The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

the crisis was left to worsen, all foreign currency would be drained from the region and Asian-owned companies would have either to close down or to sell themselves to Western firms—both beneficial outcomes for Morgan Stanley. “I’d like to see closure of companies and asset sales … . Asset sales are very difficult; typically owners don’t want to sell unless they’re forced to. Therefore, we need more bad news to continue to put the pressure on these corporates to sell their companies.”

The fall of the Tigers, he said, represented nothing less than “the fall of a second Berlin Wall,” the collapse of “the notion that there is a ‘Third Way’ between free-market democratic capitalism and socialist statism.”

In other words, the destruction of Asia’s managed economy was actually a process of creating a new American-style economy—birth pangs for a new Asia, to borrow a phrase that would be used in an even more violent context a few years later.

The IMF displayed no interest in what had actually caused the crisis. Instead, like a prison interrogator looking for a weakness, the fund was exclusively focused on how the crisis could be used as leverage.

There, the end of the IMF negotiations coincided with scheduled presidential elections in which two of the candidates were running on anti-IMF platforms. In an extraordinary act of interference with a sovereign nation’s political process, the IMF refused to release the money until it had commitments from all four main candidates that they would stick to the new rules if they won. With the country effectively held at ransom, the IMF was triumphant: each candidate pledged his support in writing.

you can vote, South Koreans were told, but your vote can have no bearing on the managing and organization of the economy. (The day the deal was signed was instantly dubbed Korea’s “National Humiliation Day.”)

That didn’t stop an unnamed “senior IMF official” from telling The Washington Post that “the markets are asking themselves the question of just how much the senior Indonesian leadership is committed to this program, and particularly to the major reform measures.” The article went on to predict that the IMF would punish Indonesia by withholding billions in promised loans. As soon as it appeared, Indonesia’s currency fell through the floor, losing 25 percent of its value in a single day.

Something else happened; the market panicked. The reasoning went like this: if the fund thought that the Tigers were such hopeless cases that they needed to be remade from scratch, then Asia was obviously in much worse shape than anyone had previously feared.

It was in this context that the U.S. secretary of state, Madeleine Albright, visited Thailand in March 1999 and saw fit to scold the Thai public for turning to prostitution and the “dead end of drugs.” It is “essential that girls not be exploited and abused and exposed to AIDS. It’s very important to fight back,” Albright said, filled with moral resolve. She apparently saw no connection between the fact that so many Thai girls were being forced into the sex trade and the austerity policies for which she expressed her “strong support” on the same trip. It was the Asian financial crisis’s equivalent of Milton Friedman expressing his displeasure with Pinochet’s or Deng Xiaoping’s human rights violations while praising their bold embrace of economic shock therapy.

The Korean titan Samsung, for instance, was broken up and sold for parts: Volvo got its heavy industry division, SC Johnson & Son its pharmaceutical arm, General Electric its lighting division. A few years later, Daewoo’s once-mighty car division, which the company had valued at $6 billion, was sold off to GM for just $400 million—a steal worthy of Russia’s shock therapy. But this time, unlike what happened in Russia, local firms were getting wiped out by the multinationals.

Other big players who got a piece of the Asian distress sale included Seagram’s, Hewlett-Packard, Nestlé, Interbrew and Novartis, Carrefour, Tesco and Ericsson. Coca-Cola bought a Korean bottling company for half a billion dollars; Procter and Gamble bought a Korean packaging company; Nissan bought one of Indonesia’s largest car companies. General Electric acquired a controlling stake in Korea’s refrigerator manufacturer LG; and Britain’s Powergen nabbed LG Energy, a large Korean electricity-and-gas company. According to Business-Week, the Saudi prince Alwaleed bin Talal was “jetting across Asia in his cream-colored Boeing 727, collecting bargains”—including a stake in Daewoo.

The truth is that Asia’s crisis is still not over, a decade later. When 24 million people lose their jobs in a span of two years, a new desperation takes root that no culture can easily absorb. It expresses itself in different forms across the region, from a significant rise in religious extremism in Indonesia and Thailand to the explosive growth in the child sex trade.

The ugly secret of “stabilization” is that the vast majority never climb back aboard. They end up in slums, now home to 1 billion people; they end up in brothels or in cargo ship containers. They are the disinherited, those described by the German poet Rainer Maria Rilke as “ones to whom neither the past nor the future belongs.”

The poor

Unlike in the former Soviet Union, where the planned misery of shock therapy could be passed off as part of the “painful transition” from Communism to market democracy, Asia’s crisis was plainly a creation of the global markets. Yet when the high priests of globalization sent missions to the disaster zone, all they wanted to do was deepen the pain.

What was left was the real world track record of the free-market crusade: the dismal reality of inequality, corruption and environmental degradation left behind when government after government embraced Friedman’s advice, given to Pinochet all those years ago, that it was a mistake to try “to do good with other people’s money.”

Since setting foot in the Pentagon, Rumsfeld had brushed aside the prescribed role of leader and motivator and acted instead like a bloodless hatchet man—a CEO secretary on a downsizing mission.

Much has been written about Rumsfeld’s controversial “transformation” project, which prompted eight retired generals to call for his resignation and eventually forced him to step down after the 2006 midterm elections.

Rumsfeld was convinced that the U.S. Department of Defense needed an equivalent makeover; as Fortune said when he arrived at the Pentagon, “Mr. CEO” was “about to oversee the same sort of restructuring that he orchestrated so well in the corporate world.”8 There were, of course, some necessary differences. Where corporations unburdened themselves of geography-bound factories and full-time workers, Rumsfeld saw the army shedding large numbers of full-time troops in favor of a small core of staffers propped up by cheaper temporary soldiers from the Reserve and National Guard. Meanwhile, contractors from companies such as Blackwater and Halliburton would perform duties ranging from high-risk chauffeuring to prisoner interrogation to catering to health care. And where corporations poured their savings on labor into design and marketing, Rumsfeld would spend his savings from fewer troops and tanks on the latest satellite and nanotechnology from the private sector.

Not surprisingly, the generals who were used to holding sway in the Pentagon were pretty sure that “things” and “mass” still mattered when it came to fighting wars. They soon became deeply hostile to Rumsfeld’s vision of a hollow military. After a little more than seven months in office, the secretary had already stepped on so many powerful toes that it was rumored his days were numbered.

He’d done it: the defense secretary had not only described the Pentagon as a grave threat to America but declared war against the institution where he worked. The audience was stunned. “He was saying we were the enemy, that the enemy was us. And here we were thinking we were doing the nation’s business,” the staffer told me.

But following the corporatist principles of the counterrevolution, in which Big Government joins forces with Big Business to redistribute funds upward, he wanted less spent on staff and far more public money transferred directly into the coffers of private companies. And with that, Rumsfeld launched his “war.” Every department needed to slash its staff by 15 percent, including “every base headquarters building in the world. It’s not just the law, it’s a good idea, and we’re going to get it done.”

After the speech, plenty of Pentagon staffers griped that the only thing standing in the way of Rumsfeld’s bold vision of outsourcing the army was the small matter of the U.S. Constitution, which clearly defined national security as the duty of government, not private companies.

Mans crazy

It is a strange historical footnote that CNN Evening News on September 10 carried a short story under the headline “Defense Secretary Declares War on the Pentagon’s Bureaucracy” and that, the next morning, the network would report on an attack on that institution of a distinctly less metaphorical kind, one that killed 125 Pentagon employees and seriously wounded another 110 of the people whom Rumsfeld had portrayed as enemies of the state less than twenty-four hours earlier.

Motive

The idea at the heart of Rumsfeld’s forgotten speech is nothing less than the central tenet of the Bush regime: that the job of government is not to govern but to subcontract the task to the more efficient and generally superior private sector.

Now, with the core set to be devoured, the crisis-exploiting methods that had been honed over the previous three decades would be used to leverage the privatization of the infrastructure of disaster creation and disaster response. Friedman’s crisis theory was going postmodern.

It’s safe to say that if you could patent the sun, Donald Rumsfeld would have long since put in an application with the U.S. Patent and Trademark Office. His former company Gilead Sciences, which also owns the patents on four AIDS treatments, spends a great deal of energy trying to block the distribution of cheaper generic versions of its lifesaving drugs in the developing world. It has been targeted for these activities by public health activists in the U.S., who point out that some of Gilead’s key medicines were developed on grants funded by taxpayers.18 Gilead, for its part, sees epidemics as a growth market, and it has an aggressive marketing campaign to encourage businesses and individuals to stockpile Tamiflu, just in case.

Dick Cheney, a protégé of Rumsfeld’s in the Ford administration, has also built a fortune based on the profitable prospect of a grim future, though where Rumsfeld saw a boom market in plagues, Cheney was banking on a future of war.

led to a bold new Pentagon contract: the Logistics Civil Augmentation Program, or LOGCAP. The Pentagon was notorious for its multi-billion-dollar contracts with weapons manufacturers, but this was something new: not supplying the military with gear but serving as manager for its operations.

A select group of companies was invited to apply to provide unlimited “logistical support” for U.S. military missions, an extremely vague work description. Furthermore, no dollar value was attached to the contract: the winning company was simply assured that whatever it did for the military, it would have its costs covered by the Pentagon, plus a guaranteed profit—what is known as a “cost plus” contract. These were the final days of the Bush Sr. administration, and the company that won the contract in 1992 was none other than Halliburton.

Halliburton

While the Halliburton division Brown & Root had a long history as a U.S. military contractor, under Cheney’s leadership Halliburton’s role was to expand so dramatically that it would transform the nature of modern war. Thanks to the loosely worded contract that Halliburton and Cheney had crafted when he was at the Pentagon, the company was able to stretch and expand the meaning of the term “logistical support” until Halliburton was responsible for creating the entire infrastructure of a U.S. military operation overseas. All that was required of the army was to provide the soldiers and the weapons—they were, in a way, content providers, while Halliburton ran the show.

That was the Halliburton difference: Cheney saw no reason why war shouldn’t be a thriving part of America’s highly profitable service economy—invasion with a smile.

In the mid-nineties, Lockheed began taking over information technology divisions of the U.S. government, running its computer systems and a great deal of its data management. Largely under the public radar, the company went so far in this direction that, in 2004, The New York Times reported, “Lockheed Martin doesn’t run the United States. But it does help run a breathtakingly big part of it … . It sorts your mail and totals your taxes. It cuts Social Security checks and counts the United States census. It runs space flights and monitors air traffic. To make all that happen, Lockheed writes more computer code than Microsoft.aw26

Then came 9/11, and all of a sudden having a government whose central mission was self-immolation did not seem like a very good idea. With a frightened population wanting protection from a strong, solid government, the attacks could well have put an end to Bush’s project of hollowing out government just as it was beginning.

After all, the nature of the September 11 security failures exposed the results of more than twenty years of chipping away at the public sector and outsourcing government functions to profit-driven corporations.

The first major victory of the Friedmanite counterrevolution in the United States had been Ronald Reagan’s attack on the air traffic controllers’ union and his deregulation of the airlines. Twenty years later, the entire air transit system had been privatized, deregulated and downsized, with the vast majority of airport security work performed by underpaid, poorly trained, nonunion contractors.

Why did a private lab have the exclusive right to produce the anthrax vaccine? Had the federal government signed away its responsibility to protect the public from a major public health emergency?

While CEOs were falling from their pedestals, unionized public sector workers—the villains of Friedman’s counterrevolution—were rapidly ascending in the public’s estimation.

Although it was true that the White House was on the verge of spending huge amounts of taxpayer money to stimulate the economy, it most certainly was not going to be on the model of FDR. Rather, Bush’s New Deal would be exclusively with corporate America, a straight-up transfer of hundreds of billions of public dollars a year into private hands.

What happened in the period of mass disorientation after the attacks was, in retrospect, a domestic form of economic shock therapy. The Bush team, Friedmanite to the core, quickly moved to exploit the shock that gripped the nation to push through its radical vision of a hollow government in which everything from war fighting to disaster response was a for-profit venture.

It was the pinnacle of the counterrevolution launched by Friedman. For decades, the market had been feeding off the appendages of the state; now it would devour the core.

“Without a public debate or formal policy decision, contractors have become a virtual fourth branch of government.”

Every aspect of the way the Bush administration has defined the parameters of the War on Terror has served to maximize its profitability and sustainability as a market—from the definition of the enemy to the rules of engagement to the ever-expanding scale of the battle.

From a military perspective, these sprawling and amorphous traits make the War on Terror an unwinnable proposition. But from an economic perspective, they make it an unbeatable one: not a flash-in-the-pan war that could potentially be won but a new and permanent fixture in the global economic architecture.

Between September 11, 2001, and 2006, the Department of Homeland Security handed out $130 billion to private contractors—money that was not in the economy before and that is more than the GDP of Chile or the Czech Republic.

Whereas in the nineties the goal was to develop the killer application, the “next new new thing,” and sell it to Microsoft or Oracle, now it was to come up with a new “search and nail” terrorist-catching technology and sell it to the Department of Homeland Security or the Pentagon. That is why, in addition to the start-ups and investment funds, the disaster industry also gave birth to an army of new lobby firms promising to hook up new companies with the right people on Capitol Hill—in 2001, there were two such security-oriented lobby firms, but by mid-2006 there were 543.

One of the first booms for the homeland security industry was surveillance cameras, 4.2 million of which have been installed in Britain, one for every fourteen people, and 30 million in the U.S., shooting about 4 billion hours of footage a year.

In the nineties, tech companies endlessly trumpeted the wonders of the borderless world and the power of information technology to topple authoritarian regimes and bring down walls. Today, inside the disaster capitalism complex, the tools of the information revolution have been flipped to serve the opposite purpose. In the process, cell phones and Web surfing have been turned into powerful tools of mass state surveillance by increasingly authoritarian regimes, with the full cooperation of privatized phone companies and search engines, whether it’s Yahoo collaborating with the Chinese government to pinpoint the location of dissidents or AT&T helping the U.S. National Security Agency to wiretap its customers without a warrant (a practice the Bush administration claims it has discontinued). The dismantling of borders, the great symbol and promise of globalization, has been replaced with the exploding industry of border surveillance, from optical scanning and biometric IDs to the planned high-tech fence on the border between Mexico and the U.S., worth up to $2.5 billion for Boeing and a consortium of other companies.

When widespread discomfort about big-brother technologies stalled many of these initiatives, it caused dismay to both marketers and retailers. September 11 loosened this logjam in the market: suddenly the fear of terror was greater than the fear of living in a surveillance society. So now, the same information collected from cash cards or “loyalty” cards can be sold not only to a travel agency or the Gap as marketing data but also to the FBI as security data, flagging a “suspicious” interest in pay-as-you-go cell phones and Middle Eastern travel.

Anyone can be blocked from flying, denied an entry visa to the U.S. or even arrested and named as an “enemy combatant” based on evidence from these dubious technologies—a blurry image identified through facial recognition software, a misspelled name, a misunderstood snippet of a conversation.

According to The New Yorker, Boeing has been acting as the “CIA’s travel agent”—blocking out flight plans for as many as 1,245 rendition voyages, arranging ground crews and even booking hotels.