Lost in Transition

excerpted from the book

The Shock Doctrine

The Rise of Disaster Capitalism

by Naomi Klein

Picador, 2007, paperback

Stephan Haggard and John Williamson, The Political Economy of Policy Reform, 1994

These worst of times give rise to the best of opportunities for those who understand the need for fundamental economic reform.

William Browder, a U.S. money manager, on investing in Poland in the early days of capitalism

There's a certain chemical that gets released in your stomach when you make ten times your money. And it's addictive.

Deng Xiaoping was enthusiastically committed to converting to a corporate-based economy-so committed that, in 1980, his government invited Milton Friedman to come to China and tutor hundreds of top-level civil servants, professors and party economists in the fundamentals of free-market theory. "All were invited guests, who had to show a ticket of invitation to attend," Friedman recalled of his audiences in Beijing and Shanghai. His central message was "how much better ordinary people lived in capitalist than in communist countries." The example he held up was Hong .Kong, a zone of pure capitalism that Friedman had long admired for its "dynamic, innovative character that has been produced by personal liberty, free trade, low taxes, and minimal government intervention." He claimed that Hong Kong, despite having no democracy, was freer than the United States, since its government participated less in the economy.

Friedman's definition of freedom, in which political freedoms were incidental, even unnecessary, compared with the freedom of unrestricted commerce, conformed nicely with the vision taking shape in the Chinese Politburo. The party wanted to open the economy to private ownership and consumerism while maintaining its own grip on power-a plan that ensured that once the assets of the state were auctioned off, party officials and their relatives would snap up the best deals and be first in line for the biggest profits. According to this version of "transition," the same people who controlled the state under Communism would control it under capitalism, while enjoying a substantial upgrade in lifestyle. The model the Chinese government intended to emulate was not the United States but something much closer to Chile under Pinochet: free markets combined with authoritarian political control, enforced by iron-fisted repression.

... in 1983, as Deng opened up the country to foreign investment and reduced protections for workers, he also ordered the creation of the 400,000-strong People's Armed Police, a new, roving riot squad charged with quashing all signs of 'economic crimes" (i.e., strikes and protests).

... Many of Deng's reforms were successful and popular-farmers had more control over their lives, and commerce returned to the cities. But in the late eighties, Deng began introducing measures that were distinctly unpopular, particularly among workers in the cities - price controls were lifted, sending prices soaring; job security was eliminated, creating waves of unemployment; and deep inequalities were opening up between the winners and losers in the new China. By 1988, the party was confronting a powerful backlash and was forced to reverse some of its price deregulation. Outrage was also mounting in the face of the party's defiant corruption and nepotism. Many Chinese citizens wanted more freedom in the market, but "reform" increasingly looked like code for party officials turning into business tycoons, as many illegally took possession of the assets they had previously managed as bureaucrats.

The most visible symbols of the opposition were the demonstrations by student strikers in Tiananmen Square. These historic protests were almost universally portrayed in the international media as a clash between modern, idealistic students who wanted Western-style democratic freedoms and old-guard authoritarians who wanted to protect the Communist state. Recently, another analysis of the meaning of Tiananmen has emerged, one that challenges the mainstream version while pulling Friedmanism at the heart of the story. This alternative narrative is being advanced by, among others, Wang Hui, one of the organizers of the 1989 protests, and now a leading Chinese intellectual of what is known as China's "New Left." In his 2003 book, China's New Order, Wang explains that the protesters spanned a huge range of Chinese society-not just elite university students but also factory workers, small entrepreneurs and teachers. What ignited the protests, he recalls, was popular discontent in the face of Deng's "revolutionary" economic changes, which were lowering wages, raising prices and causing "a crisis of layoffs and unemployment. According to Wang, "These changes were the catalyst for the 1989 social mobilization."

The demonstrations were not against economic reform per se; they were against the specific Friedmanite nature of the reforms - their speed, ruthlessness and the fact that the process was highly antidemocratic. Wang says that the protesters' call for elections and free speech were intimately connected to this economic dissent. What drove the demand for democracy was the fact that the party was pushing through changes that were revolutionary in scope, entirely without popular consent. There was, he writes, "a general request for democratic means to supervise the fairness of the reform process and the reorganization of social benefits."

These demands forced the Politburo to make a definite choice. The choice was not, as was so often claimed, between democracy and Communism, or "reform" versus the "old guard." It was a more complex calculation: Should the party bulldoze ahead with its free-market agenda, which it could do only by rolling over the bodies of the protesters? Or should it bow to the protesters' demands for democracy, cede its monopoly on power and risk a major setback to the economic project?

Some of the free-market reformers within the party, most notably General Secretary Zhao Ziyang, appeared willing to gamble on democracy, convinced that economic and political reform could still be compatible. More powerful elements in the party were not willing to take the risk. The verdict came down: the state would protect its economic "reform" program by crushing the demonstrators.

That was the clear message when, on May 20, 1989, the government of the People's Republic of China declared martial law. On June 3, the tanks of the People's Liberation Army rolled into the protests, shooting indiscriminately into the crowds. Soldiers stormed onto buses where student demonstrators were taking cover and beat them with sticks; more troops broke through the barricades protecting Tiananmen Square, where students had erected a Goddess of Democracy statue, and rounded up the organizers. Similar crackdowns took place simultaneously across the country.

There will never be reliable estimates for how many people were killed and injured in those days. The party admits to hundreds, and eyewitness reports at the time put the number of dead at between two thousand and seven thousand and the number of injured as high as thirty thousand. The protests were followed by a national witch hunt against all regime critics and opponents. Some forty thousand were arrested, thousands were jailed and many-possibly hundreds-were executed. As in Latin America, the government reserved its harshest repression for the factory workers, who represented the most direct threat to deregulated capitalism. "Most of those arrested, and virtually all who were executed, were workers. With the obvious aim of terrorizing the population, it became a well-publicized policy to systematically subject arrested individuals to beatings and torture," writes Maurice Meisner.

/Five days after the bloody crackdown, Deng addressed the nation and made it perfectly clear that it wasn't Communism he was protecting with his crackdown, but capitalism. After dismissing the protesters as "a large quantity of the dregs o society," China's president reaffirmed the party's commitment to economic shock therapy. "In a word, this was a test, and we passed," Deng said, adding, "Perhaps this bad thing will enable us to go ahead with reform and the open-door policy at a more steady, better, even a faster pace .... We haven't been wrong. There's nothing wrong with the four cardinal principles [of economic reform]. If there is anything amiss, it's that these principles haven't been thoroughly implemented "

Orville Schell, a China scholar and journalist, summarized Deng Xiaoping's choice: "After the massacre of 1989, he in effect said we will not stop economic reform; we will in effect halt political reform."

For Deng and the rest of the Politburo, the free-market possibilities were now limitless. Just as Pinochet's terror had cleared the streets for revolutionary change, so Tiananmen paved the way for a radical transformation free from fear of rebellion. If life grew harder for peasants and workers, they would either have to accept it quietly or face the wrath of the army and the secret police. And so, with the public in a state of raw terror, Deng rammed through his most sweeping reforms yet.

... It was this wave of reforms that turned China into the sweatshop the world, the preferred location for contract factories for virtually every multinational on the planet. No country offered more lucrative conditions than China: low taxes and tariffs, corruptible officials and, most of all, a plentiful low-wage workforce that, for many years, would be unwilling to risk demanding decent salaries or the most basic workplace protections for fear of the most violent reprisals.

For foreign investors and the party, it has been a win-win arrangement. According to a 2006 study, 90 percent of China's billionaires (calculated in Chinese yuan) are the children of Communist Party officials. Roughly twenty-nine hundred of these party scions - known as "the princelings" - control $260 billion, It is a mirror of the corporatist state first pioneered in Chile under Pinochet: a revolving to between corporate and political elites who combine their power to eliminate workers as an organized political force.

... One of the truths revealed by Tiananmen was the stark similarity between the tactics of authoritarian Communism and Chicago School capitalism-a shared willingness to disappear opponents, to blank the slate of all resistance and begin anew.

Despite the fact that the massacre happened just months after he had encouraged Chinese officials to push forward with painful and unpopular free-market policies, Friedman never did face "an avalanche of protests for having been willing to give advice to so evil a government." And as usual, he saw no connection between the advice he had given and the violence required to enforce it. While condemning China's use of repression, Friedman continued to hold it up as an example of "the efficacy of free-market arrangements in promoting both prosperity and freedom.

In January 1990, Nelson Mandela, age seventy-one, sat down in his prison compound to write a note to his supporters outside. It was meant to settle a debate over whether twenty-seven years behind bars, most of it spent on Robben Island off the coast of Cape Town, had weakened the leader's commitment to the economic transformation of South Africa's apartheid state. The note was only two sentences long, and it decisively put the matter to rest. "The nationalisation of he mines, banks and monopoly industries is the policy of the ANC, and the change or modification of our views in this regard is inconceivable. Black economic empowerment is a goal we fully support and encourage, but in our situation state control of certain sectors of economy is unavoidable."

... In South Africa, the largest economy on the African continent, it seemed that some people still believed that freedom included the right to reclaim and redistribute their oppressors' ill-gotten gains.

That belief had formed the basis of the policy of the African National Congress for thirty-five years, ever since it was spelled out in its statement of core principles, the Freedom Charter.

... The charter enshrines the right to work, to decent housing, to freedom of thought, and, most radically, to a share in the wealth of the richest country in Africa, containing, among other treasures, the largest goldfield in the world. "The national wealth of our country, the heritage of South Africans, shall be restored to the people; the mineral wealth beneath the soil, the Banks and monopoly industry shall be transferred to the ownership of the people as a whole; all other industry and trade shall be controlled to assist the well-being of the people," the charter states.

If Mandela led the ANC to power and nationalized the banks and the mines, the precedent would make it far more difficult for Chicago School economists to dismiss such proposals in other countries as relics of the past and insist that only unfettered free markets and free trade had the ability to redress deep inequalities.

... In the years that passed between Mandela's writing his note from prison and the ANC's 1994 election sweep in which he was elected president, something happened to convince the party hierarchy that it could not use its grassroots prestige to reclaim and redistribute the country's stolen wealth. So, rather than meeting in the middle between California and the Congo, 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.

Running alongside these often explosive summits were the much lower profile economic negotiations, primarily managed on the ANC side by Thabo Mbeki, then a rising star in the party, now South Africa's president. As the political talks progressed, and it became clear to the National Party that Parliament would soon be firmly in the hands of the ANC, the party of South Africa's elites began pouring its energy and creativity into the economic negotiations. South Africa's whites had failed to keep blacks from taking over the government, but when it came to safeguarding the wealth they had amassed under apartheid, they would not give up so easily.

In these talks, the de Klerk government had a twofold strategy. First, drawing on the ascendant Washington Consensus that there was now only one way to run an economy, it portrayed key sectors of economic decision making-such as trade policy and the central bank-as "technical" or "administrative." Then it used a wide range of new policy tools- international trade agreements, innovations in constitutional law and structural adjustment programs-to hand control of those power centers to supposedly impartial experts, economists and officials from the IMF, the World Bank, the General Agreement on Tariffs and Trade (GAIT) and the National Party-anyone except the liberation fighters from the ANC. It was a strategy of balkanization, not of the country's geography (as de Klerk had originally attempted) but of its economy.

This plan was successfully executed under the noses of ANC leaders, who were naturally preoccupied with winning the battle to control Parliament. In the process, the ANC failed to protect itself against a far more insidious strategy-in essence, an elaborate insurance plan against the economic clauses in the Freedom Charter ever becoming law in South Africa. "The people shall govern!" would soon become a reality, but the sphere over which they would govern was shrinking fast.

As one of the few classically trained economists active in the ANC, [Vishnu] Padayachee was enlisted to play a leading role in Make Democracy Work ("doing the number-crunching," as he puts it). Most of the people he worked alongside in those long policy meetings went on to top posts in the ANC government, but Padayachee did not. He has turned down all the offers of government jobs, preferring academic life in Durban, where he teaches, writes and owns the much-loved Ike's Bookshop, named after Ike Mayet, the first nonwhite South African bookseller. It was there, surrounded by carefully preserved out-of-print volumes on African history, that we met to discuss the transition.

... In late 1993, when he and a colleague from the Make Democracy Work group got a call from the negotiating team who were in the final stages of haggling with the National Party. The call was a request for them to write a position paper on the pros and cons of making South Africa's central bank an independent entity, run with total autonomy from the elected government - oh, and the negotiators needed it by morning.

'We were caught completely off guard, recalled Padayachee, now in his early fifties. He had done his graduate studies at Johns Hopkins University in Baltimore. He knew that at the time, even among free-market economists in the U.S., central bank independence was considered a fringe idea, a pet policy of a handful of Chicago School ideologues who believed that central banks should be run as sovereign republics within states, out of reach of the meddling hands of elected lawmakers.* For Padayachee and his colleagues, who strongly believed that monetary policy needed to serve the new government's "big goals of growth, employment and redistribution," the ANC's position was a no-brainer: "There was not going to be an independent central bank in South Africa."

What happened in those negotiations is that the ANC found itself caught in a new kind of web, one made of arcane rules and regulations, all designed to confine and constrain the power of elected leaders. As the web descended on the country, only a few people even noticed it was there, but when the new government came to power and tried to move freely, to give its voters the tangible benefits of liberation they expected and thought they had voted for, the strands of the web tightened and the administration discovered that its powers were tightly bound. Patrick Bond, who worked as an economic adviser in Mandela's office during the first years of ANC rule, recalls that the in-house quip was "Hey, we've got the state, where's the power?" As the new government attempted to make tangible the dreams of the Freedom Charter, it discovered that the power was elsewhere.

Want to redistribute land? Impossible -at the last minute, the negotiators agreed to add a clause to the new constitution that protects all private property, making land reform virtually impossible. Want to create jobs for millions of unemployed workers? Can't-hundreds of factories were actually about to close because the ANC had signed on to the GAIT, the precursor to the World Trade Organization, which made it illegal to subsidize the auto plants and textile factories. Want to get free AIDS drugs to the townships, where the disease is spreading with terrifying speed? That violates an intellectual property rights commitment under the WTO, which the ANC joined with no public debate as a continuation of the GAIT. Need money to build more and larger houses for the poor and to bring free electricity to the townships? Sorry-the budget is being eaten up servicing the massive debt, passed on quietly by the apartheid government. Print more money? Tell that to the apartheid-era head of the central bank. Free water for all? Not likely. The World Bank, with its large in-country contingent of economists, researchers and trainers (a self-proclaimed "Knowledge Bank"), is making private-sector partnerships the service norm. Want to impose currency controls to guard against wild speculation? That would violate the $850 million IMF deal, signed, conveniently enough, right before the elections. Raise the minimum wage to close the apartheid income gap? Nope. The IMF deal promises "wage restraint." 12 And don't even think about ignoring these commitments-any change will be regarded as evidence of dangerous national untrustworthiness, a lack of commitment to "reform," an absence of a "rules-based system." All of which will lead to currency crashes, aid cuts and capital flight. The bottom line was that South Africa was free but simultaneously captured; each one of these arcane acronyms represented a different thread in the web that pinned down the limbs of the new government.

A longtime antiapartheid activist, Rassool Snyman, described the trap to me in stark terms. "They never freed us. They only took the chain from around our neck and put it on our ankles." Yasmin Sooka, a prominent South African human rights activist, told me that the transition "was business saying, 'We'll keep everything and you [the ANC] will rule in name .... You can have political power, you can have the façade of governing, but the real governance will take place somewhere " It was a process of infantilization that is common to so-called transitional countries-new governments are, in effect, given the keys to the house but not the combination to the safe.

It was the Chicago Boys in Chile, fittingly, who pioneered this process of democracy-proofing capitalism, or building what they called "new democracy." In Chile, before handing over power to an elected government after seventeen years of junta rule, the Chicago Boys rigged the constitution and the courts so it was legally next to impossible to reverse their revolutionary laws. They had many names for this process: building a "technified democracy," a "protected democracy," or, as Pinochet's young minister José Piñera put it, ensuring "insulation from politics."

In the first two years of ANC rule, the party still tried to use the limited ( resources it had to
make good on the promise of redistribution. There was a flurry of public investment-more than
a hundred thousand homes were built for the poor, and millions were hooked up to water,
electricity and phone lines. 14 But, in a familiar story, weighed down by debt and under international pressure to privatize these services, the government soon began raising prices. After a decade of ANC rule, millions of people had been cut off from newly connected water and electricity because they couldn't pay the bills.* At least 40 percent of the new phones lines were no longer in service by 2003. As for the "banks, mines and monopoly industry" that Mandela had pledged to nationalize, they remained firmly in the hands of the same four white-owned megaconglomerates that also control 80 percent of the Johannesburg Stock Exchange. 16 In 2005, only 4 percent of the companies listed on the exchange were owned or controlled by blacks." Seventy percent of South Africa's land, in 2006, was still monopolized by whites, who are just 10 percent of the population. Most distressingly, the ANC government has spent far more time denying the severity of the AIDS crisis than getting lifesaving drugs to the approximately 5 million people infected with HIV, though there were, by early 2007, some positive signs of progress. Perhaps the most striking statistic is this one: since 1990, the year Mandela left prison, the average life expectancy for South Africans has dropped by thirteen years.

... the party could have attempted to launch a second liberation movement and break free of the asphyxiating web that had been spun during the transition. Or it could simply accept its restricted power and embrace the new economic order. The ANC's leadership chose the second option. Rather than making the centerpiece of its policy the redistribution of wealth that was already in the country-the core of the Freedom Charter on which it had been elected-the ANC, once it became the government, accepted the dominant logic that its only hope was to pursue new foreign investors who would create new wealth, the benefits of which would trickle down to the poor for the trickle-down model to have a hope of working, the ANC government had to radically alter its behavior to make itself appealing to investors.

This was not an easy task, as Mandela had learned when he walked out of prison. As soon as he was released, the South African stock market collapsed in panic; South Africa's currency, the rand, dropped by 10 percent.' A few weeks later, De Beers, the diamond corporation, moved its headquarters from South Africa to Switzerland. This kind of instant punishment from the markets would have been unimaginable three decades earlier, when Mandela was first imprisoned. In the sixties, it was unheard of for multinationals to switch nationalities on a whim and, back then, the world money system was still firmly linked to the gold standard. Now South Africa's currency had been stripped of controls, trade barriers were down and most trading was short-term speculation.

Not only did the volatile market not like the idea of a liberated Mandela, but just a few misplaced words from him or his fellow ANC leaders could lead to an earth-shaking stampede by what the New York Times columnist Thomas Friedman has aptly termed "the electronic herd... he stampede that greeted Mandela's release was just the start of what became a call-and-response between the leadership and the financial markets-a shock dialogue that trained the party in the new rules of the game. Every time a top party official said something that hinted that the ominous Freedom Charter might still become policy, the market responded with a shock, sending the rand into free fall. The rules were simple and crude, the electronic equivalent of monosyllabic grunts: justice-expensive sell status quo - good, buy.

Of all the constraints on the new government, it was the market that proved most confining - and this, in a way, is the genius of unfettered capitalism: it's self-enforcing. Once countries have opened themselves up to the global market's temperamental moods, any departure from Chicago School orthodoxy is instantly punished by traders in New York and London who bet against the offending country's currency, causing a deeper crisis and the need for more loans, with more conditions attached. Mandela acknowledged the trap in 1997, telling the ANC's national conference, "The very mobility of capital and the globalisation of the capital and other markets, make it impossible for countries, for instance, to decide national economic policy without regard to the likely response of these markets."

The person inside the ANC who seemed to understand how to make the shocks stop was Thabo Mbeki, Mandela's right hand during his presidency and soon to be his successor.

... The beast of the market had been unleashed, Mbeki would explain; there was no taming it, just feeding it what it craved: growth and more growth.

... Mbeki convinced Mandela that what was needed was a definitive break with the past. The ANC needed a completely new economic plan-something bold, something shocking, something that would communicate, in the broad, dramatic strokes the market understood, that the ANC was ready to embrace the Washington Consensus.

... In June 1996, Mbeki unveiled the results: it was a neoliberal shock therapy program for South Africa, calling for more privatization, cutbacks to government spending, labor "flexibility," freer trade and even looser controls on money flows. According to GeIb, its overriding aim "was to signal to potential investors the government's (and specifically the ANC's) commitment to the prevailing orthodoxy." To make sure the message was loud and clear to traders in New York and London, at the public launch of the plan, Mbeki quipped, "Just call me a Thatcherite."

South Africa's Truth and Reconcillation Commission is frequently held up as a model of successful "peace building," exported to other conflict zones from Sri Lanka to Afghanistan. But many of those who were directly involved in the process are deeply ambivalent. When he unveiled the final report in March 2003, the commission's chairman, Archbishop Desmond Tutu, confronted journalists with freedom's unfinished business. "Can you explain how a black person wakes up in a squalid ghetto today, almost 10 years after freedom ?hen he goes to work in town, which is still largely white, in palatial homes. And at the end of the day, he goes back home to squalor? I don't know why those people don't just say, 'To hell with peace. To hell with Tutu and the truth commission."

[Yasmin] Sooka [one of the jurors on South Africa's Truth and Reconciliation Commission] who now heads South Africa's Foundation for Human Rights, says that she feels that though the hearings dealt with what she described as "outward manifestations of apartheid such as torture, severe ill treatment and disappearances," it left the economic system served by those abuses "completely untouched"-an echo of the concerns about the blindness of "human rights" expressed by Orlando Letelier three decades earlier. If she had the process to do over again, Sooka said, "I would do it completely differently. I would look at the systems of apartheid - I would look at the question of land, I would certainly look at the role of multinationals, I would look at the role of the mining industry very, very closely because I think that's the real sickness of South Africa .... I would look at the systematic effects of the policies of apartheid, and I would devote only one hearing to torture because I think when you focus on torture and you don't look at what it was serving, that's when you start to do a revision of the real history."

Then there is the matter of where, precisely, the money is going. During the transition negotiations, F. W. de Klerk's team demanded that all civil servants be guaranteed their jobs even after the handover; those who wanted to leave, they argued, should receive hefty lifelong pensions. This was an extraordinary demand in a country with no social safety net to speak of, yet it was one of several "technical" issues on which the ANC ceded ground. The concession meant that the new ANC government carried the cost of two governments-its own, and a shadow white government that was out of power. Forty percent of the government's annual debt payments go to the country's massive pension fund. The vast majority of the beneficiaries are former apartheid employees.

In the end, South Africa has wound up with a twisted case of reparations in reverse, with the white businesses that reaped enormous profits from black labor during the apartheid years paying not a cent in reparations, but the victims of apartheid continuing to send large paychecks to their former victimizers. And how do they raise the money for this generosity? By stripping the state of its assets through privatization-a modern form of the very looting that the ANC had been so intent on avoiding when it agreed to negotiations, hoping to prevent a repeat of Mozambique. Unlike what happened in Mozambique, however, where civil servants broke machinery, stuffed their pockets and then fled, in South Africa the dismantling of the state and the pillaging of its coffers continue to this day.

After more than a decade since South Africa made its decisive turn toward Thatcherism, the results of its experiment in trickle-down justice are scandalous:

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 .

* Between 1991 and 2002, the unemployment rate for black South Africans more than doubled, from 23 percent to 48 percent.

* 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.

* The ANC government has built 1.8 million homes, but in the meantime 2 million people have lost their homes.

* Close to 1 million people have been evicted from farms in the first decade of democracy.

* 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.

Grigory Gorin, Russian writer, 1993

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.

What happened next - the dissolution of the Soviet Union, Gorbachev's eclipse by Yeltsin, and the tumultuous course of economic shock therapy in Russia - one of the greatest crimes committed against a democracy in modern history. Russia, like China, was forced to choose between a Chicago School economic program and an authentic democratic revolution. Faced with that choice, China's leaders had attacked their own people in order to prevent democracy from disturbing their free-market plans. Russia was different: the democratic revolution was already well under way-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.

Gorbachev knew that the only way to impose the kind of shock therapy being advocated by the G7 and the IMF was with force-as did many in the West pushing for these policies. The Economist magazine, in an influential 1990 piece, urged Gorbachev to adopt "strongman rule... to smash the resistance that has blocked serious economic reform." 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. Under the heading "Mikhail Sergeevich Pinochet?" the article concluded that even though following its advice could cause "possible blood-letting... it might, just might, be the Soviet Union's turn for what could be called the Pinochet approach to liberal economics." The Wash was willing to go further. In August 1991, the paper ran a commentary under the headline "Pinochet's Chile a Pragmatic Model for Soviet Economy." The article supported the idea of a coup for getting rid of the slow-going Gorbachev, but the author, Michael Schrage, worried that the Soviet president's opponents "had neither the savvy nor the support to seize the Pinochet option." They should model themselves, Schrage wrote, after "a despot who really knew how to run a coup: retired Chilean general Augusto Pinochet."

Gorbachev soon found himself facing an adversary who was more than willing to play the role of a Russian Pinochet.

Russian newspaper Nezavisirnaya Gazeta about Boris Yeltsin's government, 1991

For the first time Russia will get in its government a team of liberals who consider themselves followers of Friedrich von Hayek and the 'Chicago school' of Milton Friedman... It will come as no surprise if they attempt to construct something like a homegrown Pinochet system. in which the role of the 'Chicago boys' will be played Yegor Gaidar's team.

Vladimir Mau, an adviser to Boris Yeltsin

The most favorable condition for reform [is a] weary public, exhausted by the previous political struggle .... That is why the government was confident, on the eve of price liberalization, that a drastic social clash was impossible, that the government would not be overthrown by a popular revolt.

After only one year [under Yeltsin], shock therapy had taken a devastating toll: millions of middle-class Russians had lost their life savings when money lost its value, and abrupt cuts to subsidies meant millions of workers had not been paid in months. The average Russian consumed 40 percent less in 1992 than in 1991, and a third of the population fell below the poverty line. The middle class was forced to sell personal belongings from card tables on the streets - desperate acts that the Chicago School economists praised as "entrepreneurial".

... 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). Vice President Aleksandr Rutskoi announced that Russia had already "paid a dear price for the political adventurism" of Yeltsin and the reformers.

Some kind of armed conflict between Yeltsin and the parliament was now inevitable. 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. Boris Kagarlitsky, director of the Institute of Globalization Studies in Moscow, told me that supporters of Russian democracy "were coming in by the thousands trying to break the blockade. There were two weeks of peaceful demonstrations confronting the troops and police forces, which led to partial unblocking of the parliament building, with people able to bring food and water inside. Peaceful resistance was growing more popular and gaining broader support every day."

With each side becoming more entrenched, the only compromise that could have resolved the standoff would have been for both sides to agree to early elections, putting everybody's job up for public review. Many were urging this outcome, but just as Yeltsin was weighing his options, and reportedly leaning toward elections, news came from Poland that voters had rained down their decisive punishment on Solidarity, the party that had betrayed them with shock therapy.

After they witnessed Solidarity get pounded at the polls, it was obvious to Yeltsin and his Western advisers that early elections were far too risky. In Russia, too much wealth hung in the balance: huge oil fields, about 30 percent of the world's natural gas reserves, 20 percent of its nickel, not to mention weapons factories and the state media apparatus with which the Communist Party had controlled the vast population.

Yeltsin abandoned negotiations and moved into war posture. Having just doubled military salaries, he had most of the army on his side, and he "surrounded the parliament with thousands of Interior Ministry troops, barbed wire and water cannons and refused to let anyone pass," according to The Washington Post. Vice President Rutskoi, Yeltsin's main rival in parliament, had by this point armed his guards and welcomed proto-fascist nationalists into his camp. He urged his supporters to "not give a moment of peace" to Yeltsin's "dictatorship. Kagarlitsky, who participated in the protests and wrote a book about the episode, told me that on October 3, crowds of supporters of the parliament "marched to the Ostankino TV center to demand that news be announced. Some people in the crowd were armed, but most were not. There were children in the crowd. It was met by Yeltsin's troops and machine-gunned." About one hundred demonstrators, and one member of the military, were killed. 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.

There is no doubt that some parliamentarians showed antipathy for a peaceful settlement by egging on the crowds, but as even the former U.S. State Department official Leslie Gelb wrote, the parliament was "not dominated by a bunch of right-wing crazies." 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.

A clear signal from Washington or the EU could have forced Yeltsin to engage in serious negotiations with the parliamentarians, but he received only encouragement. Finally, on the morning of October 4, 1993, Yeltsin fulfilled his long-prescribed destiny and became Russia's very own Pinochet, unleashing a series of violent events with unmistakable echoes of the coup in Chile exactly twenty years earlier. 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. Communism may have collapsed without the firing of a single shot, but Chicago-style capitalism, it turned out, required a great deal of gunfire to defend itself: Yeltsin called in five thousand soldiers, dozens of tanks and armored personnel carriers, helicopters and elite shock troops armed with automatic machine guns-all to defend Russia's new capitalist economy from the grave threat of democracy.

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. A clique of nouveaux billionaires, many of whom were to become part of the group universally known as "the oligarchs" for their imperial levels of wealth and power, teamed up with Yeltsin's Chicago Boys and stripped the country of nearly everything of value, moving the enormous profits offshore at a rate of $2 billion a month. Before shock therapy, Russia! had no millionaires; by 2003, the number of Russian billionaires had risen to seventeen, according to the Forbes list.

For the country's oligarchs and foreign investors, only one cloud loomed on the horizon: Yeltsin's plummeting popularity. The effects of the economic program were so brutal for the average Russian, and the process was so self-evidently corrupt, that his approval ratings fell to the single digits.

... In December 1994, Yeltsin did what so many desperate leaders L have done throughout history to hold on to power: he started a war. His national security chief, Oleg Lobov, had confided to a legislator, {We need a small, victorious war to raise the president's ratings," and the defense minister predicted that his army could defeat the forces in the breakaway republic of Chechnya in a matter of hours -a cakewalk.

When Yeltsin faced reelection in 1996, he was still so unpopular and his defeat looked so certain that his advisers toyed with canceling the vote altogether; a letter signed by a group of Russian bankers published in all the Russian national newspapers strongly hinted at this possibility. Yeltsin's privatization minister, Anatoly Chubais (whom Sachs once described as "a freedom fighter"), became one of the most outspoken proponents of the Pinochet option. In order to have a democracy in society there must be a dictatorship in power," he pronounced. It was a direct echo of both the excuses made for Pinochet by Chile's Chicago Boys and Deng Xiaoping's philosophy of Friedmanism without the freedom.

In the end, the election went ahead and Yeltsin won, thanks to an estimated $100 million in financing from oligarchs (thirty-three times the legal amount) as well as eight hundred times more coverage on oligarch-controlled TV stations than his rivals. With the threat of a sudden change in government removed, the knockoff Chicago Boys were able to move to the most contentious, and most lucrative, part of their program: selling off what Lenin had once called "the commanding heights."

Forty percent of an oil company comparable in size to France's Total was sold for $88 million (Total's sales in 2006 were $193 billion). Norilsk Nickel, which produced a fifth of the world's nickel, was sold for $170 million-even though its profits alone soon reached $1.5 billion annually. The massive oil company Yukos, which controls more oil than Kuwait, was sold for $309 million; it now earns more than $3 billion in revenue a year. Fifty-one percent of the oil giant Sidanko went for $130 million; just two years later that stake would be valued on the international market at $2.8 billion. A huge weapons factory sold for $3 million, the price of a vacation home in Aspen.

The scandal wasn't just that Russia's public riches were auctioned off for a fraction of their worth-it was also that, in true corporatist style, they were purchased with public money. As the Moscow Times journalists Malt Bivens and Jonas Bernstein put it, "a few hand-picked men took over Russia's state-developed oil fields for free, as part of a giant shell game in which one arm of government paid another arm." In a bold act of cooperation between the politicians selling the public companies and the businessmen buying them, several of Yeltsin's ministers transferred large sums of public money, which should have gone into the national bank or treasury, into private banks that had been hastily incorporated by oligarchs.* The state then contracted with the same banks to run the privatization auctions for the oil fields and mines. The banks ran the auctions, but they also bid in them-and sure enough, the oligarch-owned banks decided to make themselves the proud new owners of the previously public assets. The money that they put up to buy the shares in these public companies was likely the same public money that Yeltsin's ministers had deposited with them earlier. In other words, the Russian people fronted the money for the looting of their own country.

In the absence of major famine, plague or battle, never have so many lost so much in such a short period of 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."

Although millions of Russians have been pulled out of poverty in recent years, thanks largely to soaring oil and gas prices, Russia's underclass of extreme poor has remained permanent-with all the sicknesses associated with that discarded status.

Russia's population is ... in dramatic decline-the country is losing roughly 700,000 people a year. Between 1992, the first full year of shock therapy, and 2006, Russia's population shrank by 6.6 million. Three decades ago, André Gunder Frank, the dissident Chicago economist, wrote a letter to Milton Friedman accusing him of "economic genocide." Many Russians describe the slow disappearance of their fellow citizens in similar terms today.

... 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. One time zone is downtown Moscow, transformed in fast-forward into a futuristic twenty-first-century sin city, where oligarchs race around in black Mercedes convoys, guarded by top-of-the-line mercenary soldiers, and where Western money managers are seduced by the open investment rules by day and by on-the-house prostitutes by night In the other time zone, a seventeen-year-old provincial girl, asked about her hopes for the future, replied, "It's difficult to talk about the twenty-first century when you're sitting here reading by candlelight. The twenty-first century does not matter. It's the nineteenth century here."

For both the Clinton and Bush Sr. administrations, not to mention the European Union, the G7 and the IMF, 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.

When the zeal for shock therapy in Russia was at its peak, its cheerleaders were absolutely convinced that only total destruction of every single institution would create the conditions for a national rebirth - the dream of the blank slate that would recur in Baghdad. It is "desirable," wrote the Harvard historian Richard Pipes, "for Russia to keep on disintegrating until nothing remains of its institutional structures." And the Columbia University economist Richard Ericson wrote in 1995, "Any reform must be disruptive on a historically unprecedented scale. An entire world must be discarded, including all of its economic and most of its social and political institutions, and concluding with the physical structure of production, capital, and technology.

Another Iraq parallel: no matter how baldly Yeltsin defied anything resembling democracy, his rule was still characterized in the West as part of "a transition to democracy," a narrative that would change only when Putin began cracking down on the illegal activities of several of the oligarchs. Similarly, the Bush administration has always portrayed Iraq as on the road to freedom, even in the face of overwhelming evidence of rampant torture, out-of-control death squads and pervasive press censorship. Russia's economic program was always described as "reform," just as Iraq is perennially under "reconstruction," even after the U.S. contractors have mostly all fled, leaving the infrastructure in a shambles, as the destruction roars on. 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.

The entire thirty-year history of he 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." The point of shock therapy is to open up a window for enormous profits to be made very quickly-not despite the lawlessness but precisely because of it.

The movement that Milton Friedman launched in the 1950s is best understood as an attempt by multinational capital to recapture the highly profitable, lawless frontier that Adam Smith, the intellectual forefather of today's neoliberals, so admired -but with a twist. Rather than journeying through Smith's "savage and barbarous nations" where there was no Western law (no longer a practical option), this movement set out to systematically dismantle existing laws and regulations to re-create that earlier lawlessness. And where Smith's colonists earned their record profits by seizing what he described as "waste lands" for "but a trifle," 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.

Under Chicago School economics, the state acts as the colonial frontier, which corporate conquistadors pillage with the same ruthless determination and energy as their predecessors showed when they hauled home the gold and silver of the Andes. Where Smith saw fertile green fields turned into profitable farmlands on the pampas and the prairies, Wall Street saw "green field opportunities" in Chile's phone system, Argentina's airline, Russia's oil fields, Bolivia's water system, the United States' public airwaves, Poland's factories-all built with public wealth, then sold for a trifle.

In much of the Southern Hemisphere, 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. After every one of these profit frenzies come the promises: next time, there will be firm laws in place before a country's assets are sold off, and the entire process will be watched over by eagle-eyed regulators and investigators with unimpeachable ethics. Next time there will be "institution building" before privatizations (to use the post-Russia parlance). But calling for law and order after the profits have all been moved offshore is really just a way of legalizing the theft ex post facto, much as the European colonizers locked in their land grabs with treaties.

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.

... 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. As long as Communism was a threat, the gentlemen's agreement that was Keynesianism would live on; once that system lost ground, all traces of compromise could finally be eradicated, thereby fulfilling the purist goal Friedman had set out for his movement a half century earlier.

John Williamson, economist, at a conference of Milton Friedman / University of Chicago doctrine proponents, in Washington, DC, January 13, 1995

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 [economic] reform.

... At Washington's most powerful financial institutions ... there was a willingness not only to create an appearance of crisis through the media but also to take concrete measures to generate crises that were all too real.

The Chicago School crisis addicts were certainly on a speedy intellectual trajectory. Only a few years earlier, they had speculated that a hyperinflation crisis could create the shocking conditions required for shock policies. Now a chief economist at the World Bank, an institution funded, by this time, with tax dollars from 178 countries and whose mandate was to rebuild and strengthen struggling economies, was advocating the creation of failed states because of the opportunities they provided to start over in the rubble.

Davidson Budhoo was a Grenadian-born, London School of Economics-trained economist ... [who] had worked at the IMF for twelve years, where is job was designing structural adjustment programs or Africa, Latin America and his native Caribbean. After the organization took its sharp right turn during the Reagan/Thatcher era, the independent-minded Budhoo felt increasingly ill at ease in his place of work. The fund was packed with zealous Chicago Boys under the leadership of its managing director, the staunch neoliberal Michel Camdessus. When Budhoo quit in 1988, he decided to devote himself to exposing the secrets of his former workplace. It began when he wrote a remarkable open letter to Camdessus ...

... 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."

... governments and peoples [are] forced to bend on their knees before us, broken and terrified and disintegrating, and begging for a sliver of reasonableness and decency on our part. But we laugh cruelly in their face, and the torture goes on unabated."

Back in the early nineties, whenever advocates of free trade wanted a persuasive success story to invoke in debates, they invariably pointed to the Asian Tigers. These were the miracle economies that were growing by leaps and bounds, supposedly because they had flung open their borders to unrestricted globalization. It was a useful story - the Tigers were certainly developing with whirlwind speed - but to suggest that their expansion was based on free trade was fiction. Malaysia, South Korea and Thailand still had highly protectionist policies that barred foreigners from owning land and from buying out national firms. They had also maintained a significant role for the state, keeping sectors like energy and transportation in public hands. The Tigers had also blocked many foreign imports from Japan, Europe and North America, as they built up their own domestic markets. They were economic success stories unquestionably, but ones that proved that mixed, managed economies grew faster and more equitably than those following the Wild West Washington Consensus.

The situation did not please Western and Japanese investment banks and multinational firms; watching Asia's consumer market explode, they understandably longed for unfettered access to the region to sell their products. They also wanted the right to buy up the best of the Tigers' corporations-particularly Korea's impressive conglomerates like Daewoo, Hyundai, Samsung and LG. In the mid-nineties, under pressure from the IMF and the newly created World Trade Organization, Asian governments agreed to split the difference: they would maintain the laws that protected national firms from foreign ownership and resist pressure to privatize their key state companies, but they would lift barriers to their financial sectors, allowing a surge of paper investing and currency trading.

In 1997, when the flood of hot money suddenly reversed current in Asia, it was a direct result of this kind of speculative investment, which was legalized only because of Western pressure. Wall Street, of course, didn't see it that way. Top investment analysts instantly recognized the crisis as the chance to level the remaining barriers protecting Asia's markets once and for all. Pelosky, the Morgan Stanley strategist, was particularly forthright about the logic: if 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 .... 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."

Some saw the breaking of Asia in even grander terms. José Piflera, Pinochet's star minister who was now working at the Cato Institute in Washington, D.C., greeted the crisis with undisguised glee, pronouncing that "the day of reckoning has arrived." In Piflera's eyes, the crisis was the latest chapter in the war that he and his fellow Chicago Boys had started in Chile in the seventies. 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."

Piflera's was not a fringe perspective. It was openly shared by Alan Greenspan, chairman of the U.S. Federal Reserve and probably the single most powerful economic policy maker in the world. Greenspan described the crisis as "a very dramatic event towards a consensus of the type of market system which we have in this country." He also observed that "the current crisis is likely to accelerate the dismantling in many Asian countries of the remnants of a system with large elements of government-directed investment." 15 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.
Eager not to let this opportunity slip by, the IMF-after months doing nothing while the emergency worsened-finally entered into negotiations with the ailing governments of Asia. The only country to resist the fund in this period was Malaysia, thanks to its relatively small debt. Malaysia's controversial prime minister, Mahthir Mohammad said that he did not think he should have to "destroy the economy in order that it should become better," which was enough to brand him as a raving radical at the time. The rest of Asia's crisis-struck economies were too desperate for foreign currency to refuse the possibility of tens of billions in IMF loans: Thailand, the Philippines, Indonesia and South Korea all came to the table. "You can't force a country to ask you for help. It has to ask. But when it's out of money, it hasn't got many places to turn," said Stanley Fischer, who was in charge of the talks for the IMF.

Fischer had been one of the most vocal advocates of shock therapy in Russia, and despite the harrowing human costs there, his attitude was just as unyielding in Asia. Several governments suggested that since the crisis was caused by the ease with which money could gush in and out of their countries with nothing to slow down the flow, perhaps it made sense to put some barriers back up-the dreaded "capital controls." China had kept its controls up (ignoring Friedman's advice in this regard), and it was the only country in the region that was not being ravaged by the crisis. And Malaysia had put controls back up, and they seemed to be working.

Fischer and the rest of the IMF team dismissed the idea out of hand. 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. The meltdown had forced a group of strong-willed countries to beg for mercy; to fail to take advantage of that window of opportunity was, for the Chicago School economists running the IMF, tantamount to professional negligence.

With their treasuries empty, the Tigers were, as far as the IMF was concerned, broken; now they were primed to be remade. The first stage of this process was to strip the countries of all the "trade and investment protectionism and activist state intervention that were the key ingredients of the 'Asian miracle," as the political scientist Walden Bello put it." The IMF also demanded that the governments make deep budget cuts, leading to mass layoffs of public sector workers in countries where people were already taking their own lives in record numbers. Fischer admitted after the fact that the IMF had concluded that in Korea and Indonesia, the crisis was unrelated to government overspending. Nonetheless, he used the extraordinary leverage granted by the crisis to extract these painful austerity measures. As one New York Times reporter wrote, the IMF's actions were "like a heart surgeon who, in the middle of an operation, decides to do some work on the lungs and kidneys, too."

After the IMF had stripped the Tigers of their old habits and ways, they were now ready to be reborn, Chicago-style: privatized basic services, independent central banks, "flexible" workforces, low social spending and, of course, total free trade.

... The economic meltdown was so dire that it gave governments the license (as similar crises had from Bolivia to Russia) to declare temporary authoritarian rule; it didn't last long - just long enough to impose the IMF decrees.

... As far as the IMF was concerned, the crisis was going extremely well. In less than a year, it had negotiated the economic equivalent of extreme makeovers for Thailand, Indonesia, South Korea and the Philippines.

The human costs of the IMF's opportunism were nearly as devastating in Asia as in Russia. The International Labor Organization estimates that a staggering 24 million people lost their jobs in this period and that Indonesia's unemployment rate increased from 4 to 12 percent. Thailand was losing 2,000 jobs a day at the height of the "reforms"- 60,000 a month. In South Korea, 300,000 workers were fired every month - largely the result of the IMF's totally unnecessary demands to slash government budgets and hike interest rates. By 1999, South Korea's and Indonesia's unemployment rates had nearly tripled in only two years. As in Latin America in the seventies, what disappeared in these parts of Asia was what was so remarkable about the region's "miracle" in the first place: its large and growing middle class. In 1996, 63.7 percent of South Koreans identified as middle class; by 1999 that number was down to 38.4 percent. According to the World Bank, 20 million Asians were thrown into poverty in this period of what Rodolfo Walsh would have called "planned misery.

... while the IMF certainly failed the people of Asia, it did not fail Wall Street-far from it. The hot money may have been spooked by the IMF's drastic measures, but the large investment houses and multinational firms were emboldened. "Of course these markets are highly volatile," said Jerome Booth, head of research at London's Ashmore Investment Management. "That's what makes them fun." These fun-seeking firms understood that as a result of the IMF adjustments," pretty much everything in Asia was now up for sale-and the more the market panicked, the more desperate Asian companies would be to sell, pushing their prices through the floor. Morgan Stanley's Jay Pelosky had said that what Asia needed was "more bad news to continue to put pressure on these corporates to sell their companies"-and that's exactly what happened, thanks to the IMF.

... Within two years, the face of much of Asia was utterly transformed, with hundreds of local brands replaced by multinational giants. It was dubbed "the world's biggest going-out-of-business sale," by The New York Times, and a "business-buying bazaar" by BusinessWeek.

... All told, there were 186 major mergers and acquisitions of firms in Indonesia, Thailand, South Korea, Malaysia and the Philippines by foreign multinationals in a span of only twenty months. Watching this sale unfold, Robert Wade, an LSE economist, and Frank Veneroso, an economic consultant, predicted that the IMF program "may even precipitate the biggest peacetime transfer of assets from domestic to foreign owners in the past fifty years anywhere in the world.

... Milton Friedman, at the height of the crisis, had cautioned against panic, insisting that "it will be over .... As they get this financial mess settled, you can see a return to growth in Asia, but whether it will be one year, two years, three years, nobody can tell you."

... 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.

Free-market crusaders are, however, slow learners when it comes to the unintended consequences of their policies. The only lesson learned from the enormously lucrative Asian sell-off appears to have been yet more confirmation for the shock doctrine, more evidence (as if any more was needed) that there is nothing like a true disaster, a genuine churning of society, to open up a new frontier. A few years after the peak of the crisis, several prominent commentators were even willing to go so far as to say that what happened in Asia, despite all the devastation, was a blessing in disguise. The Economist noted that "it took a national crisis for South Korea to turn from an inward-looking nation to one that embraced foreign capital, change and competition." And Thomas Friedman, in his best-selling book The Lexus and the Olive Tree, declared that what happened in Asia wasn't a crisis at all. "I believe globalization did us all a favor by melting down the economies of Thailand, Korea, Malaysia, Indonesia, Mexico, Russia, and Brazil in the 1990s, because it laid bare a lot of rotten practices and institution he wrote, adding that "exposing the crony capitalism in Korea was no crisis in my book. In his New York Times columns supporting the invasion of Iraq, a similar logic would be on display, except that the melting down would be done with cruise missiles, not currency trades.

Financial Times editorial

... Asia was a "warning signal that public unease with capitalism and the forces of globalization is reaching a worrying level. The Asian crisis showed the world how even the most successful countries could be brought to their knees by a sudden outflow of capital. People were outraged at how the whims of secretive hedge funds could apparently cause mass poverty on the other side of the world.

Unlike in the former Soviet Union, where the planned misery o 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.

After 1998, it became increasingly difficult to impose the shock therapy-style makeovers by peaceful means-through the usual IMF bullying or arm-twisting at trade summits. The defiant new mood coming from the South made its global debut when the World Trade Organization talks collapsed in Seattle in 1999. Though the college-age protesters received the bulk of the media coverage, the real rebellion took place inside the conference center, when developing countries formed a voting bloc and rejected demands for deeper trade concessions as long as Europe and the U.S. continued to subsidize and protect their domestic industries.

At the time, it was still possible to dismiss the Seattle breakdown as a minor pause in the steady advance of corporatism. Within a few years, however, the depth of the shift would be undeniable: the U.S. government's ambitious dream of creating a unified free-trade zone encompassing all of Asia-Pacific was abandoned, as were a global investors' treaty and plans for a Free Trade Area of the Americas, stretching from Alaska to Chile.

Perhaps the greatest impact of the so-called antiglobalization movement was that it forced the Chicago School ideology into the dead center of the international debate. For a brief moment at the turn of the millennium, there was no pressing crisis to deflect attention-the debt shocks had faded, the "transitions" were complete, and a new global war had not yet arrived. 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."

In retrospect, it is striking that capitalism's monopoly period, when it no longer had to deal with competing ideas or counterpowers, was extremely brief-only eight years, from the collapse of the Soviet Union in 1991 to the collapse of the WTO talks in 1999.

The Shock Doctrine

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