by Naomi Klein
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 first mass privatization auction in a Western democracy. This was the real Operation Corporate, one with historic implications. Thatcher’s successful harnessing of the Falklands War was the first definitive evidence that a Chicago School economic program did not need military dictatorships and torture chambers in order to advance. She had proved that with a large enough political crisis to rally around, a limited version of shock therapy could be imposed in a democracy.
Still, Thatcher had needed an enemy to unite the country, a set of extraordinary circumstances that justified her use of emergency measures and repression—a crisis that made her look tough and decisive rather than cruel and regressive. The war had served her purpose perfectly, but the Falklands War was an anomaly in the early eighties, a throwback to earlier colonial conflicts. If the eighties were really going to be the dawn of a new age of peace and democracy, as many claimed, then Falklands-type clashes would be far too infrequent to form the basis of a global political project.
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.”33 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.”34
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 name of responding to a national emergency. Crises are, in a way, democracy-free zones—gaps in politics as usual when the need for consent and consensus do not seem to apply.
The idea that market crashes can act as catalysts for revolutionary change has a long history on the far left, most notably in the Bolshevik theory that hyperinflation, by destroying the value of money, takes the masses one step closer to the destruction of capitalism itself.35 This theory explains why a certain breed of sectarian leftist is forever calculating the exact conditions under which capitalism will reach “the crisis,” much as evangelical Christians calibrate signs of the coming Rapture. In the mid-eighties, this Communist idea began to experience a powerful revival, picked up by Chicago School economists who argued that just as market crashes could precipitate left-wing revolutions, so too could they be used to spark right-wing counterrevolutions, a theory that became known as “the crisis hypothesis.”36
Friedman’s interest in crisis was also a clear attempt to learn from the victories of the left after the Great Depression: when the market crashed, Keynes and his disciples, previously voices in the wilderness, had been ready and waiting with their ideas, their New Deal solutions. In the seventies and early eighties, Friedman and his corporate underwriters had attempted to mimic this process with their unique brand of intellectual disaster preparedness. They painstakingly built up a new network of right-wing think tanks, including Heritage and Cato, and produced the most significant vehicle to disseminate Friedman’s views, the ten-part PBS miniseries Free to Choose—underwritten by some of the largest corporations in the world, including Getty Oil, Firestone Tire & Rubber Co., PepsiCo, General Motors, Bechtel and General Mills.37 When the next crisis hit, Friedman was determined that it would be his Chicago Boys who would be the ones ready with their ideas and their solutions.
At the time he first articulated the crisis theory in the early eighties, the U.S. was in a recession—a double whammy of high inflation and unemployment. And Chicago School policies, now known as Reaganomics, certainly held sway in Washington. But even Reagan didn’t dare implement the kind of sweeping shock therapy that Friedman dreamed of, the kind he had prescribed in Chile.
Once again, it would be a Latin American country that would be the testing ground for Friedman’s crisis theory—and this time, it wouldn’t be a Chicago Boy who would lead the way, but a new breed of shock doctor, one more suited to the new democratic age.
CHAPTER 7
THE NEW DOCTOR SHOCK
ECONOMIC WARFARE REPLACES DICTATORSHIP
Bolivia’s situation could well be compared with the case of a person who has cancer. He knows he faces that most dangerous and painful operation which monetary stabilization and a number of other measures will undoubtedly be. Yet he has no alternative.
—Cornelius Zondag, U.S. economic adviser to Bolivia, 1956.1
The use of cancer in political discourse encourages fatalism and justifies “severe” measures—as well as strongly reinforcing the widespread notion that the disease is necessarily fatal. The concept of disease is never innocent. But it could be argued that the cancer metaphors are in themselves implicitly genocidal.
—Susan Sontag, Illness as Metaphor, 19772
In 1985, Bolivia was part of the democratic wave sweeping the developing world. For eighteen of the previous twenty-one years, Bolivians had been living under some form of dictatorship. Now they were getting the chance to choose their president in national elections.
Winning control over Bolivia’s economy at this particular juncture looked less like a prize than a punishment, however: its debt was so high that the amount Bolivia owed in interest surpassed its entire national budget. A year earlier, in 1984, Ronald Reagan’s administration pushed the country 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.3
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, Víctor 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.4
Sachs had been heavily influenced by Keynes’s writings on the connection between hyperinflation and the spread of fascism in Germany after the First World War. The peace agreement imposed on Germany had sent it into severe economic crisis—including a hyperinflation rate of 3.25 million percent in 1923—which was then compounded by the Great Depression a few years later. With an unemployment rate of 30 percent and generalized rage at what seemed a global conspiracy, the country was fertile ground for Nazism.
Sachs liked to quote Keynes’s warning that “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.”5 He shared Keynes’s view that it was the sacred duty of economists to suppress those forces of destruction at all costs. “The thing I got from Keynes,” Sachs says, “was this deep sadness and sense of risk that things can go completely awry. And how incredibly stupid it was of us to leave Germany in a state of disrepair.”6 Sachs also told journalists that he regarded Keynes’s lifestyle as a politically engaged, globe-trotting economist as a model for his own career.
Although Sachs shared Keynes’s belief in the power of economics to fight poverty, he was also a product of Reagan’s America, which was, in 1985, in the midst of a Friedman-inspired backlash against all that Keynes represented. Chicago School precepts about the supremacy of the free market had rapidly become the unquestioned orthodoxy in Ivy League economics departments, including Harvard’s, and Sachs was definitely not immune. He admired Friedman’s “faith in markets, his constant insistence on proper monetary management,” calling it “far more accurate than fuzzy structuralist or pseudo-Keynesian arguments one hears a lot in the developing world.”7
Those “fuzzy” arguments were the same ones that in Latin America had been suppressed by violence a decade earlier—the conviction that in order to escape poverty, the continent needed to break the colonial ownership structures with such interventionist policies as land reform, trade protections and subsidies, nationalization of natural resources, and cooperatively run workplaces. Sachs had little time for such structural changes. So although he knew next to nothing about Bolivia and its long history of colonial exploitation, the suppression of its indigenous inhabitants and the hard-won gains of its 1952 revolution, he was convinced that in addition to hyperinflation, Bolivia suffered from “socialist romanticism”—the same delusion of developmentalism that an earlier generation of U.S.-trained economists had tried to stamp out in the Southern Cone.8
Where Sachs parted ways with Chicago School orthodoxy was that he believed free-market policies needed to be supported by debt relief and generous aid—for the young Harvard economist, the invisible hand was not enough. This discrepancy eventually led Sachs to part ways from his more laissez-faire colleagues and devote his efforts exclusively to aid. But that split was years away. In Bolivia, Sachs’s hybrid ideology merely made for some strange contradictions. For instance, when he got off the plane in La Paz, breathing the thin Andean air for the first time, he imagined himself as a latter-day Keynes arriving to save the Bolivian people from the “chaos and disorder” of hyperinflation.* Although the core tenet of Keynesianism is that countries in severe economic recession should spend money to stimulate the economy, Sachs took the opposite approach, advocating government austerity and price increases in the midst of the crisis—the same recipe for contraction that BusinessWeek had described in Chile as a “Dr. Strangelove world of deliberately induced depression.”9
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. In a speech to the Bolivian-American Chamber of Commerce, Sachs again predicted that hyperinflation could be ended in a day, reporting that “the crowd was startled, and delighted, at the prospect.”10 Like Friedman, Sachs was a firm believer that, with a sudden policy jolt, “an economy can be reoriented from a dead end, a dead end of socialism or a dead end of mass corruption or a dead end of central planning, to a normal market economy.”11
At the time Sachs made these bold promises, the results of Bolivia’s elections were still up in the air. The former dictator Hugo Banzer was acting as if he had won, but his rival in the race, Victor Paz Estenssoro, hadn’t yet given up. During the campaign, Paz Estenssoro had provided few concrete details about how he planned to deal with inflation. But he had served three times before as Bolivia’s elected president, most recently in 1964, before he was overthrown in a coup. It was Paz who had been the face of Bolivia’s developmentalist transformation, nationalizing the large tin mines, beginning to distribute land to indigenous peasants, defending the right of all Bolivians to vote. Like Argentina’s Juan Perón, Paz was a complicated, omnipresent fixture on the political landscape, often switching allegiances abruptly in order to hold on to power or make a comeback. During the 1985 campaign, an aging Paz pledged allegiance to his “nationalist revolutionary” past and made vague statements about fiscal responsibility. He was not a socialist, but he was no Chicago School neoliberal—or so Bolivians believed.12
Since the final decision about who would be named president was up to Congress, this was a period of high-stakes backroom negotiations and horse-trading between the parties, the Congress and the Senate. One newly elected senator ended up playing a pivotal role: Gonzalo Sánchez de Lozada (known in Bolivia as Goni). He had lived in the United States for so long that he spoke Spanish with a heavy American accent and had returned to Bolivia to become one of the country’s wealthiest businessmen. He owned Comsur, the second-largest private mine in the country, soon to be the largest. As a young man, Goni had studied at the University of Chicago, and though he was not an economist, he was strongly influenced by Friedman’s ideas and recognized that they held tremendously profitable implications in the mining sector, which in Bolivia was still largely controlled by the state. When Sachs laid out his shock plans to Banzer’s team, Goni was impressed.
The details of the backroom negotiations have never been disclosed, but the results are clear enough. On August 6, 1985, it was Paz who was sworn in as president of Bolivia. Only four days later, Paz appointed Goni to head up a top-secret bipartisan emergency economic team charged with radically restructuring the economy. The group’s starting point was Sachs’s shock therapy, but it would go much further than anything he had suggested. In fact, it would propose dismantling the entire state-centered economic model that Paz himself had constructed decades earlier. At this point Sachs was back at Harvard, but he says he “was happy to hear that the ADN [Banzer’s party] had shared a copy of our stabilization plan with the new president and his team.”13
Paz’s party had no idea that their leader had struck this backroom deal. With the exception of the minister of finance and the minister of planning, who were part of the secret group, Paz did not even tell his newly elected cabinet about the existence of the emergency economic team.14
For seventeen days straight, the emergency team met in the living room of Goni’s palatial home. “We holed ourselves up there in a cautious and almost clandestine way,” recalled the planning minister, Guillermo Bedregal, in an interview given in 2005, revealing these details for the first time.*15 What they were contemplating was a radical overhaul of a national economy so sweeping that nothing like it had ever been attempted in a democracy. President Paz was convinced that his only hope was to move as fast and suddenly as possible. That way, Bolivia’s notoriously militant trade unions and peasant groups would be caught off guard and wouldn’t have a c
hance to organize a response, or so he hoped. As Goni recalled, Paz “kept saying, ‘If you are going to do it, do it now. I can’t operate twice.’”16 The reason for Paz’s postelection about-face remains something of a mystery. He died in 2001 and never did explain whether he had agreed to adopt Banzer’s shock therapy program in exchange for being awarded the presidency, or whether he had undergone a heartfelt ideological conversion. Some insight was provided to me by Edwin Corr, the U.S. ambassador to Bolivia at the time. He recalled that he had met with all the political parties and made it clear that U.S. aid would flow if they went the shock route.
After seventeen days, Bedregal, the planning minister, had the draft of a textbook shock therapy program. It called for the elimination of food subsidies, the canceling of almost all price controls and a 300 percent hike in the price of oil.17 Despite the fact that life was about to get a lot more expensive in an already desperately poor country, the plan froze government wages at their already low levels for a year. It also called for deep cuts to government spending, flung open Bolivia’s borders to unrestricted imports and called for a downsizing of state companies, the precursor to privatization. Bolivia had missed the neoliberal revolution imposed on the rest of the Southern Cone in the seventies; now it was going to make up for lost time.
