by Naomi Klein
The phrase “debt wall” suddenly entered the vocabulary. What it meant was that, although life seemed comfortable and peaceful now, Canada was spending so far beyond its means that, very soon, powerful Wall Street firms like Moody’s and Standard and Poor’s would downgrade our national credit rating from its perfect Triple A status to something much lower. When that happened, hypermobile investors, liberated by the new rules of globalization and free trade, would simply pull their money from Canada and take it somewhere safer. The only solution, we were told, was to radically cut spending on such programs as unemployment insurance and health care. Sure enough, the governing Liberal Party did just that, despite having just been elected on a platform of job creation (Canada’s version of “voodoo politics”).
Two years after the deficit hysteria peaked, the investigative journalist Linda McQuaig definitively exposed that a sense of crisis had been carefully stoked and manipulated by a handful of think tanks funded by the largest banks and corporations in Canada, particularly the C. D. Howe Institute and the Fraser Institute (which Milton Friedman had always actively and strongly supported).15 Canada did have a deficit problem, but it wasn’t caused by spending on unemployment insurance and other social programs. According to Statistics Canada, it was caused by high interest rates, which exploded the worth of the debt much as the Volcker Shock had ballooned the developing world’s debt in the eighties. McQuaig went to Moody’s Wall Street head office and spoke with Vincent Truglia, the senior analyst in charge of issuing Canada’s credit rating. He told her something remarkable: that he had come under constant pressure from Canadian corporate executives and bankers to issue damning reports about the country’s finances, something he refused to do because he considered Canada an excellent, stable investment. “It’s the only country that I handle where, usually, nationals from that country want the country downgraded even more—on a regular basis. They think it’s rated too highly.” He said he was used to getting calls from country representatives telling him he had issued too low a rating. “But Canadians usually, if anything, disparage their country far more than foreigners do.”
That’s because, for the Canadian financial community, the “deficit crisis” was a critical weapon in a pitched political battle. At the time Truglia was getting those strange calls, a major campaign was afoot to push the government to lower taxes by cutting spending on social programs such as health and education. Since these programs are supported by an overwhelming majority of Canadians, the only way the cuts could be justified was if the alternative was national economic collapse—a full-blown crisis. The fact that Moody’s kept giving Canada the highest possible bond rating—the equivalent of an A++—was making it extremely difficult to maintain the apocalyptic mood.
Investors, meanwhile, were getting confused by the mixed messages: Moody’s was upbeat about Canada, but the Canadian press contantly presented the national finances as catastrophic. Truglia got so fed up with the politicized statistics coming out of Canada, which he felt were calling his own research into question, that he took the extraordinary step of issuing a “special commentary” clarifying that Canada’s spending was “not out of control,” and he even aimed some veiled shots at the dodgy math practiced by right-wing think tanks. “Several recently published reports have grossly exaggerated Canada’s fiscal debt position. Some of them have double counted numbers, while others have made inappropriate international comparisons…. These inaccurate measurements may have played a role in exaggerated evaluations of the severity of Canada’s debt problems.” With Moody’s special report, word was out that there was no looming “debt wall”—and Canada’s business community was not pleased. Truglia says that when he put out the commentary, “one Canadian…from a very large financial institution in Canada called me up on the telephone screaming at me, literally screaming at me. That was unique.”*16
By the time Canadians learned that the “deficit crisis” had been grossly manipulated by the corporate-funded think tanks, it hardly mattered—the budget cuts had already been made and locked in. As a direct result, social programs for the country’s unemployed were radically eroded and have never recovered, despite many subsequent surplus budgets. The crisis strategy was used again and again in this period. In September 1995, a video was leaked to the Canadian press of John Snobelen, Ontario’s minister of education, telling a closed-door meeting of civil servants that before cuts to education and other unpopular reforms could be announced, a climate of panic needed to be created by leaking information that painted a more dire picture than he “would be inclined to talk about.” He called it “creating a useful crisis.”17
“Statistical Malpractice” in Washington
By 1995, political discourse in most Western democracies was saturated with talk of debt walls and imminent economic collapse, demanding ever-deeper cuts and more ambitious privatizations, with the Friedmanite think tanks always out front crying crisis. At Washington’s most powerful financial institutions, however, there was a willingness not only to create an appearance of crisis through the media but also to take concrete measures to generate crises that were all too real. Two years after Williamson made his observations about “stoking up” crisis, Michael Bruno, chief economist of development economics at the World Bank, publicly echoed the same line, once again without attracting media scrutiny. In a lecture to the International Economic Association in Tunis in 1995, later published as a paper by the World Bank, Bruno informed five hundred assembled economists from sixty-eight countries that there was a growing consensus about “the idea that a large enough crisis may shock otherwise reluctant policymakers into instituting productivity-enhancing reforms.”*18 Bruno pointed to Latin America as “a prime example of seemingly beneficial deep crises” and to Argentina in particular, where, he said, President Carlos Menem and his finance minister, Domingo Cavallo, were doing a fine job of “taking advantage of the emergency atmosphere” to push through deep privatization. Just in case the audience missed the point, Bruno said, “I have emphasized one major theme: the political economy of deep crises tends to yield radical reforms with positive outcomes.”
In light of this fact, he argued that international agencies needed to do more than just take advantage of existing economic crises to push through the Washington Consensus—they needed to preemptively cut off aid to make those crises worse. “An adverse shock (such as a drop in government revenue or in external transfers) may actually increase welfare because it shortens the delay [before reforms are adopted]. The notion that ‘things have to get worse before they can get better’ emerges naturally…. In fact, a high-inflation crisis may leave a country better off than if it had muddled along through less severe crises.”
Bruno conceded that deepening or creating a serious economic meltdown was frightening—government salaries would go unpaid, public infrastructure would rot—but, Chicago disciple that he was, he urged his audience to embrace this destruction as the first stage of creation. “Indeed, as the crisis deepens the government may gradually wither away,” Bruno said. “This development has a positive outcome; namely, at the time of reform the power of entrenched groups may have been weakened—and a leader who opts for the long-run solution over short-term expediency may win support for reform.”19
The Chicago School crisis addicts were certainly on a speedy intellectual trajectory. Only a few years earlier, they had speculated that a hyperinflation crisis could create the shocking conditions required for shock policies. Now a chief economist at the World Bank, an institution funded, by this time, with tax dollars from 178 countries and whose mandate was to rebuild and strengthen struggling economies, was advocating the creation of failed states because of the opportunities they provided to start over in the rubble.20
For years, there had been rumors that the international financial institutions had been dabbling in the art of “pseudo-crisis,” as Williamson put it, in order to bend countries to their will, but it was difficult to prove. The most extensive testimony came from Da
vison Budhoo, an IMF staffer turned whistle-blower, who accused the organization of cooking the books in order to doom the economy of a poor but strong-willed country.
Budhoo was a Grenadian-born, London School of Economics-trained economist who stood out in Washington thanks to an unconventional approach to personal style: he let his hair stand straight on end, à la Albert Einstein, and preferred the windbreaker to the pinstripe suit. He had worked at the IMF for twelve years, where his job was designing structural adjustment programs for Africa, Latin America and his native Caribbean. After the organization took its sharp right turn during the Reagan/Thatcher era, the independent-minded Budhoo felt increasingly ill at ease in his place of work. The fund was packed with zealous Chicago Boys under the leadership of its managing director, the staunch neoliberal Michel Camdessus. When Budhoo quit in 1988, he decided to devote himself to exposing the secrets of his former workplace. It began when he wrote a remarkable open letter to Camdessus, adopting the j’accuse tone of André Gunder Frank’s letters to Friedman a decade earlier.
Showing an enthusiasm for language rare for senior fund economists, the letter began: “Today I resigned from the staff of the International Monetary Fund after over twelve years, and after 1000 days of official Fund work in the field, hawking your medicine and your bag of tricks to governments and to peoples in Latin America and the Caribbean and Africa. To me resignation is a priceless liberation, for with it I have taken the first big step to that place where I may hope to wash my hands of what in my mind’s eye is the blood of millions of poor and starving peoples…. The blood is so much, you know, it runs in rivers. It dries up, too; it cakes all over me; sometimes I feel that there is not enough soap in the whole world to cleanse me from the things that I did do in your name.”21
He then went on to build his case. Budhoo accused the fund of using statistics as “lethal” weapons. He exhaustively documented how, as a fund employee in the mid-eighties, he was involved in elaborate “statistical malpractices” to exaggerate the numbers in IMF reports on oil-rich Trinidad and Tobago in order to make the country look far less stable than it actually was. Budhoo contended that the IMF had more than doubled a crucial statistic measuring the labor costs in the country, making it appear highly unproductive—even though, as he said, the fund had the correct information on hand. In another instance, he claimed that the fund “invented, literally out of the blue,” huge unpaid government debts.22
Those “gross irregularities,” which Budhoo claims were deliberate and not mere “sloppy calculations,” were taken as fact by the financial markets, which promptly classified Trinidad as a bad risk and cut off its financing. The country’s economic problems—triggered by a drop in the price of oil, its primary export—quickly became calamitous, and it was forced to beg the IMF for a bailout. The fund then demanded that it accept what Budhoo described as the IMF’s “deadliest medicine”: layoffs, wage cuts and the “whole gamut” of structural adjustment policies. He described the process as the “deliberate blocking of an economic lifeline to the country through subterfuge” in order to see “Trinidad and Tobago destroyed economically first, and converted thereafter.”
In his letter, Budhoo, who died in 2001, made it clear that his dispute was over more than the treatment of one country by a handful of officials. He characterized the IMF’s entire program of structural adjustment as a form of mass torture in which “‘screaming-in-pain’ governments and peoples [are] forced to bend on their knees before us, broken and terrified and disintegrating, and begging for a sliver of reasonableness and decency on our part. But we laugh cruelly in their face, and the torture goes on unabated.”
After the letter was published, the government of Trinidad commissioned two independent studies to investigate the allegations and found that they were correct: the IMF had inflated and fabricated numbers, with tremendously damaging results for the country.23
Even with this substantiation, however, Budhoo’s explosive allegations disappeared virtually without a trace; Trinidad and Tobago is a collection of tiny islands off the coast of Venezuela, and unless its people storm the headquarters of the IMF on Nineteenth Street, its complaints are unlikely to capture world attention. The letter was, however, turned into a play in 1996 called Mr. Budhoo’s Letter of Resignation from the I.M.F. (50 Years Is Enough), put on in a small theater in New York’s East Village. The production received a surprisingly positive review in The New York Times, which praised its “uncommon creativity” and “inventive props.”24 The short theater review was the only time Budhoo’s name was ever mentioned in The New York Times.
CHAPTER 13
LET IT BURN
THE LOOTING OF ASIA AND “THE FALL OF A SECOND BERLIN WALL”
Money flows to where opportunity is, and, right now, Asia appears to be cheap.
—Gerard Smith, a financial institutions banker at UBS Securities in New York, on the Asian economic crisis of 1997–981
Good times make bad policy.
—Mohammad Sadli, economic adviser to Indonesia’s General Suharto2
They seemed like simple questions. What can your salary buy? Is it enough for room and board? Is there any left over to send money back to your parents? How about transportation costs to and from the factory? But no matter how I phrased them, the answers I kept getting were “It depends.” Or “I don’t know.”
“A few months ago,” a seventeen-year-old worker who sewed Gap clothing near Manila explained, “I used to have enough money to send a little bit home to my family every month, but now I don’t even make enough to buy food for myself.”
“Are they lowering your wages?” I asked.
“No, I don’t think so,” she said, a little confused. “It just doesn’t buy as much. The prices keep rising.”
It was the summer of 1997, and I was in Asia researching the working conditions inside the region’s booming export factories. I found workers facing a problem bigger than forced overtime or abusive supervisors: their countries were rapidly falling into what would soon become a full-fledged depression. In Indonesia, where the crisis was even deeper, the atmosphere felt dangerously volatile. The Indonesian currency dropped between morning and nightfall over and over and again. One day factory workers could buy fish and rice, and the next day they were subsisting on rice alone. In casual conversations at restaurants and in taxis, everyone seemed to have the same theory about who was to blame: “the Chinese,” I was told. It was ethnic Chinese people, as Indonesia’s merchant class, who seemed to be profiting most directly from the rising prices, and so they were bearing the brunt of the anger. This is what Keynes had meant when he warned of the dangers of economic chaos—you never know what combination of rage, racism and revolution will be unleashed.
Southeast Asian countries were particularly vulnerable to conspiracy theories and ethnic scapegoating because, on the face of it, the financial crisis had no rational cause. On television and in newspapers, analysis kept referring to the region as if it had contracted some mysterious but highly contagious disease—“the Asian Flu,” as the market crash was immediately labeled, later upgraded to “the Asian Contagion” when it spread to Latin America and Russia.
Just weeks before it all went wrong, these countries were being held up as paragons of economic fitness and vitality—the so-called Asian Tigers, globalization’s most robust success stories. One minute, stockbrokers were telling their clients that there was no surer route to wealth than sinking your savings in Asian “emerging market” mutual funds; the next they were cashing out in droves, while traders “attacked” the currencies—the baht, the ringgit, the rupiah—creating what The Economist called “a destruction of savings on a scale more usually associated with a full-scale war.”3 And yet, within Asia’s Tiger economies, nothing observable had changed—for the most part, they were still run by the same crony elite; they had not been hit by a natural disaster or war; they were not running large deficits—some had none at all. Many large conglomerates were carrying heavy debts,
but they were still producing everything from sneakers to cars, and their sales were as strong as ever. So how was it possible that, in 1996, investors had seen fit to pour $100 billion into South Korea and then, the very next year, the country had a negative investment of $20 billion—a discrepancy of $120 billion?4 What could explain this kind of monetary whiplash?
It turned out that the countries were victims of pure panic, made lethal by the speed and volatility of globalized markets. What began as a rumor—that Thailand did not have enough dollars to back up its currency—triggered a stampede by the electronic herd. Banks called in their loans, and the real estate market, which had been growing so quickly that it had become a bubble, promptly popped. Construction ground to a halt on half-built malls, skyscrapers and resorts; motionless construction cranes loomed over Bangkok’s crowded skyline. In a slower era of capitalism, the crisis might have stopped there, but because mutual fund brokers had marketed the Asian Tigers as part of a single investment package, when one Tiger went down, they all did: after Thailand, panic spread and money fled from Indonesia, Malaysia, the Philippines and even South Korea, the eleventh-largest economy in the world and a star in the globalization firmament.
