The Shock Doctrine: The Rise of Disaster Capitalism

by Naomi Klein

In every country where Chicago School policies have been applied over the past three decades, what has emerged is a powerful ruling alliance between a few very large corporations and a class of mostly wealthy politicians—with hazy and ever-shifting lines between the two groups.

A more accurate term for a system that erases the boundaries between Big Government and Big Business is not liberal, conservative or capitalist but corporatist. Its main characteristics are huge transfers of public wealth to private hands, often accompanied by exploding debt, an ever-widening chasm between the dazzling rich and the disposable poor and an aggressive nationalism that justifies bottomless spending on security.

First, governments must remove all rules and regulations standing in the way of the accumulation of profits. Second, they should sell off any assets they own that corporations could be running at a profit. And third, they should dramatically cut back funding of social programs.

As momentum began to build toward Allende’s ouster, a chilling warning began appearing in red paint on the walls of Santiago. It said, “Jakarta is coming.”

The theories of Milton Friedman gave him the Nobel Prize; they gave Chile General Pinochet. —Eduardo Galeano, Days and Nights of Love and War, 1983

In that year and a half, many of the country’s business elite had had their fill of the Chicago Boys’ adventures in extreme capitalism. The only people benefiting were foreign companies and a small clique of financiers known as the “piranhas,” who were making a killing on speculation. The nuts-and-bolts manufacturers who had strongly supported the coup were getting wiped out. Orlando Sáenz—the president of the National Association of Manufacturers, who had brought the Chicago Boys into the coup plot in the first place—declared the results of the experiment “one of the greatest failures of our economic history.”

Freed of the naysayers, Pinochet and de Castro got to work stripping away the welfare state to arrive at their pure capitalist utopia. In 1975, they cut public spending by 27 percent in one blow—and they kept cutting until, by 1980, it was half of what it had been under Allende.27 Health and education took the heaviest hits. Even The Economist, a free-market cheerleader, called it “an orgy of self-mutilation.”28 De Castro privatized almost five hundred state-owned companies and banks, practically giving many of them away, since the point was to get them as quickly as possible into their rightful place in the economic order.29 He took no pity on local companies and removed even more trade barriers; the result was the loss of 177,000 industrial jobs between 1973 and 1983.30 By the mid-eighties, manufacturing as a percentage of the economy dropped to levels last seen during the Second World War.

did. In the first year of Friedman-prescribed shock therapy, Chile’s economy contracted by 15 percent, and unemployment—only 3 percent under Allende—reached 20 percent, a rate unheard of in Chile at the time.33 The country was certainly convulsing under its “treatments.” And contrary to Friedman’s sunny predictions, the unemployment crisis lasted for years, not months.

Pinochet’s economic team went into more experimental territory, introducing Friedman’s most vanguard policies: the public school system was replaced by vouchers and charter schools, health care became pay-as-you-go, and kindergartens and cemeteries were privatized. Most radical of all, they privatized Chile’s social security system.

Many came for an up-close look at the Chilean laboratory, including Friedrich Hayek himself, who traveled to Pinochet’s Chile several times and in 1981 selected Viña del Mar (the city where the coup had been plotted) to hold the regional meeting of the Mont Pelerin Society,

in 1982, despite its strict adherence to Chicago doctrine, Chile’s economy crashed: its debt exploded, it faced hyperinflation once again and unemployment hit 30 percent—ten times higher than it was under Allende.46 The main cause was that the piranhas, the Enron-style financial houses that the Chicago Boys had freed from all regulation, had bought up the country’s assets on borrowed money and run up an enormous debt of $14 billion.

The only thing that protected Chile from complete economic collapse in the early eighties was that Pinochet had never privatized Codelco, the state copper mine company nationalized by Allende. That one company generated 85 percent of Chile’s export revenues, which meant that when the financial bubble burst, the state still had a steady source of funds.

Chile under Pinochet and the Chicago Boys was not a capitalist state featuring a liberated market but a corporatist one. Corporatism, or “corporativism,” originally referred to Mussolini’s model of a police state run as an alliance of the three major power sources in society—government, businesses and trade unions—all collaborating to guarantee order in the name of nationalism. What Chile pioneered under Pinochet was an evolution of corporatism: a mutually supporting alliance between a police state and large corporations, joining forces to wage all-out war on the third power sector—the workers—thereby drastically increasing the alliance’s share of the national wealth.

what many Chileans understandably see as a war of the rich against the poor and middle class—is the real story of Chile’s economic “miracle.” By 1988, when the economy had stabilized and was growing rapidly, 45 percent of the population had fallen below the poverty line.50 The richest 10 percent of Chileans, however, had seen their incomes increase by 83 percent.51 Even in 2007, Chile remained one of the most unequal societies in the world—out of 123 countries in which the United Nations tracks inequality, Chile ranked 116th, making it the 8th most unequal country on the list.

People were in prison so that prices could be free. —Eduardo Galeano, 19902

These days, we are once again living in an era of corporatist massacres, with countries suffering tremendous military violence alongside organized attempts to remake them into model “free market” economies; disappearances and torture are back with a vengeance. And once again the goals of building free markets, and the need for such brutality, are treated as entirely unrelated.

When Friedrich Hayek, patron saint of the Chicago School, returned from a visit to Chile in 1981, he was so impressed by Augusto Pinochet and the Chicago Boys that he sat down and wrote a letter to his friend Margaret Thatcher, prime minister of Britain.

“We are all Keynesians now,” Nixon famously proclaimed—the cruelest cut of all.

The University of Chicago professor had built a movement on the equation of capitalism and freedom, yet free people just didn’t seem to vote for politicians who followed his advice. Worse, dictatorships—where freedom was markedly absent—were the only governments who were ready to put pure free-market doctrine into practice.

Friedman had spent a fair bit of time staring down an intellectual paradox: as the heir to Adam Smith’s mantle, he believed passionately that humans are governed by self-interest and that society works best when self-interest is allowed to govern almost all activities—except when it comes to a little activity called voting.

In 1979, she had run on the slogan “Labor isn’t working,” but by 1982, the number of unemployed had doubled under her watch, as had the inflation rate.16 She had tried to take on one of the most powerful unions in the country, the coal miners, and had failed. After three years in office, Thatcher saw her personal approval rating drop to only 25 percent—lower than George W. Bush at his lowest point and lower than any British prime minister in the history of opinion polls. Approval for her government as a whole had sunk to 18 percent.

The cluster of islands off the Argentine coast was thousands of miles from Britain and costly to guard and maintain. Argentina, too, had little use for them, though having a British outpost in its waters was regarded as an affront to national pride. The legendary Argentine writer Jorge Luis Borges scathingly described the land dispute as “a fight between two bald men over a comb.”

Thatcher’s personal approval rating more than doubled over the course of the battle, from 25 percent at the start to 59 percent at the end, paving the way for a decisive victory in the following year’s election.

Crises are, in a way, democracy-free zones—gaps in politics as usual when the need for consent and consensus do not seem to apply.

The use of cancer in political discourse encourages fatalism and justifies “severe” measures—as well as strongly reinforcing the widespread notion that the disease is necessarily fatal. The concept of disease is never innocent. But it could be argued that the cancer metaphors are in themselves implicitly genocidal. —Susan Sontag, Illness as Metaphor, 19772

Well, what is the sense of ruining my head and erasing my memory, which is my capital, and putting me out of business? It was a brilliant cure but we lost the patient. —Ernest Hemingway on his electroshock therapy, shortly before committing suicide, 19611

In 1982, just before Argentina’s dictatorship collapsed, the junta did one last favor for the corporate sector. Domingo Cavallo, president of Argentina’s central bank, announced that the state would absorb the debts of large multinational and domestic firms that had, like Chile’s piranhas, borrowed themselves to the verge of bankruptcy. The tidy arrangement meant that these companies continued to own their assets and profits, but the public had to pay off between $15 and $20 billion of their debts; among the companies to receive this generous treatment were Ford Motor Argentina, Chase Manhattan, Citibank, IBM and Mercedes-Benz.

The colonization of the World Bank and the IMF by the Chicago School was a largely unspoken process, but it became official in 1989 when John Williamson unveiled what he called “the Washington Consensus.” It was a list of economic policies that he said both institutions now considered the bare minimum for economic health—“the common core of wisdom embraced by all serious economists.”25 These policies, masquerading as technical and uncontentious, included such bald ideological claims as all “state enterprises should be privatized” and “barriers impeding the entry of foreign firms should be abolished.”26 When the list was complete, it made up nothing less than Friedman’s neoliberal triumvirate of privatization, deregulation /free trade and drastic cuts to government spending. These were the policies, Williamson said, “that were being urged on Latin America by the powers-that-be in Washington.”27 Joseph Stiglitz, former chief economist of the World Bank and one of the last holdouts against the new orthodoxy, wrote that “Keynes would be rolling over in his grave were he to see what has happened to his child.”

I live in a Poland that is now free, and I consider Milton Friedman to be one of the main intellectual architects of my country’s liberty. —Leszek Balcerowicz, former finance minister of Poland, November 20061

Shock therapy in Poland did not cause “momentary dislocations,” as Sachs had predicted. It caused a full-blown depression: a 30 percent reduction in industrial production in the two years after the first round of reforms. With government cutbacks and cheap imports flooding in, unemployment skyrocketed, and in 1993 it reached 25 percent in some areas—a wrenching change in a country that, under Communism, for all its many abuses and hardships, had no open joblessness. Even when the economy began growing again, high unemployment remained chronic. According to the World Bank’s most recent figures, Poland has an unemployment rate of 20 percent—the highest in the European Union. For those under twenty-four, the situation is far worse: 40 percent of young workers were unemployed in 2006, twice the EU average. Most dramatic are the number of people in poverty: in 1989, 15 percent of Poland’s population was living below the poverty line; in 2003, 59 percent of Poles had fallen below the line. 58 Shock therapy, which eroded job protection and made daily life far more expensive, was not the route to Poland’s becoming one of Europe’s “normal” countries (with their strong labor laws and generous social benefits) but to the same gaping disparities that have accompanied the counterrevolution everywhere it has triumphed, from Chile to China.

Reconciliation means that those who have been on the underside of history must see that there is a qualitative difference between repression and freedom. And for them, freedom translates into having a supply of clean water, having electricity on tap; being able to live in a decent home and have a good job; to be able to send your children to school and to have accessible health care. I mean, what’s the point of having made this transition if the quality of life of these people is not enhanced and improved? If not, the vote is useless. —Archbishop Desmond Tutu, chair of South Africa’s Truth and Reconciliation Commission, 20011

the ANC adopted policies that exploded both inequality and crime to such a degree that South Africa’s divide is now closer to Beverly Hills and Baghdad. Today, the country stands as a living testament to what happens when economic reform is severed from political transformation. Politically, its people have the right to vote, civil liberties and majority rule. Yet economically, South Africa has surpassed Brazil as the most unequal society in the world.

Since 1994, the year the ANC took power, the number of people living on less than $1 a day has doubled, from 2 million to 4 million in 2006.45 • Between 1991 and 2002, the unemployment rate for black South Africans more than doubled, from 23 percent to 48 percent.46 • Of South Africa’s 35 million black citizens, only five thousand earn more than $60,000 a year. The number of whites in that income bracket is twenty times higher, and many earn far more than that amount.47 • The ANC government has built 1.8 million homes, but in the meantime 2 million people have lost their homes.48 • Close to 1 million people have been evicted from farms in the first decade of democracy.49 • Such evictions have meant that the number of shack dwellers has grown by 50 percent. In 2006, more than one in four South Africans lived in shacks located in informal shantytowns, many without running water or electricity.

Moscow’s mayor, Gavriil Popov, has claimed that there were really only two options for how to break up the centrally controlled economy: “Property can be divided among all members of society, or the best pieces can be given to the leaders … . In a word, there’s the democratic approach, and there’s the nomenklatura, apparatchik approach.”17 Yeltsin took the latter approach—and he was in a hurry.

These were highly profitable investments, but the principal share of the wealth in Russia was in the hands of Russian players, not their foreign partners. It is an oversight that the IMF and the U.S. Treasury would successfully rectify in future privatization auctions in Bolivia and Argentina. And in Iraq after the invasion, the U.S. would go even further, attempting to cut the local elite out of lucrative privatization deals entirely.

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.”

By 1949, that meant tolerating from the West German government all kinds of policies that were positively uncapitalist: direct job creation by the state, huge investment in the public sector, subsidies for German firms and strong labour unions. In a move that would have been unthinkable in Russia in the 1990s or Iraq under U.S. occupation, the U.S. government infuriated its own corporate sector by imposing a moratorium on foreign investment so that war-battered German companies would not be forced to compete before they had recovered. “The feeling was that letting foreign companies come in at that point would have been like piracy,” I was told by Carolyn Eisenberg, author of an acclaimed history of the Marshall Plan.7 “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 liberation from all constraints is, in essence, Chicago School economics (otherwise known as neoliberalism or, in the U.S., neoconservatism): not some new invention but capitalism stripped of its Keynesian appendages, capitalism in its monopoly phase, a system that has let itself go—that no longer has to work to keep us as customers, that can be as antisocial, antidemocratic and boorish as it wants.

The topic today is an adversary that poses a threat, a serious threat, to the security of the United States of America. This adversary is one of the world’s last bastions of central planning. It governs by dictating five-year plans. From a single capital, it attempts to impose its demands across time zones, continents, oceans and beyond. With brutal consistency, it stifles free thought and crushes new ideas. It disrupts the defense of the United States and places the lives of men and women in uniform at risk. Perhaps this adversary sounds like the former Soviet Union, but that enemy is gone: our foes are more subtle and implacable today … . The adversary’s closer to home. It’s the Pentagon bureaucracy.

None of the money went to Iraqi factories so they could reopen and form the foundation of a sustainable economy, create local jobs and fund a social safety net. Iraqis had virtually no role in this plan at all. Instead, the U.S. federal government contracts, most of them issued by USAID, commissioned a kind of country-in-a-box, designed in Virginia and Texas, to be assembled in Iraq. It was, as the occupation authorities repeatedly said, “a gift from the people of the United States to the people of Iraq”—all Iraqis needed to do was unwrap it.16 Even Iraqis’ low-wage labor wasn’t required for the assembly process because the major U.S. contractors such as Halliburton, Bechtel and the California-based engineering giant Parsons preferred to import foreign workers whom they felt confident they could control. Once again Iraqis were cast in the role of awed spectators—first awed by U.S. military technology and then by its engineering and management prowess.

As the political scientist Michael Wolfe puts it, “Conservatives cannot govern well for the same reason that vegetarians cannot prepare a world-class boeuf bourguignon: If you believe that what you are called upon to do is wrong, you are unlikely to do it very well.” He adds, “As a way of governing, conservatism is another name for disaster.”

In March 2006, a federal jury in Virginia ruled against the company, finding it guilty of fraud, and forced it to pay $10 million in damages. The company then asked the judge to overturn the verdict, with a revealing defense. It claimed that the CPA was not part of the U.S. government, and therefore not subject to its laws, including the False Claims Act. The implications of this defense were enormous: the Bush administration had indemnified U.S. corporations working in Iraq from any liability under Iraqi laws; if the CPA wasn’t subject to U.S. law either, it meant that the contractors weren’t subject to any law at all—U.S. or Iraqi. This time, the judge ruled in the company’s favor: he said there was plenty of evidence that Custer Battles had submitted to the CPA “false and fraudulently inflated invoices,” but he ruled that the plaintiffs had “failed to prove that the claims were presented to the United States.”40 In other words, the U.S. government presence in Iraq during the first year of its economic experiment had been a mirage—there had been no government, just a funnel to get U.S. taxpayer and Iraqi oil dollars to foreign corporations, completely outside the law. In this way, Iraq represented the most extreme expression of the anti-state counterrevolution—a hollow state, where, as the courts finally established, there was no there, there.

Stuart Bowen, U.S. special inspector general for Iraq reconstruction, reported that in the few cases where contracts were awarded directly to Iraqi firms, “it was more efficient and cheaper. And it has energized the economy because it puts the Iraqis to work.” It turns out that funding Iraqis to rebuild their own country is more efficient than hiring lumbering multinationals who don’t know the country or the language, surround themselves with $900-a-day mercenaries and spend as much as 55 percent of their contract budgets on overhead.37 Jon C. Bowersox, who worked as the health adviser at the U.S. embassy in Baghdad, offered this radical observation: the problem with Iraq’s reconstruction, he said, was its desire to build everything from scratch. “We could have gone in and done low-cost rehabs, and not tried to transform their health-care system in two years.”

At the start of the occupation, there were an estimated ten thousand private soldiers in Iraq, already far more than during the first Gulf War. Three years later, a report by the U.S. Government Accountability Office found that there were forty-eight thousand private soldiers, from around the world, deployed in Iraq. Mercenaries represented the largest contingent of soldiers after the U.S. military—more than all the other members of the “Coalition of the Willing” combined. The “Baghdad boom,” as it was called in the financial press, took what was a frowned-upon, shadowy sector and fully incorporated it into the U.S. and U.K. war-fighting machines. Blackwater hired aggressive Washington lobbyists to erase the word “mercenary” from the public vocabulary and turn its company into an all-American brand. According to its CEO, Erik Prince, “This goes back to our corporate mantra: We’re trying to do for the national security apparatus what FedEx did for the postal service.”

Ajay Kapur, the former head of Citigroup Smith Barney’s global equity strategy group in New York, encourages his clients to invest in his “Plutonomy basket” of stocks, featuring companies like Bulgari, Porsche, Four Seasons and Sotheby’s. “If plutonomy continues, which we think it will, if income inequality is allowed to persist and widen, the plutonomy basket should continue to do very well.”

At the 2007 World Economic Forum in Davos, Switzerland, however, political and corporate leaders were scratching their heads over a state of affairs that seemed to flout this conventional wisdom. It was being called the “Davos Dilemma,” which the Financial Times columnist Martin Wolf described as “the contrast between the world’s favourable economics and troublesome politics.” As he put it, the economy had faced “a series of shocks: the stock market crash after 2000; the terrorist outrages of September 11, 2001; wars in Afghanistan and Iraq; friction over US policies; a jump in real oil prices to levels not seen since the 1970s; the cessation of negotiations in the Doha round [of WTO talks]; and the confrontation over Iran’s nuclear ambitions”—and yet it found itself in “a golden period of broadly shared growth.” Put bluntly, the world was going to hell, there was no stability in sight and the global economy was roaring its approval. Soon after, former U.S. Treasury Secretary Lawrence Summers described the “near complete disconnect” between politics and markets as “something out of Dickens, you talk to international relations experts and it’s the worst of all times. Then you talk to potential investors and it’s one of the best of all times.”

Over the course of the 1990s, roughly 1 million Jews left the former Soviet Union and moved to Israel. Immigrants who came from the former Soviet Union in this period now make up more than 18 percent of Israel’s total Jewish population.14 It’s hard to overstate the impact of such a large and rapid population transfer to a country as small as Israel. Proportionally, it would be the equivalent of every person in Angola, Cambodia and Peru packing their bags and moving to the United States all at once. In Europe, it would be equivalent to all of Greece moving to France.

With more and more countries turning themselves into fortresses (walls and high-tech fences are going up on the border between India and Kashmir, Saudi Arabia and Iraq, Afghanistan and Pakistan), “security barriers” may prove to be the biggest disaster market of all. That’s why Elbit and Magal don’t mind the relentless negative publicity that Israel’s wall attracts around the world—in fact, they consider it free advertising.

In 2007, 24.4 percent of Israelis were living below the poverty line, with 35.2 percent of all children in poverty—compared with 8 percent of children twenty years earlier.42 Yet even though the benefits of the boom have not been widely shared, they have been so lucrative for a small sector of Israelis, particularly the powerful segment that is seamlessly integrated into both the military and government (with all the familiar corporatist corruption scandals), that a crucial incentive for peace has been obliterated.