Surviving Democracy

excerpted from the book

The Shock Doctrine

The Rise of Disaster Capitalism

by Naomi Klein

Picador, 2007, paperback

M. K. Gandhi, Non-Violence - The Greatest Force," 1926

An armed conflict between nations horrifies us. But the economic war is no better than an armed conflict. This is like a surgical operation. An economic war is prolonged torture. And its ravages are no less terrible than those depicted in the literature on war property so called. We think nothing of the other because we are used to its deadly effects .... The movement against war is sound. I pray for its success. But I cannot help the gnawing fear that the movement will fail if it does not touch the root of all evil-human greed.

Across the Atlantic, '[Margaret] Thatcher was attempting an English version of Friedmanism by championing what has become known as "the ownership society." The effort centered on Britain's public housing, or council estates, which Thatcher opposed on philosophical grounds, believing that the state had no role to play in the housing market. The council estates were filled with the type of people who wouldn't vote Tory because it wasn't in their economic self-interest; Thatcher was convinced that if they could be brought into the market, they would start to identify with the interests of the wealthier people who opposed redistribution. With that in mind, she offered strong incentives to the residents of public housing to buy their flats at reduced rates. Those who could became homeowners, while those who couldn't faced rents that were almost twice as high as before. It was a divide-and-conquer strategy, and it worked: the renters continued to oppose Thatcher, the streets of Britain's large cities saw a visible increase in homelessness, but polls showed that more than half of the new owners did switch their party affiliation to the Tories.

Although the estate sales offered a glimmer of hope for the possibility of hard-right economics in a democracy, Thatcher still looked poised to lose her job after just one term. 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." 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. With a general election looming, Thatcherism was about to come to an early and inglorious close, well before the Tories had achieved their most ambitious goals of mass privatization and breaking the blue-collar unions. It was in those trying circumstances that Thatcher wrote to Hayek, politely informing him that a Chilean-style transformation was "quite unacceptable" in the U.K.

Thatcher's catastrophic first term seemed to further confirm the lessons of the Nixon years: that the radical and highly profitable policies of the Chicago School couldn't survive in a democratic system. It seemed clear that the successful imposition of economic shock therapy required some other sort of shock-whether of a coup, or of the torture chamber delivered by a repressive regime.

On April 2, 1982, Argentina invaded the Falkland Islands, a relic of British colonial rule. The Falklands War, or the Malvinas War if you are Argentine, went down in history as a vicious but fairly minor battle. At the time, the Falklands appeared to have no strategic importance. 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."

From a military standpoint, the eleven-week battle appears to have almost no historic significance. Overlooked, however, was the war's impact on the free-market project, which was enormous: it was the Falklands War that gave Thatcher the political cover she needed to bring a program of radical capitalist transformation to a Western liberal democracy for the first time.

Both sides in the conflict had good reasons to want a war. In 1982, Argentina's economy was collapsing under the weight of its debt and corruption, and human rights campaigns were gaining momentum. A new junta government, led by General Leopoldo Galtieri, calculated that the only thing more powerful than the anger at its continued suppression of democracy was anti-imperialist sentiment, which Galtieri expertly unleashed on the British for their refusal to give up the islands. Soon enough, the junta had Argentina's blue-and-white flag planted on that rocky outpost, and the country cheered on cue.

'When news arrived that Argentina had laid claim to the Falklands, Thatcher recognized it as a last-ditch hope to turn around her political fortunes and immediately went into Churchillian battle mode. Until this point, she had shown only disdain for the financial burden that the Falklands placed on government coffers. She had cut grants to the islands and announced major cutbacks to the navy, including the armed ships that guarded the Falklands - moves read by the Argentine generals as clear indications that Britain was ready to cede the territory. (One of Thatcher's biographers characterized her Falklands policy as "practically an invitation to Argentina to invade.") In the lead-up to the war, critics across the political spectrum accused Thatcher of using the military for her own political goals. The Labour MP Tony Benn said, "It looks more and more as if what is at stake is Mrs. Thatcher's reputation, not the Falkland Islands at all," while the conservative Financial Times noted, "What is deplorable is that the issue is rapidly becoming mixed up with political differences within Britain itself which have nothing to do with the matter in hand. Not only the pride of the Argentine Government is involved. So is the standing, perhaps even the survival, of the Tory Government in Britain."

Yet even with all of this healthy cynicism in the run-up, as soon as troops were deployed, the country was swept up in what a draft Labour Party resolution described as a "jingoistic, militaristic frame of mind," embracing the Falkland Islands as a last blast of glory for Britain's faded empire.

Thatcher was fighting for her political future-and she succeeded spectacularly. After the Falklands victory, which took the lives of 255 British soldiers and 655 Argentines, the prime minister was heralded as a war hero, her moniker "Iron Lady" transformed from insult to high praise. 25 Her poll numbers were similarly transformed. 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 La decisive victory in the following year's election.

The British military's counter-invasion of the Falklands was codenamed Operation Corporate, and though it was an odd name for a military campaign, it proved prescient. Thatcher used the enormous popularity afforded her by the victory to launch the very corporatist revolution she had told Hayek was impossible before the war. When the coal miners went on strike in 1984, Thatcher cast the standoff as a continuation of the war with Argentina, calling for similarly brutal resolve. She famously declared, "We had to fight the enemy without in the Falklands and now we have to fight the enemy within, which is much more difficult but just as dangerous to liberty. With British workers now categorized as "the enemy within," Thatcher unleashed the full force of the state on the strikers...

By 1985, Thatcher had won this war too: workers were going hungry and couldn't hold out; in the end 966 people were fired." It was a devastating setback for Britain's most powerful union, and it sent a clear message to the others: if Thatcher was willing to go to the wall to break the coal miners, on whom the country depended for its lights and warmth, it would be suicide for weaker unions producing less crucial products and services to take on her new economic order. Better just to accept whatever was on offer. It was a message very similar to the one Ronald Reagan had sent a few months after he took office with his response to a strike by the air-traffic controllers. By not showing up to work, they had "forfeited their jobs and will be terminated," Reagan said. Then he fired 11,400 of the country's most essential workers in a single blow-a shock from which the U.S. labor movement has yet to fully recover.

In Britain, Thatcher parlayed her victory in the Falklands and over the miners into a major leap forward for her radical economic agenda. Between 1984 and 1988, the government privatized, among others, British Telecom, British Gas, British Airways, British Airport Authority and British Steel, while it sold its shares in British Petroleum.

Much as the terrorist attacks of September 11, 2001, would take an unpopular president and hand him an opportunity to launch a massive privatization initiative (in Bush's case, the privatization of security, warfare and reconstruction), Thatcher used her war to launch the mass privatization auction in a Western democracy.

it was in 1982 that Milton Friedman wrote the highly influential passage that best summarizes the shock doctrine: "Only a crisis-actual or perceived-produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. It was to become a kind of mantra for his movement in the new democratic era. Allan Meltzer elaborated on the philosophy: "Ideas are alternatives waiting on a crisis to serve as the catalyst of change. Friedman's model of influence was to legitimize ideas, to make them bearable, and worth trying when the opportunity comes."

The kind of crisis Friedman had in mind was not military but economic. What he understood was that in normal circumstances, economic decisions are made based on the push and pull of competing ( interests-workers want jobs and raises, owners want low taxes and relaxed regulation, and politicians have to strike a balance between these competing forces. However, if an economic crisis hits and is severe enough-a currency meltdown, a market crash, a major recession-it blows everything else out of the water, and leaders are liberated to do whatever is necessary (or said to be necessary) in the f name of responding to a national emergency.

In 1984, Ronald Reagan's administration pushed [Bolivia] over the edge by funding an unprecedented attack on its coca farmers, who grow the green leaf that can be refined into cocaine. The siege, which turned a large section of Bolivia into a military zone, didn't just choke the coca trade, but cut off the source of roughly half of the country's export revenues, triggering an economic meltdown. As The New York Times reported, "When the army marched into the Chapare in August, closing the narcodollar pipeline part way, the shock wave immediately hit the thriving black market in dollars ... less than a week after the Chapare occupation, the Government was forced to drop the peso's official value by more than half." A few months later, inflation had increased tenfold, and thousands were leaving the country in search of jobs in Argentina, Brazil, Spain and the United States.

It was in those volatile circumstances, with inflation up to 14,000 percent, that Bolivia entered its historic 1985 national elections. The election was a race between two familiar figures for Bolivians-their former dictator, Hugo Banzer, and their former elected president, VIctor Paz Estenssoro. The vote was very close, and the final decision would be left to Bolivia's Congress, but Banzer's team was sure it had won. Before the results were announced, the party enlisted the help of a little-known thirty-year-old economist named Jeffrey _Sachs to help develop an anti-inflation economic plan. Sachs was the rising star of Harvard's economics department, raking in academic awards and becoming one of the university's youngest tenured professors. A few months earlier, a delegation of Bolivian politicians had visited Harvard and seen Sachs in action; they had been impressed by his bravado-he had told them that he could turn around their inflationary crisis in a day. Sachs had no experience in development economics, but, by his own admission, "I thought that I knew just about everything that needed to be known" about inflation.

John Maynard Keynes

'There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction.

[In Bolivia, Jeffery Sachs advocated] government austerity and price increases in the midst of the crisis - the same recipe for contraction that Business Week had described in Chile as a "Dr. Strangelove world of deliberately induced depression."'

Sachs's advice to Banzer was straightforward: only sudden shock therapy would cure Bolivia's hyperinflation crisis. He proposed raising the price of oil tenfold and a range of other price deregulations and budget cuts.

Just as Friedman had promised in Chile, freer trade [in Bolivia] was supposed to create jobs for the newly jobless. It didn't, and the unemployment rate increased from 20 percent at the time of the elections to between 25 and 30 percent two years later. The state mining corporation alone-the same one that Paz had nationalized in the 1950s-was downsized from twenty-eight thousand employees to just six thousand.

The minimum wage never recovered its value, and two years into the program, real wages were down 40 percent; at one point they would drop 70 percent. In 1985, the year of shock therapy, the per capita average income in Bolivia was $845; two years later it had fallen to $789. This is the measure used by Sachs and the government, and despite the lack of progress it conveys, it does not begin to capture the degradation of daily life for many Bolivians. Average income is derived by adding up the country's total income and dividing by the number of people in the country; it glosses over the fact that shock therapy in Bolivia had the same effects that it had in the rest of the region: a small elite grew far wealthier while large portions of what had been the working class were discarded from the economy altogether and turned into surplus people. In 1987, Bolivian peasants, known as campesinos, were earning, on average, just $140 year, less than one-fifth of the "average income.

... One immediate result of this resolve was that many of Bolivia's desperately poor were pushed to become coca growers, because it paid roughly ten times as much as other crops (somewhat of an irony since the original economic crisis was set off by the U.S.-funded siege on the coca farmers.)29 By 1989, an estimated one in ten workers was turning to work in some aspect of the coca or cocaine industries. These workers would include the family of Evo Morales, future president of Bolivia and a former leader of the militant coca growers' union.

The coca industry played a significant role in resuscitating Bolivia's economy and beating inflation (a fact now recognized by historians but never mentioned by Sachs in explanations of how his reforms triumphed over inflation).31 Just two years after the "atomic bomb," illegal drug exports were generating more income for Bolivia than all its legal exports combined, and an estimated 350,000 people were earning a living in some facet of the drug trade.

... In the immediate aftermath of shock therapy, few outside Bolivia were talking about such complex repercussions. They were telling a far simpler story: about a bold, boyish professor from Harvard who had, virtually single-handedly, "salvaged the inflation-wracked economy of Bolivia," according to Boston Magazine. The victory over inflation that Sachs had helped engineer was enough to qualify Bolivia as a stunning free-market success story, "the most remarkable of modern times," as The Economist described it. "Bolivia's Miracle" gave Sachs immediate star status in powerful financial circles and launched his career as the leading expert on crisis-struck economies, sending him on to Argentina, Peru, Brazil, Ecuador and Venezuela in the coming years.

The praise heaped on Sachs was not just about beating inflation in a poor country. It was that he had achieved what so many had claimed was impossible: he had helped stage a radical neoliberal transformation within the confines of a democracy and without a war, a change far more sweeping than those attempted by either Thatcher or Reagan.

... The story of the Bolivian miracle has been told and retold, in newspaper and magazine articles, in profiles of Sachs, in Sachs's own best-selling book, and in documentary productions such as PBS's three-part series Commanding Heights: The Battle for the World Economy. There is one major problem: it isn't true. Bolivia did show that shock therapy could be imposed in a country that had just had elections, but it did not show that it could be imposed democratically or without repression-in fact, it proved, once again, that the opposite was still the case.

First, there was the obvious problem that President Paz had no mandate from Bolivian voters to remake the entire economic architecture of the country. He had run on a nationalist platform, which the abruptly abandoned in a backroom deal.

... Predictably, many of the voters who elected Paz were furious at his betrayal, and as soon as the decree was handed down, tens of thousands took to the streets to try to block a plan that would mean layoffs and deepening hunger. The major opposition came from the country's main labor federation, which called a general strike that brought industry to a halt. Paz's response made Thatcher's treatment of the miners seem tame: He immediately declared a "state of siege," and army tanks rolled through the streets of the capital, which was placed under a strict curfew. To travel through their own country, Bolivian citizens now needed special passes. Riot police raided union halls, a university and a radio station, as well as several factories. Political assemblies and marches were forbidden, and state permission was required to hold meetings. Oppositional politics was effectively banned - just as it had been during the Banzer dictatorship.

... This extraordinary state of siege stayed in place for three months and since the plan was pushed through in one hundred days, that meant the country was under lockdown during the decisive shock therapy period. One year later, when the Paz government moved ahead with mass layoffs in the tin mines, the unions once again took to the streets, and the same series of dramatic events unfolded: a state of siege was declared, and two Bolivian Air Force planes carried one hundred of the country's top labor leaders to internment camps in Bolivia's tropical flatlands.

... It was a kind of junta lite. In order for the regime to impose economic shock therapy, certain people needed to disappear-if only temporarily. Though certainly less brutal, these disappearances served the same purpose as they had in the seventies. Interning Bolivia's trade unionists so that they could not resist the reforms cleared the path for the economic erasure of whole sectors of workers; their jobs were soon lost, and they ended up warehoused in the shantytowns and slums surrounding La Paz.

Sachs had gone to Bolivia quoting Keynes's warning about economic collapse breeding fascism, but he had proceeded to prescribe measures so painful that quasi-fascist measures were required for their m enforcement.

By the mid-eighties, several economists had observed that a true hyperinflation crisis simulates the effects of a military war-spreading fear and confusion, creating refugees and causing large loss of life. It was strikingly clear that in Bolivia, hyperinflation had played the same role as had Pinochet's "war" in Chile and the Falklands War for Margaret Thatcher-it had created the context for emergency measures, a state of exception during which the rules of democracy could be suspended and economic control could be temporarily handed over to the team of experts...

... There was no shortage of such opportunities in the eighties. fact, much of the developing world, but particularly Latin America, was at that very moment spiraling into hyperinflation. The crisis was the result of two main factors, both with roots in Washington financial institutions. The first was their insistence on passing on illegitimate debts accumulated under dictatorships to new democracies. The second was the Friedman-inspired decision at the U.S. Federal Reserve to allow interest rates to soar, which massively increased the size of those debts overnight.

In 1983, when the junta collapsed after the Falklands War, Argentines elected Raul AlfonsIn as their new president. The newly liberated country was rigged to detonate, thanks to the planting of a so-called debt bomb. As part of what the outgoing junta had termed a "dignified transition" to democracy, Washington insisted that the new government agree to pay off the debts amassed by the generals. During junta rule, Argentina's external debt had ballooned from $7.9 billion the year before the coup to $45 billion at the time of the handover-debts owed to the international Monetary Fund, the World Bank, the U.S. Export-Import Bank and private banks based in the U.S. It was much the same across the region. In Uruguay, the junta took a debt of half a billion dollars when it seized power and expanded it to $5 billion, a huge load in a country of only 3 million people. In Brazil, the most dramatic case, the generals, who came to power in 1964 promising financial order, managed to take the debt from $3 billion to $103 billion in 1985.

At the time of the transitions to democracy, powerful arguments were made, both moral and legal, that these debts were "odious" and that newly liberated people should not be forced to pay the bills of their oppressors and tormentors. The case was especially strong in the Southern Cone because so much of the foreign credit had gone straight to the military and police during the dictatorship years-to pay for guns, water cannons and state-of-the-art torture camps. In Chile, for instance, the loans bankrolled a tripling in military spending, enlarging Chile's army from forty-seven thousand in 1973 to eighty-five thousand in 1980. In Argentina, the World Bank estimates that roughly $10 billion of the money borrowed by the generals went to military purchases.

Much of what wasn't spent on weapons simply vanished. A culture of corruption permeated junta rule-a glimpse of the debauched future to come when the same free-wheeling economic policies spread to Russia, China and the "free fraud zone" of occupied Iraq (to borrow a phrase from a disaffected U.S. adviser).' According to a 2005 U.S. Senate report, Pinochet maintained a Byzantine web of at least 125 secret foreign bank accounts listed under the names of various family members and combinations of his own name. The accounts, the most notorious of which were at the Washington, D.C.-based Riggs Bank, hid an estimated $27 million.

In Argentina, the junta has been accused of being even more acquisitive. In 1984, José Martinez de Hoz, architect of the economic program, was arrested on fraud charges relating to a massive state subsidy to one of the companies he used to head (the case was later dismissed).' The World Bank, meanwhile, later tracked what happened to $35 billion in foreign loans borrowed by the junta and found that $19 billion-54 percent of the total-was moved offshore. Swiss officials have confirmed that much of it ended up in numbered accounts. The U.S. Federal Reserve observed that in 1980 alone, Argentina's debt expanded by $9 billion; in that same year, the amount of money deposited abroad by Argentine citizens increased by $6.7 billion. Larry Sjaastad, a famed University of Chicago professor who personally trained many of Argentina's Chicago Boys, has described these missing billions (stolen under the noses of his students) as "the greatest fraud of the twentieth century."

Those who favored defaulting on these illegitimately accumulated debts argued that the lenders knew, or ought to have known, that the money was being spent on repression and corruption. This case was bolstered recently when the State Department declassified the transcript of a meeting held on October 7, 1976, between Henry Kissinger, then secretary of state, and Argentina's foreign minister under the military dictatorship, the admiral César Augusto Guzzetti. After discussing the international human rights outcry following the coup, Kissinger said, "Look, our basic attitude is that we would like you to succeed. I have an old-fashioned view that friends ought to be supported .... The quicker you succeed, the better." Kissinger then moved on to the topic of loans, encouraging Guzzetti to apply for as much foreign assistance as possible and fast, before Argentina's "human rights problem" tied the hands of the U.S. administration. "There are two loans in the bank," Kissinger said, referring to the Inter-American Development Bank. "We have no intention of voting against them." He also instructed the minister, "Proceed with your Export-Import Bank requests. We would like your economic program to succeed and we will do our best to help you."

The transcript proves that the U.S. government approved loans to the junta knowing they were being used in the midst of a campaign of terror. In the early eighties, it was these odious debts that Washington insisted Argentina's new democratic government had to repay.

On their own, the debts would have been an enormous burden on the new democracies, but that burden was about to get much heavier.

A new kind of shock was in the news: the Volcker Shock. Economists used this term to describe the impact of the decision made by Federal Reserve chairman Paul Volcker when he dramatically increased interest rates in the United States, letting them rise as high as 21 percent, reaching a peak in 1981 and lasting through the mid-eighties. In the U.S., rising interest rates led to a wave of bankruptcies, and in 1983 the number of people who defaulted on their mortgages tripled."

The deepest pain, however, was felt outside the US In developing countries carrying heavy debt loads, the Volcker Shock-also known as the "debt shock" or the "debt crisis"-was like a giant Taser gun fired from Washington, sending the developing world into convulsions. Soaring interest rates meant higher interest payments on foreign debts, and often the higher payments could only be met by taking on more loans. The debt spiral was born. In Argentina, the already huge debt of $45 billion passed on by the junta grew rapidly until it reached $65 billion in 1989, a situation reproduced in poor countries around the world. 17 It was after the Volcker Shock that Brazil's debt exploded, doubling from $50 billion to $100 billion in six years. Many African countries, having borrowed heavily in the seventies, found themselves in similar straits: Nigeria's debt in the same short time period went from $9 billion to $29 billion.

... This is where Friedman's crisis theory became self-reinforcing. The more the global economy followed his prescriptions, with floating interest rates, deregulated prices and export-oriented economies, the more crisis-prone the system became, producing more and more of precisely the type of meltdowns he had identified as the only circumstances under which governments would take more of his radical advice.

In this way, crisis is built into the Chicago School model. When limitless sums of money are free to travel the globe at great speed, and speculators are able to bet on the value of everything from cocoa to currencies, the result is enormous volatility. And, since free-trade policies encourage poor countries to continue to rely on the export of raw resources such as coffee, copper, oil or wheat, they are particularly vulnerable to getting trapped in a vicious circle of continuing crisis. A sudden drop in the price of coffee sends entire economies into depression, which is then deepened by currency traders who, seeing a country's financial downturn, respond by betting against its currency, causing its value to plummet. When soaring interest rates are added, and national debts balloon overnight, you have a recipe for potential economic mayhem.

In the eighties and nineties, much of the developing world was in the grip of a kind of terror hangover, free on paper but still cautious and wary. Having finally escaped the darkness of dictatorship, few elected politicians were willing to risk inviting another round of U. S.-supported coups d'etat by pushing the very policies that had provoked the coups of the seventies-especially when the military officials who had staged them were, for the most part, not in prison but, having negotiated immunity, in their barracks, watching.

Understandably unwilling to go to war with the Washington institutions that owned their debts, crisis-struck new democracies had little choice but to play by Washington's rules. And then, in the early
eighties, Washington's rules got a great deal stricter. That's because the debt shock coincided precisely, and not coincidentally, with a new era in North-South relations, one that would make military dictatorships largely unnecessary. It was the dawn of the era of "structural adjustment"-otherwise known as the dictatorship of debt.

Philosophically, Milton Friedman did not believe in the IMF or the World Bank: they were classic examples of government interference with the delicate signals of the free market. So it was ironic that there was a virtual conveyor belt delivering Chicago Boys to the two institutions' hulking headquarters on Nineteenth Street in Washington, 'D.C., where they took up many of the top positions.

... Friedman may have opposed the institutions on philosophical grounds, but practically, there were no institutions better positioned to implement his crisis theory. When countries were sent spiraling into crisis in the eighties, they had nowhere else to turn but the World Bank and the IMF. When they did, they hit a wall of orthodox Chicago Boys, trained to see their economic catastrophes not as problems to solve but as precious opportunities to leverage in order to secure a new free-market frontier. Crisis opportunism was now the guiding logic of the world's most powerful financial institutions. It was also a fundamental betrayal of their founding principles.

Like the UN, the World Bank and the IMF were created in direct response to the horror of the Second World War. With the goal of never again repeating the mistakes that had allowed fascism to rise in the heart of Europe, the world powers came together in 1944 in Bretton Woods, New Hampshire, to create a new economic architecture. The World Bank and the IMF, financed through contributions by their initial forty-three member countries, were given the explicit mandate to prevent future economic shocks and crashes like the ones that had so destabilized Weimar Germany. The World Bank would make long-term investments in development to pull countries out of poverty, while the IMF would act as a kind of global shock absorber, promoting economic policies that reduced financial speculation and market volatility. When a country looked as though it was falling into crisis, the IMF would leap in with stabilizing grants and loans, thereby preventing crises before they occurred. The two institutions, located across the street from each other in Washington, would coordinate their responses.

... The IMF and the World Bank did not live up to that universal vision; from the start they allocated power not on the basis of "one country, one vote," like the UN General Assembly, but rather on the size of each country's economy-an arrangement that gives the United States an effective veto over all major decisions, with Europe and Japan controlling most of the rest. That meant that when Reagan and Thatcher came to power in the eighties, their highly ideological administrations were essentially able to harness the two institutions for their own ends, rapidly increasing their power and turning them into the primary vehicles for the advancement of the corporatist crusade.

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." 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. '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 ...

... When crisis-struck countries came to the IMF seeking debt relief and emergency loans, the fund responded with sweeping shock therapy programs...

The IMF issued its first full-fledged "structural adjustment" program in 1983. For the next two decades, every country that came to the fund for a major loan was informed that it needed to revamp its economy from top to bottom. Davison Budhoo, an IMF senior economist who designed structural adjustment programs in Latin America and Africa throughout the eighties, admitted later that "everything we did from 1983 onward was based on our new sense of mission to have the south 'privatised' or die; towards this end we ignominiously created economic bedlam in Latin America and Africa in 1983-88.

Despite this radical (and highly profitable) new mission, the IMF and the bank always claimed that everything they did was in the interest of stabilization. The fund's official mandate was still crisis prevention-not social engineering or ideological transformation - so stabilization needed to be the official rationale. The reality was that country after country, the international debt crisis was being methodically leveraged to advance the Chicago School agenda, based on a ruthless application of Friedman's shock doctrine.

The principle was simple: countries in crisis desperately need emergency aid to stabilize their currencies. When privatization and free-trade policies are packaged together with a financial bailout, countries have little choice but to accept the whole package.

In the early nineties, the Argentine state sold off the riches of the country so rapidly and so completely that the project far surpassed what had taken place in Chile a decade earlier. By 1994, 90 percent of all state enterprises had been sold to private companies, including Citibank, Bank Boston, France's Suez and Vivendi, Spain's Repsol, and Telefónica.

In moments of crisis, people are willing to hand over a great deal of power to anyone who claims to have a magic cure - whether the crisis is a financial meltdown ... or a terrorist attack.

And that is how the crusade that Friedman began managed to survive the dreaded transition to democracy-not by its proponents persuading electorates of the wisdom of their worldview, but by moving deftly from crisis to crisis, expertly exploiting the desperation of economic emergencies to push through policies that would tie the hands of fragile new democracies. Once the tactic was perfected, opportunities just seemed to multiply. The Volcker Shock would be followed by the Mexican Tequila Crisis in 1994, the Asian Contagion in 1997 and the Russian Collapse in 1998, which was followed shortly afterward by one in Brazil. When these shocks and crises started to lose their power, even more cataclysmic ones would appear: tsunamis, hurricanes, wars and terrorist attacks. Disaster capitalism was taking shape.

The Shock Doctrine

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