Friedman emphasized the importance of “shock” repeatedly, using the word three times and underlining that “gradualism is not feasible.”24

  Pinochet was converted. In his letter of response, Chile’s supreme chief expressed “my highest and most respectful regard for you,” assuring Friedman that “the Plan is being fully applied at the present time.”25 Immediately after Friedman
’s visit, Pinochet fired his economic minister and handed the job to Sergio de Castro, whom he later promoted to finance minister. De Castro stacked the government with his fellow Chicago Boys, appointing one of them to head the central bank. Orlando Sáenz, who had objected to the mass layoffs and plant closures, was replaced as head of the Association of Manufacturers by someone with a more shock-friendly attitude. “If there are industrialists who complain because of this, let them ‘go to hell.’ I won’t defend them,” the new director announced.26

  Freed of the naysayers, Pinochet and de Castro got to work stripping away the welfare state to arrive at their pure capitalist utopia. In 1975, they cut public spending by 27 percent in one blow—and they kept cutting until, by 1980, it was half of what it had been under Allende.27 Health and education took the heaviest hits. Even The Economist, a free-market cheerleader, called it “an orgy of self-mutilation.”28 De Castro privatized almost five hundred state-owned companies and banks, practically giving many of them away, since the point was to get them as quickly as possible into their rightful place in the economic order.29 He took no pity on local companies and removed even more trade barriers; the result was the loss of 177,000 industrial jobs between 1973 and 1983.30 By the mid-eighties, manufacturing as a percentage of the economy dropped to levels last seen during the Second World War.31

  Shock treatment was an apt description for what Friedman had prescribed. Pinochet had deliberately sent his country into a deep recession, based on the untested theory that the sudden contraction would jolt the economy into health. In its logic, it was strikingly similar to that of the psychiatrists who started mass-prescribing ECT in the 1940s and 1950s, convinced that deliberately induced grand mal seizures would magically reboot their patients’ brains.