The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

  So much wealth was being made in Russia in this period that some of the “reformers” couldn’t resist getting in on the action. Indeed, more than anywhere else up to this point, the situation in Russia exposed the myth of the technocrat, the egghead free-market economist supposedly imposing textbook models out of pure conviction. As in Chile and China, where rampant corruption and economic shock therapy went hand in hand, several of Yeltsin’s Chicago School ministers and deputy ministers ended up losing their posts in high-profile corruption scandals.69

  Then there were the whiz kids from Harvard’s Russia Project, tasked with organizing the country’s privatizations and the mutual fund market. The two academics who headed the project—Harvard economics professor Andrei Shleifer and his deputy Jonathan Hay—were discovered to have been directly profiting from the market they were busily creating. While Shleifer was the lead adviser to the Gaidar team on privatization policy, his wife was investing heavily in privatized Russian assets. Hay, a thirty-year-old graduate of Harvard Law School, also made personal investments in privatized Russian oil stocks, allegedly in direct violation of Harvard’s USAID contract. And while Hay was helping the Russian government to set up a new mutual fund market, his girlfriend, later wife, was awarded the first license to open a mutual fund company in Russia, which, when it started, was managed out of the U.S. government–funded Harvard office. (Technically, as head of the Harvard Institute for International Development, which housed the Russia Project, Sachs was Shleifer’s and Hay’s boss for part of this time. However, Sachs was no longer working on the ground in Russia and has never been implicated in any of the questionable actions.)70

  When these tangles came to light, the U.S. Department of Justice sued Harvard, alleging that the business dealings of Shleifer and Hay violated contracts they had signed agreeing not to profit personally from their high-level work. After a seven-year investigation and legal battle, the U.S. District Court in Boston found that Harvard had breached its contract, that the two academics “conspired to defraud the United States,” that “Shleifer engaged in apparent self-dealing,” that “Hay attempted to launder $400,000 through his father and girlfriend.”71 Harvard paid a settlement of $26.5 million, the largest in the institution’s history. Shleifer agreed to pay $2 million, and Hay agreed to pay between $1 and $2 million, depending on his earnings, though neither admitted any liability.*72

  Perhaps this kind of “self-dealing” was inevitable, given the nature of the Russian experiment. Anders Åslund, one of the most influential Western economists working in Russia at the time, claimed that shock therapy would work because “the miraculous incentives or temptations of capitalism conquer more or less anything.”73 So if greed was to be the engine for rebuilding Russia, then surely the Harvard men and their wives and girlfriends, as well as Yeltsin’s staff and family, by taking part in the frenzy themselves, were simply leading by example.

  This points to a nagging and important question about free-market ideologues: Are they “true believers,” driven by ideology and faith that free markets will cure underdevelopment, as is often asserted, or do the ideas and theories frequently serve as an elaborate rationale to allow people to act on unfettered greed while still invoking an altruistic motive? All ideologies are corruptible, of course (as Russia’s apparatchiks made abundantly clear when, during the Communist era, they collected their abundant privileges), and there are certainly honest neoliberals. But Chicago School economics does seem particularly conducive to corruption. Once you accept that profit and greed as practiced on a mass scale create the greatest possible benefits for any society, pretty much any act of personal enrichment can be justified as a contribution to the great creative cauldron of capitalism, generating wealth and spurring economic growth—even if it’s only for yourself and your colleagues.

  George Soros’s philanthropic work in Eastern Europe—including his funding of Sachs’s travels through the region—has not been immune to controversy. There is no doubt that Soros was committed to the cause of democratization in the Eastern Bloc, but he also had clear economic interests in the kind of economic reform accompanying that democratization. As the world’s most powerful currency trader, he stood to benefit greatly when countries implemented convertible currencies and lifted capital controls, and when state companies were put on the auction block, he was one of the potential buyers.

  It would have been perfectly legal for Soros to profit directly from the markets he—as a philanthropist—was helping to open up, but it would not have looked particularly good. For a time, he dealt with the appearance of conflict of interest by barring his companies from investing in countries where his foundations were active. But by the time Russia went up for sale, Soros could no longer resist. In 1994, he explained that his policy “has been modified due to the fact that markets are really developing in the region and I have no rhyme or reason or right to deny my funds, or my shareholders, the possibility of investing there, or to deny those countries the chance to get hold of some of these funds.” Soros had already purchased shares in Russia’s privatized phone system in 1994, for example (a very bad investment, as it turned out), and acquired a piece of a large food company in Poland.74 In the early days of the fall of Communism, Soros, through Sachs’s work, had been one of the prime movers behind the push for the shock approach to economic transformation. By the late nineties, however, he had an apparent change of heart, becoming one of the leading critics of shock therapy and directing his foundations to fund NGOs that focus on putting anticorruption measures in place before privatizations occur.

  That epiphany came much too late to save Russia from casino capitalism. Shock therapy had cracked it open to flows of hot money—short-term speculative investment and currency trading, which are highly profitable. Such intense speculation meant that in 1998, when the Asian financial crisis (the subject of chapter 13) started spreading, Russia was left wholly unprotected. Its already precarious economy crashed definitively. The public blamed Yeltsin, and his approval rating dropped to an utterly untenable 6 percent.75 With the futures of many of the oligarchs in jeopardy once again, it was going to take yet another major shock to save the economic project and stave off the threat of genuine democracy coming to Russia.

  In September 1999, the country was hit with a series of exceedingly cruel terrorist attacks: seemingly out of the blue, four apartment buildings were blown up in the middle of the night, killing close to three hundred people. In a narrative all too familiar to Americans after September 11, 2001, every other issue was blasted off the political map by the only force on earth capable of doing the job. “It was this sort of very simple fear,” explains the Russian journalist Yevgenia Albats. “All of a sudden, it appeared that all these discussions about democracy, oligarchs—nothing compared to this fear to die inside your own apartment.”76

  The man put in charge of hunting down the “animals” was Russia’s prime minister, the steely and vaguely sinister Vladimir Putin.*77 Immediately after the apartment bombings, in late September 1999, Putin launched air strikes on Chechnya, attacking civilian areas. In the new light of terror, the fact that Putin was a seventeen-year veteran of the KGB—the most feared symbol of the Communist era—suddenly seemed reassuring to many Russians. With Yeltsin’s alcoholism making him increasingly dysfunctional, Putin the protector was perfectly positioned to succeed him as president. On December 31, 1999, with the war in Chechnya foreclosing serious debate, several oligarchs engineered a quiet handover from Yeltsin to Putin, no elections necessary. Before he left power, Yeltsin took one last page out of the Pinochet playbook and demanded legal immunity for himself. Putin’s first act as president was signing a law protecting Yeltsin from any criminal prosecution, whether for corruption or for the military’s killing of pro-democracy demonstrators that took place on his watch.

  Yeltsin is regarded by history more as a corrupt buffoon than a menacing strongman. Yet his economic policies, and the wars he waged in order to protect them, contributed significan
tly to the Chicago School crusade death toll, which has been mounting steadily since Chile in the seventies. In addition to the casualties of Yeltsin’s October coup, the wars in Chechnya have killed an estimated 100,000 civilians.78 The larger massacres he precipitated have taken place in slow motion, but their numbers are much higher—the “collateral damage” of economic shock therapy.

  In the absence of major famine, plague or battle, never have so many lost so much in so short a time. By 1998, more than 80 percent of Russian farms had gone bankrupt, and roughly seventy thousand state factories had closed, creating an epidemic of unemployment. In 1989, before shock therapy, 2 million people in the Russian Federation were living in poverty, on less than $4 a day. By the time the shock therapists had administered their “bitter medicine” in the mid-nineties, 74 million Russians were living below the poverty line, according to the World Bank. That means that Russia’s “economic reforms” can claim credit for the impoverishment of 72 million people in only eight years. By 1996, 25 percent of Russians—almost 37 million people—lived in poverty described as “desperate.”79

  Although millions of Russians have been pulled out of poverty in recent years, thanks largely to soaring oil and gas prices, Russia’s underclass of extreme poor has remained permanent—with all the sicknesses associated with that discarded status. As miserable as life under Communism was, with crowded, cold apartments, Russians at least were housed; in 2006 the government admitted that there were 715,000 homeless kids in Russia, and UNICEF has put the number as high as 3.5 million children.80

  During the Cold War, widespread alcoholism was always seen in the West as evidence that life under Communism was so dismal that Russians needed large quantities of vodka to get through the day. Under capitalism, however, Russians drink more than twice as much alcohol as they used to—and they are reaching for harder painkillers as well. Russia’s drug czar, Aleksandr Mikhailov, says that the number of users went up 900 percent from 1994 to 2004, to more than 4 million people, many of them heroin addicts. The drug epidemic has contributed to another silent killer: in 1995, fifty thousand Russians were HIV positive, and in only two years that number doubled; ten years later, according to UNAIDS, nearly a million Russians were HIV positive.81

  These are the slow deaths, but there are fast ones as well. As soon as shock therapy was introduced in 1992, Russia’s already high suicide rate began to rise; 1994, the peak of Yeltsin’s “reforms,” saw the suicide rate climb to almost double what it had been eight years earlier. Russians also killed each other with much greater frequency: by 1994, violent crime had increased more than fourfold.82

  “What have our motherland and her people gotten out of the last 15 criminal years?” Vladimir Gusev, a Moscow academic, asked at a 2006 democracy demonstration. “The years of criminal capitalism have killed off 10 percent of our population.” Russia’s population is indeed in dramatic decline—the country is losing roughly 700,000 people a year. Between 1992, the first full year of shock therapy, and 2006, Russia’s population shrank by 6.6 million.83 Three decades ago, André Gunder Frank, the dissident Chicago economist, wrote a letter to Milton Friedman accusing him of “economic genocide.” Many Russians describe the slow disappearance of their fellow citizens in similar terms today.

  This planned misery is made all the more grotesque because the wealth accumulated by the elite is flaunted in Moscow as nowhere else outside of a handful of oil emirates. In Russia today, wealth is so stratified that the rich and the poor seem to be living not only in different countries but in different centuries. One time zone is downtown Moscow, transformed in fast-forward into a futuristic twenty-first-century sin city, where oligarchs race around in black Mercedes convoys, guarded by top-of-the-line mercenary soldiers, and where Western money managers are seduced by the open investment rules by day and by on-the-house prostitutes by night. In the other time zone, a seventeen-year-old provincial girl, asked about her hopes for the future, replied, “It’s difficult to talk about the twenty-first century when you’re sitting here reading by candlelight. The twenty-first century does not matter. It’s the nineteenth century here.”84

  This pillage of a country with as much wealth as Russia required extreme acts of terror—from the torching of the parliament to the invasion of Chechnya. “Policy that breeds poverty and crime,” writes Georgi Arbatov, one of Yeltsin’s original (and ignored) economic advisers, “…can survive only if democracy is suppressed.”85 Just as it had been in the Southern Cone, in Bolivia under the state of siege, in China during Tiananmen. Just as it would be in Iraq.

  When in Doubt, Blame Corruption

  Rereading Western news reports on Russia’s shock therapy period, it is striking how closely discussions at that time paralleled debates about Iraq that would unfold more than a decade later. For both the Clinton and Bush Sr. administrations, not to mention the European Union, the G7 and the IMF, the clear goal in Russia was to erase the preexisting state and create the conditions for a capitalist feeding frenzy, which in turn would kick-start a booming free-market democracy—managed by overconfident Americans barely out of school. In other words, it was Iraq without the explosives.

  When the zeal for shock therapy in Russia was at its peak, its cheerleaders were absolutely convinced that only total destruction of every single institution would create the conditions for a national rebirth—the dream of the blank slate that would recur in Baghdad. It is “desirable,” wrote the Harvard historian Richard Pipes, “for Russia to keep on disintegrating until nothing remains of its institutional structures.”86 And the Columbia University economist Richard Ericson wrote in 1995, “Any reform must be disruptive on a historically unprecedented scale. An entire world must be discarded, including all of its economic and most of its social and political institutions, and concluding with the physical structure of production, capital, and technology.”87

  Another Iraq parallel: no matter how baldly Yeltsin defied anything resembling democracy, his rule was still characterized in the West as part of “a transition to democracy,” a narrative that would change only when Putin began cracking down on the illegal activities of several of the oligarchs. Similarly, the Bush administration has always portrayed Iraq as on the road to freedom, even in the face of overwhelming evidence of rampant torture, out-of-control death squads and pervasive press censorship. Russia’s economic program was always described as “reform,” just as Iraq is perennially under “reconstruction,” even after the U.S. contractors have mostly all fled, leaving the infrastructure in a shambles, as the destruction roars on. In Russia in the mid-nineties, anyone who dared question the wisdom of “the reformers” was dismissed as nostalgic for Stalin, just as critics of Iraq’s occupation were, for years, met with accusations that they thought life was better under Saddam Hussein.

  When it was no longer possible to hide the failures of Russia’s shock therapy program, the spin turned to Russia’s “culture of corruption,” as well as speculation that Russians “aren’t ready” for genuine democracy because of their long history of authoritarianism. Washington’s think-tank economists hastily disavowed the Frankenstein economy they helped create in Russia, deriding it as “mafia capitalism”—supposedly a phenomenon peculiar to the Russian character. “Nothing good will ever come of Russia,” The Atlantic Monthly reported in 2001, quoting a Russian office worker. In the Los Angeles Times, the journalist and novelist Richard Lourie pronounced that “the Russians are such a calamitous nation that even when they undertake something sane and banal, like voting and making money, they make a total hash of it.”88 The economist Anders Åslund had claimed that the “temptations of capitalism” alone would transform Russia, that the sheer power of greed would provide the momentum to rebuild the country. Asked a few years later what went wrong, he replied, “Corruption, corruption and corruption,” as if corruption was something other than the unrestrained expression of the “temptations of capitalism” that he had so enthusiastically praised.89

  The entire charade would b
e replayed a decade later to explain away the billions of missing reconstruction dollars in Iraq, with the disfiguring legacy of Saddam and the pathologies of “radical Islam” standing in for the legacy of Communism and czarism. In Iraq, U.S. rage at the apparent inability of Iraqis to accept their gift of gunpoint “freedom” would also turn abusive—except that in Iraq the rage would not be found only in nasty editorials about “ungrateful” Iraqis but would also be pounded out on the bodies of Iraqi civilians by U.S. and British soldiers.

  The real problem with the blame-Russia narrative is that it pre-empts any serious examination of what the whole episode has to teach about the true face of the crusade for unfettered free markets, the most powerful political trend of the past three decades. The corruption of many of the oligarchs is still spoken of as an alien force that infected otherwise worthy free-market plans. But corruption wasn’t an intruder to Russia’s free-market reforms: quick and dirty deals were actively encouraged by Western powers at every stage as the fastest way to kick-start the economy. National salvation through the harnessing of greed was the closest thing Russia’s Chicago Boys and their advisers had to a plan for what they were going to do after they finished destroying Russia’s institutions.

  Nor were these catastrophic results unique to Russia; the entire thirty-year history of the Chicago School experiment has been one of mass corruption and corporatist collusion between security states and large corporations, from Chile’s piranhas, to Argentina’s crony privatizations, to Russia’s oligarchs, to Enron’s energy shell game, to Iraq’s “free fraud zone.” The point of shock therapy is to open up a window for enormous profits to be made very quickly—not despite the lawlessness but precisely because of it. “Russia Has Become a Klondike for International Fund Speculators,” ran a headline in a Russian newspaper in 1997, while Forbes described Russia and Central Europe as “the new frontier.”90 The colonial-era terms were entirely appropriate.