The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

the message that the ANC leadership was getting from the start from “Western governments, the IMF and the World Bank. They would say, ‘The world has changed; none of that left stuff means anything anymore; this is the only game in town.’” As Gumede writes, “It was an onslaught for which the ANC was wholly unprepared.

“That was what we understood then. But the economies of the world are interdependent. The process of globalization is taking root. No economy can develop separately from the economies of other countries.”

By their very nature, people spearheading intense national transformations are narrowly focused on their own narratives and power struggles, often unable to pay close attention to the world beyond their borders.

For a long time we lived under the dictatorship of the Communists, but now we have found out that life under the dictatorship of business people is no better. They couldn’t care less about what country they are in. —Grigory Gorin, Russian writer, 1993

Gorbachev was moving toward a mixture of a free market and a strong safety net, with key industries under public control—a process he predicted would take ten to fifteen years to be completed. His end goal was to build social democracy on the Scandinavian model, “a socialist beacon for all mankind.”

So what happened at the G7 meeting in 1991 was totally unexpected. The nearly unanimous message that Gorbachev received from his fellow heads of state was that, if he did not embrace radical economic shock therapy immediately, they would sever the rope and let him fall. “Their suggestions as to the tempo and methods of transition were astonishing,” Gorbachev wrote of the event.

in order to push through a Chicago School economic program, that peaceful and hopeful process that Gorbachev began had to be violently interrupted, then radically reversed.

Only two weeks after the Nobel Committee had declared an end to the Cold War, The Economist was urging Gorbachev to model himself after one of the Cold War’s most notorious killers.

He formed an alliance with two other Soviet republics, a move that had the effect of abruptly dissolving the Soviet Union, thereby forcing Gorbachev’s resignation. The abolition of the Soviet Union, “the only country most Russians had ever known,” was a powerful shock to the Russian psyche—and as the political scientist Stephen Cohen put it, it was the first of “three traumatic shocks” that Russians would endure over the next three years.

In late 1991, he went to the parliament and made an unorthodox proposal: if they gave him one year of special powers, under which he could issue laws by decree rather than bring them to parliament for a vote, he would solve the economic crisis and give them back a thriving, healthy system. What Yeltsin was asking for was the kind of executive power enjoyed by dictators, not democrats, but the parliament was still grateful to the president for his role during the attempted coup, and the country was desperate for foreign aid. The answer was yes: Yeltsin could have one year of absolute power to remake Russia’s economy.

The problem his team was up against was the usual one: the threat of democracy obstructing their plans. Russians did not want their economy organized by a Communist central committee, but most still believed firmly in wealth redistribution and in an activist role for government.

That meant that if Yeltsin’s team had submitted their plans to democratic debate, rather than launching a stealth attack on an already deeply disoriented public, the Chicago School revolution would not have stood a chance.

if the optimal conditions for profit making were created, the country would rebuild itself, no planning required. (It was a faith that would reemerge, a decade later, in Iraq.)

As in Poland, Russians did, eventually, regain their bearings and began to demand an end to the sadistic economic adventure (“no more experiments” was a popular piece of graffiti in Moscow at the time).

Until this point, it had still been possible to present “economic reform” and democratic reform as part of the same project in Russia. But once Yeltsin declared a state of emergency, the two projects were on a collision course, with Yeltsin and his shock therapists in direct opposition to the elected parliament and the constitution.

In fact, these were the same politicians, for all their flaws (and with 1,041 deputies there were plenty), who had stood with Yeltsin and Gorbachev against the coup by the hardliners in 1991, who had voted to dissolve the Soviet Union and who had, until recently, thrown their support behind Yeltsin. Yet The Washington Post opted to cast Russia’s parliamentarians as “antigovernment”—as if they were interlopers and not themselves part of the government.

In Russia, the referendum was widely seen as a propaganda exercise, and a failed one at that. The reality was that Yeltsin and Washington were still stuck with a parliament that had the constitutional right to do what it was doing: slowing down the shock therapy transformation.

Yeltsin, confident that he had the West’s support, took his first irreversible step toward what was now being openly referred to as the “Pinochet option”: he issued decree 1400, announcing that the constitution was abolished and parliament dissolved. Two days later, a special session of parliament voted 636–2 to impeach Yeltsin for this outrageous act (the equivalent of the U.S. president unilaterally dissolving Congress).

Despite the fact that Russia’s Constitutional Court once again ruled Yeltsin’s behavior unconstitutional, Clinton continued to back him, and Congress voted to give Yeltsin $2.5 billion in aid. Emboldened, Yeltsin sent in troops to surround the parliament and got the city to cut off power, heat and phone lines to the White House parliament building.

Yeltsin’s next move was to dissolve all city and regional councils in the country. Russia’s young democracy was being destroyed piece by piece.

It was Yeltsin’s illegal dissolution of parliament and his defiance of the country’s highest court that precipitated the crisis—moves that were bound to be met by desperate measures in a country that had little desire to give up the democracy it had just won.

In what was the third traumatic shock inflicted by Yeltsin on the Russian people, he ordered a reluctant army to storm the Russian White House, setting it on fire and leaving charred the very building he had built his reputation defending just two years earlier.

all to defend Russia’s new capitalist economy from the grave threat of democracy.

But Russia wasn’t a repeat of Chile—it was Chile in reverse order: Pinochet staged a coup, dissolved the institutions of democracy and then imposed shock therapy; Yeltsin imposed shock therapy in a democracy, then could defend it only by dissolving democracy and staging a coup.

In theory, all this wheeling and dealing was supposed to create the economic boom that would lift Russia out of desperation; in practice, the Communist state was simply replaced with a corporatist one: the beneficiaries of the boom were confined to a small club of Russians, many of them former Communist Party apparatchiks, and a handful of Western mutual fund managers who made dizzying returns investing in newly privatized Russian companies.

In other words, the Russian people fronted the money for the looting of their own country.

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?

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.

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.

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.

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.

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.

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.”

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.

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.

Well said

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, 1933

Some wanted a radically different one: in the 1932 presidential elections, one million Americans voted for Socialist or Communist candidates. Growing numbers of Americans were also paying close attention to Huey Long, the populist senator from Louisiana who believed that all Americans should receive a guaranteed annual income of $2,500. Explaining why he had added more social welfare benefits to the New Deal in 1935, FDR said he wanted to “steal Long’s thunder.”

“The main difference between now and then is that the U.S. government did not see Germany as a cash cow. They didn’t want to antagonize people. The belief was that if you come in and start pillaging the place, you interfere with the recovery of Europe as a whole.” This approach, Eisenberg points out, was not born of altruism. “The Soviet Union was like a loaded gun. The economy was in crisis, there was a substantial German left, and they [the West] had to win the allegiance of the German people fast. They really saw themselves battling for the soul of Germany.”

there was never going to be a Marshall Plan for Russia because there was only ever a Marshall Plan because of Russia. When Yeltsin abolished the Soviet Union, the “loaded gun” that had forced the development of the original plan was disarmed. Without it, capitalism was suddenly free to lapse into its most savage form, not just in Russia but around the world. With the Soviet collapse, the free market now had a global monopoly, which meant all the “distortions” that had been interfering with its perfect equilibrium were no longer required.

That was the real point of Fukuyama’s dramatic “end of history” announcement at the University of Chicago lecture in 1989: he wasn’t actually claiming that there were no other ideas in the world, but merely that, with Communism collapsing, there were no other ideas sufficiently powerful to constitute a head-to-head competitor.

I couldn’t help thinking that Sachs wasn’t giving his audience enough credit. The people in that room were well versed in Milton Friedman’s crisis theory, and many had applied it in their own countries. Most understood perfectly how wrenching and volatile an economic meltdown could be, but they were taking a different lesson from Russia: that a painful and disorienting political situation was forcing Yeltsin to rapidly auction off the riches of the state, a distinctly favorable outcome.

One will have to ask whether it could conceivably make sense to think of deliberately provoking a crisis so as to remove the political logjam to reform. For example, it has sometimes been suggested in Brazil that it would be worthwhile stoking up a hyperinflation so as to scare everyone into accepting those changes … . Presumably no one with historical foresight would have advocated in the mid-1930s that Germany or Japan go to war in order to get the benefits of the supergrowth that followed their defeat. But could a lesser crisis have served the same function? Is it possible to conceive of a pseudo-crisis that could serve the same positive function without the cost of a real crisis?12 Williamson’s remarks represented a major leap forward for the shock doctrine.

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).

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.

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.

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.”

Letter of resignation from IMF economist

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.

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?

Asia’s crisis was caused by a classic fear cycle, and the only move that might have arrested it was the same one that had rescued Mexico’s currency during the so-called Tequila Crisis of 1994: a quick, decisive loan—proof to the market that the U.S. Treasury would simply not let Mexico fail.9 No such timely move was forthcoming for Asia. In fact, as soon as the crisis hit, a surprising array of heavy hitters from the financial establishment stepped forward with a unified message: Don’t help Asia.

The message was clear: the U.S. Treasury was in no rush to stop the pain. As for the IMF, the world body created to prevent crashes like this one, it took the do-nothing approach that had become its trademark since Russia.