The Shock Doctrine: The Rise of Disaster Capitalism

In 1984, the Reagan administration cracked down on the coca trade in Bolivia, causing massive unemployment and hyperinflation. (Coca is used to make cocaine.) In 1985, Bolivian politicians consulted with Harvard economist Jeffrey Sachs for advice on how to control their inflation. Sachs recommended “shock therapy” by raising the price of oil and other staple products, and implementing budget cuts. Bolivian politicians, led by Senator Gonzalo Sánchez de Lozada, took this advice and crafted a backroom deal to pass a raft of shock therapy economic policies. 

When Paz Estenssoro became president of Bolivia in August 1985, his administration pushed through these policies in the first 100 days. Afterward, inflation did decrease. However, many people became unemployed and impoverished. As a result, more people went to work in the illegal coca industry.

The Anglophone press lauded Jeffrey Sachs for his success in implementing shock therapy in a democracy without resorting to the violent tactics of, for example, Pinochet. Klein points out that, contrary to this narrative, President Paz did oppress dissent of his policies. For instance, demonstrations were banned, riot police were used to violently break up protests, and a university, factories, and a radio station were raided. Labor leaders were rounded up and jailed until the policies were implemented. Klein describes this process as a “civilian coup d’état, one carried out by politicians and economists in business suits rather than soldiers in military uniforms” (154).

The international community took note of Sachs’s “success” in Bolivia. They interpreted the results as a signal that hyperinflation was a crisis that could be leveraged to push through market fundamentalist reforms. In the 1980s, many countries around the world, and particularly in Latin America, were facing hyperinflation.

Passing on Odious Debts

Klein describes the case of Argentina’s economy in the 1980s as an example. In 1983, Argentina’s dictatorship collapsed and Raúl Alfonsín was elected president. His administration inherited the debts of the dictatorial regime, which had liberally borrowed money from international institutions like the International Monetary Fund (IMF), the World Bank, the US Export-Import Bank, and others. Much of this money was embezzled into private accounts held by those connected to the regime. However, the institutions insisted the new government had to honor these debts regardless.

The Debt Shock

The size of the debt carried by newly democratic nations ballooned at this time due to the Volcker Shock. Between 1980 and 1982, US Federal Reserve chairman Paul Volcker “dramatically increased interest rates” (159). The high domestic interest rates led to higher interest rates on foreign debt, causing debt servicing payments to explode internationally. In this context, prices on global commodities became highly unstable. This created a vicious cycle of crises that could then be used by Chicago-style economists to push through more drastic market fundamentalist reforms. Klein argues that “crisis is built into the Chicago School model” (160).

In response to this debt shock, the IMF, World Bank, and similar institutions began attaching market fundamentalist reform requirements to their debt relief packages. This is known as “structural adjustment.” These institutions were created at the end of World War II to stabilize the global economy to avoid another world war, under the theory that Germany’s hyperinflation led to its descent into fascism. However, by 1989, these institutions had all embraced free-market fundamentalism and its attendant volatility. This is known as the “Washington Consensus.” If a developing nation wants a loan from one of these institutions, either to service debts, stabilize currency, or otherwise invest in its economy, they are obligated to enact free-market reforms as well. These policies are required by these institutions even as economists like Dani Rodrik, who worked with the World Bank, acknowledge that they “had no direct link with creating stability” (165).

Argentina was “the ‘model student’ of the IMF” (165) in the late 1980s and 1990s. Argentina’s government during the administration of Carlos Menem was stacked with Chicago Boys, who implemented the “Cavallo Program” of privatization and austerity during a period of hyperinflation. Like in Bolivia, this showed how hyperinflation could be used as a crisis to push through “disaster capitalism.”