by Naomi Klein
The movement that Milton Friedman launched in the 1950s is best understood as an attempt by multinational capital to recapture the highly profitable, lawless frontier that Adam Smith, the intellectual forefather of today’s neoliberals, so admired—but with a twist. Rather than journeying through Smith’s “savage and barbarous nations” where there was no Western law (no longer a practical option), this movement set out to systematically dismantle existing laws and regulations to re-create that earlier lawlessness. And where Smith’s colonists earned their record profits by seizing what he described as “waste lands” for “but a trifle,” today’s multinationals see government programs, public assets and everything that is not for sale as terrain to be conquered and seized—the post office, national parks, schools, social security, disaster relief and anything else that is publicly administered.91
Under Chicago School economics, the state acts as the colonial frontier, which corporate conquistadors pillage with the same ruthless determination and energy as their predecessors showed when they hauled home the gold and silver of the Andes. Where Smith saw fertile green fields turned into profitable farmlands on the pampas and the prairies, Wall Street saw “green field opportunities” in Chile’s phone system, Argentina’s airline, Russia’s oil fields, Bolivia’s water system, the United States’ public airwaves, Poland’s factories—all built with public wealth, then sold for a trifle.92 Then there are the treasures created by enlisting the state to put a patent and a price tag on life-forms and natural resources never dreamed of as commodities—seeds, genes, carbon in the earth’s atmosphere. By relentlessly searching for new profit frontiers in the public domain, Chicago School economists are like the mapmakers of the colonial era, identifying new waterways through the Amazon, marking off the location of a hidden cache of gold inside an Inca temple.
Corruption has been as much a fixture on these contemporary frontiers as it was during the colonial gold rushes. Since the most significant privatization deals are always signed amid the tumult of an economic or political crisis, clear laws and effective regulators are never in place—the atmosphere is chaotic, the prices are flexible and so are the politicians. What we have been living for three decades is frontier capitalism, with the frontier constantly shifting location from crisis to crisis, moving on as soon as the law catches up.
And so, far from acting as a cautionary tale, the rise of Russia’s billionaire oligarchs proved precisely how profitable the strip mining of an industrialized state could be—and Wall Street wanted more. Immediately following the Soviet collapse, the U.S. Treasury and the IMF became much tougher in their demands for instant privatizations from other crisis-racked countries. The most dramatic case to date came in 1994, the year after Yeltsin’s coup, when Mexico’s economy suffered a major meltdown known as the Tequila Crisis: the terms of the U.S. bailout demanded rapid-fire privatizations, and Forbes announced that the process had minted twenty-three new billionaires. “The lesson here is fairly obvious: to predict whence the next bursts of billionaires will issue, look for countries where markets are opening.” It also cracked Mexico open to unprecedented foreign ownership: in 1990, only one of Mexico’s banks was foreign owned, but “by 2000 twenty-four out of thirty were in foreign hands.”93 Clearly the only lesson learned from Russia is that the faster and more lawless the transfer of wealth, the more profitable it will be.
One person who understood that was Gonzalo Sánchez de Lozada (Goni), the businessman in whose living room the Bolivian shock therapy plan had been drafted in 1985. As president of the country in the mid-nineties, he sold off Bolivia’s national oil company, as well as the national airline, railway, electricity and phone companies. Unlike what transpired in Russia, where the biggest prizes were awarded to locals, the winners of Bolivia’s fire sale included Enron, Royal Dutch/Shell, Amoco Corp. and Citicorp—and the sales were direct; there was no need to partner with local firms.94 The Wall Street Journal described the Wild West scene in La Paz in 1995: “The Radisson Plaza Hotel is crammed with executives from major U.S. companies like AMR Corp.’s American Airlines, MCI Communications Corp., Exxon Corp. and Salomon Brothers Inc. They have been invited by the Bolivians to rewrite laws governing the sectors to be privatized and to bid on the companies on the block”—a tidy arrangement. “The important thing is to make these changes irreversible and to get them done before the antibodies kick in,” said President Sánchez de Lozada, explaining his shock therapy approach. To make absolutely sure those “antibodies” didn’t kick in, Bolivia’s government did something it had done before under similar circumstances: it imposed yet another prolonged “state of siege” that banned political gatherings and authorized the arrest of all opponents of the process.95
These were also the years of Argentina’s notoriously corrupt privatization circus, hailed as “A Bravo New World” in an investment report by Goldman Sachs. Carlos Menem, the Peronist president who came to power promising to be the voice of the working man, was in charge during those years, downsizing and then selling the oil fields, the phone system, the airline, the trains, the airport, the highways, the water system, the banks, the Buenos Aires zoo and, eventually, the post office and the national pension plan. As the country’s wealth moved offshore, the lifestyles of Argentina’s politicians grew increasingly lavish. Menem, once known for his leather jackets and working-class sideburns, began wearing Italian suits and reportedly making trips to the plastic surgeon (“a bee sting” is how he explained his swollen features). María Julia Alsogaray, Menem’s minister in charge of privatization, posed for the cover of a popular magazine wearing nothing but an artfully draped fur coat, while Menem began driving a bright red Ferrari Testarossa—a “gift” from a grateful businessman.96
The countries that emulated Russia’s privatizations also experienced milder versions of Yeltsin’s coups-in-reverse—governments that came to power peacefully and, through elections, found themselves resorting to increasing levels of brutality to hold on to power and defend their reforms. In Argentina, the rule of unfettered neoliberalism ended on December 19, 2001, when President Fernando de la Rúa and his finance minister, Domingo Cavallo, tried to impose further IMF-prescribed austerity measures. The population revolted, and de la Rúa sent in federal police on orders to disperse the crowds by whatever means were required. De la Rúa was forced to flee in a helicopter, but not before twenty-one protesters were killed by police and 1,350 people were injured.97 Goni’s last months and days in office were even bloodier. His privatizations sparked a series of “wars” in Bolivia: first the water war, against Bechtel’s water contract that sent prices soaring 300 percent; then a “tax war” against an IMF-prescribed plan to make up a budget shortfall by taxing the working poor; then the “gas wars” against his plans to export gas to the U.S. In the end, Goni was also forced to flee the presidential palace to live in exile in the U.S., but, as in de la Rúa’s case, not before many lives were lost. After Goni ordered the military to put down street demonstrations, soldiers killed close to seventy people—many of them bystanders—and injured four hundred others. As of early 2007, Goni was wanted by Bolivia’s Supreme Court on charges relating to the massacre.98
The regimes that imposed mass privatization on Argentina and Bolivia were both held up in Washington as examples of how shock therapy could be imposed peacefully and democratically, without coups or repression. Although it’s true that they did not begin in a hail of gunfire, it is surely significant that both ended in one.
In much of the Southern Hemisphere, neoliberalism is frequently spoken of as “the second colonial pillage”: in the first pillage, the riches were seized from the land, and in the second they were stripped from the state. After every one of these profit frenzies come the promises: next time, there will be firm laws in place before a country’s assets are sold off, and the entire process will be watched over by eagle-eyed regulators and investigators with unimpeachable ethics. Next time there will be “institution building” before privatizations (to use the post-
Russia parlance). But calling for law and order after the profits have all been moved offshore is really just a way of legalizing the theft ex post facto, much as the European colonizers locked in their land grabs with treaties. Lawlessness on the frontier, as Adam Smith understood, is not the problem but the point, as much a part of the game as the contrite hand-wringing and the pledges to do better next time.
CHAPTER 12
THE CAPITALIST ID
RUSSIA AND THE NEW ERA OF THE BOOR MARKET
You have made yourself the trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system. If you fail, rational change will be gravely prejudiced throughout the world, leaving orthodoxy and revolution to fight it out.
—John Maynard Keynes in a letter to President Franklin D. Roosevelt, 19331
On the day I went to visit Jeffrey Sachs in October 2006, New York City was under a damp blanket of gray drizzle punctuated, every five paces or so, by a vibrant burst of red. It was the week of the grand launch of Bono’s (Product) Red brand, and the city was getting the full blitz. Red iPods and Armani sunglasses loomed from billboards overhead, every bus shelter featured Steven Spielberg or Penélope Cruz in a different red garment, every Gap outlet in the city had given itself over to the launch, and the Apple store on Fifth Avenue was emitting a rosy glow. “Can a tank top change the world?” asked one ad. Yes it can, we were assured, because a portion of the profits was going to the Global Fund to Fight AIDS, TB and malaria. “Shop till it stops!” Bono had pronounced, in the midst of a televised shopping spree with Oprah a couple of days earlier.2
I had a hunch that most of the journalists wanting to talk to Sachs that week would be looking for the superstar economist’s view on this fashionable new way to raise aid money. After all, Bono refers to Sachs as “my professor,” and a photo of the two men greeted me as I entered Sachs’s office at Columbia University (he left Harvard in 2002). In the midst of all this glamorous charity, I felt like a bit of a spoiler, because I wanted to talk about the professor’s least favorite topic of all, one that has prompted him to threaten to hang up on reporters mid-interview. I wanted to talk about Russia and what went wrong there.
It was in Russia, after the first year of shock therapy, that Sachs began his own transition, from global shock doctor to one of the world’s most outspoken campaigners for increasing aid to impoverished countries. It is a transition that, in the years since, has put him in conflict with many former colleagues and collaborators in orthodox economic circles. As far as Sachs is concerned, he isn’t the one who changed—he was always committed to helping countries develop market-based economies bolstered by generous aid and debt forgiveness. For years he had found it possible to achieve these goals by working in partnership with the IMF and the U.S. Treasury. But by the time he was on the ground in Russia, the tenor of discussion had changed and he came up against a level of official indifference that shocked him and pushed him into a more confrontational stance with Washington’s economic establishment.
Seen with hindsight, there is no doubt that Russia marked the beginning of a new chapter in the evolution of the Chicago School crusade. In earlier shock therapy laboratories of the seventies and eighties, there had been some desire at the U.S. Treasury and the IMF to make the experiments at least superficially successful—precisely because they were experiments, meant to serve as models for other countries to follow. The Latin American dictatorships of the seventies were rewarded for their attacks on trade unions and their open borders with steady loans, which were granted despite such departures from Chicago School orthodoxy as Chile’s continued state control over the world’s largest copper mines and the Argentine junta’s slow action on privatizations. Bolivia, as the first democracy to adopt shock therapy in the eighties, was granted aid and had a portion of its debt erased—well before Goni moved ahead with privatization in the nineties. In Poland, the first Eastern Bloc country to impose shock therapy, Sachs had no trouble securing substantial loans, and, once again, major privatizations were slowed and staggered when the original plan encountered strong opposition.
Russia was different. “Too much shock, not enough therapy” was the widespread verdict. Western powers were totally unyielding in their demand for the most painful “reforms,” at the same time as they were assiduously stingy in the amount of aid they would offer in return. Even Pinochet had cushioned the pain of shock therapy with food programs for the poorest children; Washington lenders saw no reason to help Yeltsin do the same, pushing the country instead into its Hobbesian nightmare.
Having a substantive discussion about Russia with Sachs isn’t easy. I was hoping to take the conversation beyond his initial defensiveness (“I was right and they were completely wrong,” he told me. Then, “Ask Larry Summers, don’t ask me; ask Bob Rubin, ask Clinton, ask Cheney how happy they were with the way Russia went”). I also wanted to get beyond the genuine despondency (“I was trying to do something at the time, which proved to be completely useless”). What I was aiming to understand better was why he was so unsuccessful in Russia, why Jeffrey Sachs’s famous luck ran out at that particular juncture.
Sachs now says that he knew something was different as soon as he arrived in Moscow. “I had a sense of foreboding from the first moment…I was furious from the first moment.” Russia was facing “a first-class macroeconomic crisis, one of the most intense and unstable I had ever seen in my life,” he said. And as far as he was concerned, the way out was clear: the shock therapy measures he had prescribed for Poland “to get basic market forces working quickly—plus a heck of a lot of aid. I was thinking of $30 billion a year, roughly divided, $15 billion for Russia and $15 billion for the republics, in order to be able to pull off a peaceful and democratic transition.”
Sachs, it must be said, has a notoriously selective memory when it comes to the draconian policies he pushed in both Poland and Russia. In our interview, he repeatedly glossed over his own calls for swift privatization and large cutbacks (in short, shock therapy, a phrase he now disavows, claiming he was referring only to narrow pricing policies, not wholesale country makeovers). The way he remembers his role, shock therapy played a minor part, and he was almost exclusively focused on fund-raising; his plan for Poland, he says, was a “stabilization fund, debt cancellation, short-term financial help, integration with the Western European economy…. When I was asked by Yeltsin’s team to help them, I proposed basically the same thing.”*
There is no debate about the key fact in Sachs’s account: securing a major aid infusion was a central pillar of his plan for Russia—that was Yeltsin’s incentive for submitting to the entire program. Sachs based this vision, he says, on the Marshall Plan, the $12.6 billion ($130 billion in today’s dollars) that the U.S. allotted for Europe to reconstruct its infrastructure and industry after the Second World War—a scheme widely regarded as Washington’s most successful diplomatic initiative.3 Sachs says the Marshall Plan showed that “when a country is in disarray, you can’t just expect it to get back up on its feet in a coherent way by itself. So, for me the interesting thing about the Marshall Plan…is how a modest amount of monetary infusion created a base for [Europe’s] economic recovery to take hold.” At the start, he had been convinced that there was a similar political will in Washington to transform Russia into a successful capitalist economy, just as there had been a genuine commitment to West Germany and Japan after the Second World War.
Sachs was confident that he could shake a new Marshall Plan out of the U.S. Treasury and the IMF, and not without reason. “Probably the most important economist in the world” is how The New York Times described him in this period.4 When he was an adviser to Poland’s government, he recalled that he “raised $1 billion in one day in the White House.” But, Sachs told me, “when I suggested the same thing for Russia, there was absolutely no interest at all. None. And the IMF just stared me down like I was crazy.”
Although Yeltsin
and his Chicago Boys had plenty of admirers in Washington, no one was willing to come up with the kind of aid they were talking about. That meant Sachs had urged wrenching policies on Russia, and he couldn’t keep up his end of the bargain. It was in this period that he came close to self-criticism: “My greatest personal mistake,” Sachs said in the midst of the Russia debacle, “was to say to President Boris Yeltsin, ‘Don’t worry; help is on the way.’ I believed deeply that the assistance was too important, and too crucial to the West, for it to be messed up as significantly and fundamentally as it has been.”5 But the problem wasn’t only that the IMF and the Treasury hadn’t listened to Sachs, it was that Sachs had pushed hard for shock therapy before he had any guarantee that they would—a gamble for which millions paid dearly.
When I revisited the question with Sachs, he reiterated that his real failing was in misreading Washington’s political mood. He recalled a discussion with Lawrence Eagleburger, U.S. secretary of state under George H. W. Bush. Sachs made his case: if Russia was allowed to descend further into economic chaos, it could unleash forces no one could control—mass famine, resurgent nationalism, even fascism, surely unwise in a country where virtually the only product held in surplus was nuclear arms. “Your analysis may be just right, but it’s not going to happen,” Eagleburger replied. Then he asked Sachs, “Do you know what year this is?”
