The Shock Doctrine: The Rise of Disaster Capitalism

Chapter 10 describes how the African National Congress (ANC) abandoned its Marxist economic ideals after coming to power in post-apartheid South Africa to instead pursue free market fundamentalist reforms. The chapter begins with a brief history of the ANC and its rise to power. 

On June 26th, 1955, the ANC organized the Congress of the People in the township of Kliptown outside Johannesburg. There, they adopted the Freedom Charter, which called for the nationalization of key industries and redistribution from white landowners to the majority Black population. The movement was violently suppressed by the apartheid government. In the 1980s, the liberation movement was revived and likewise embraced the Freedom Charter. While in prison, ANC leader Nelson Mandela voiced his support for the Freedom Charter’s Marxist economic policies. On February 11th, 1990, Mandela was freed. In 1994, he was elected president of South Africa.

The ANC entered negotiations with F.W. De Klerk’s apartheid government to discuss the terms of the handover. Although the Freedom Charter called for public services, redistribution, and other progressive reforms, economists within the ANC who supported these ideas were sidelined in the negotiations. Instead, the ANC committed to the neoliberal framework of economic policies, joining the General Agreements on Tariffs and Trade (GATT), the World Trade Organization (WTO), and other multinational agreements in order to secure loans to service apartheid-era debt. This prevented their government from instituting any of the progressive reforms they had promised. For instance, they could not raise the minimum wage because the IMF agreement prevented it. 

Klein interviews an ANC activist, William Gumede, who states that the ANC agreed to these things in negotiations because they were not focused on economic issues enough and they did not understand the long-term ramifications of these decisions. As in other countries, the neoliberal economic policies decimated local industries and increased poverty. Due to the globalized “electronic herd,” if the ANC even hinted at redistributive policies to address the historic inequalities caused by apartheid, “the market responded with a shock, sending the rand [South Africa’s currency] into free fall” (207). ANC leader Thabo Mbeki [president of South Africa, who succeeded Mandela from 1999 to 2008] led the economic negotiations and encouraged free market reforms.

The Shock of the Base

In 1996, South Africa held a Truth and Reconciliation Commission to gather information about, and assess reparations for, the apartheid regime. The Commission focused on the violence of the regime instead of “the economic system served by those abuses” (211).

Reparations in Reverse

The ANC spends a lot of money servicing apartheid-era debts and providing pensions for apartheid-era state employees instead of investing in state services.

On the 50th anniversary of the Freedom Charter, the ANC government held a memorial in Kliptown. Klein notes that Kliptown was in worse economic condition in 2005 than it had been when the charter was signed. The redevelopment of the area had been turned over to “an odd [government] entity” (214) called Blue IQ, which proposed to relocate slum dwellers to make room for a museum and tourist destinations.

Klein ends the chapter arguing that the ANC adopted neoliberal policies because “everyone” in the international community was encouraging them to do so.

In July 1991, Soviet president Mikhail Gorbachev attended the G7 Summit in London. Gorbachev had been pursuing a structured mixed-market reform in the Soviet Union that was slowly opening up the country to globalized trade while maintaining state supports. The other member nation leaders and advisors told Gorbachev that he was not going far or fast enough, and encouraged him to do shock therapy instead. They advised him to use brute force, like Pinochet, to enact reforms.

On August 19th, 1991, Russian politician Boris Yeltsin gained national fame for standing up to Communist tanks outside the Russian parliament building. He used that fame to create “an alliance with two other Soviet republics” (221), triggering the fall of the Soviet Union and Gorbachev’s resignation. Yeltsin came to power. He formed a team of “Chicago Boys,” including Jeffrey Sachs and others from Harvard, who pursued shock therapy economic reforms like price liberalization. 

Yeltsin was granted emergency powers to push through these reforms, which were unpopular and quickly increased poverty and unemployment. In March 1993, the Russian parliament voted to rescind these special powers, triggering a constitutional crisis as Yeltsin refused to accept the vote. The West, including President Bill Clinton, backed Yeltsin. On October 4th, 1993, Yeltsin’s forces burned down the Russian parliament, killed 500 people, and injured thousands. A dictatorship under Yeltsin was established. Russia’s public assets were sold off, creating rampant speculation and a caste of oligarchs. Harvard’s economists were criticized for taking part in the sell-off themselves, making millions in the process. 

In September 1999, a series of apartments were bombed in Russia. The Russian government blamed the attack on Islamist terrorists from Chechnya and began to bomb the area. Vladimir Putin led the charge, and that December became president of Russia.

As elsewhere, the neoliberal reforms impoverished the majority of Russian people, although a small percent of them became very wealthy.

When in Doubt, Blame Corruption

Klein argues that the rhetoric used to describe the Russian reforms in the 1990s closely parallel those used to describe reform in Iraq in the 2000s. For instance, Yeltsin’s authoritarianism was framed as “part of ‘a transition to democracy’” similar to the Bush administration framing of the Iraq reforms as part of “the road to freedom” (240). 

When Russia’s authoritarianism became too obvious to ignore, Western commentators pivoted to characterize the effects of shock therapy as the result of “corruption.” Klein argues that corruption is not an aberration, but rather a necessary and constant component of shock therapy economic reforms. She notes that Argentina and Bolivia likewise had more corruption during their market reform eras. She describes this process overall 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” (244).

In October 2006, Klein interviewed economist Jeffrey Sachs about his culpability in implementing shock therapy in Russia. She describes him as alternately defensive and despondent. She notes he has a “selective memory” about his role in Poland and Russia. He argues that he simply wanted to secure international funds to support those economies. He felt that if he pushed Russia to pursue structural adjustment, the IMF would lend them money, and he was “shocked” when the IMF refused. He attributes the failure of the international response to “sheer laziness.”

Klein argues that a major reason capitalist governments in the West pursued Keynesian monetary policy, like the Marshall Plan in the post-WWII era, was to forestall expansion of communism into their countries and elsewhere. By conceding to some of labor’s demands, through policies like the 1935 New Deal, capitalist leaders were able to prevent more radical reforms from taking root. After the Soviet Union fell, capitalists no longer needed to broker a compromise with labor and could pursue free market fundamentalist reforms without check. Thus, when Sachs asked for money to stabilize the Russian economy, capitalist nations had no reason to agree to a Marshall Plan-like policy.

At a conference in Washington, DC on January 13th, 1993, Jeffrey Sachs chastised the assembled finance leaders and economists for abandoning the principles of foreign aid and pursuing laissez-faire economics at all costs. The crowd was unmoved. Then, economist John Williamson spoke. In his speech, he proposed that instead of waiting for a crisis to occur to enact economic reforms, governments and economists should consider creating a crisis that could then be capitalized upon. The following month, in Canada, economists and market leaders attempted to do just that by creating propaganda suggesting that Canada had a deficit problem, necessitating cuts to public services. The government complied. In 1995, an investigative reporter revealed that the whole “crisis” had been manufactured by “corporate-funded think tanks” (258).

“Statistical Malpractice” in Washington

In 1988, former IMF economist Davidson Budhoo issued an open letter accusing the IMF of doctoring economic numbers to make it look as if economic conditions in Trinidad and Tobago were worse than they actually were, as a justification for more drastic “structural adjustment” policies. The Trinidadian government confirmed his findings. Budhoo described the policies as a form of “torture.”

Chapter 13 is about the manufactured crisis in 1997 that was used to impose structural adjustment policies in Southeast Asian countries. In the early 1990s, Indonesia, Malaysia, Thailand, the Philippines, South Korea, and other Asian countries were experiencing economic growth. Investors packaged and advertised Southeast Asian portfolios as attractive investments. 

In 1997, the market was spooked by a rumor that Thailand did not have enough reserves to back its currency. This sparked an economic downturn throughout the region. In exchange for stabilization loans, the Washington Consensus obligated these countries to pursue policies of market liberalization, privatization, and austerity. (Malaysia was the only country to refuse.) The argument was that this shock therapy would make the region more attractive to international investment.

The Reveal

When the market reforms were complete, investors interpreted the extensive nature of the reforms as a signal that the Asian markets were weaker than they had anticipated. Instead of investing, investors “yank[ed] out even more money and further attack[ed] Asia’s currencies” (272). Millions of people in the region were thrown into unemployment and poverty.

Feeding Off the Ruins

An IMF internal audit concluded that the structural reforms were “ill-advised.” The people who most benefited from them were “large investment houses and multinational firms” (274) who took advantage of the crash to buy Asian companies cheaply. For instance, Washington-based firm the Carlyle Group bought Korean company Daewoo’s telecoms division. By the time the market stabilized, Western companies had achieved a massive penetration of Southeast Asian markets, but poverty rates were slow to improve. In Indonesia, the crisis provoked the overthrow of General Suharto’s regime. Klein notes that “free-market crusaders” felt the liquidation of the Southeast Asian and other economies in the 1990s was a success.

Following the events in 1997, public outrage against the IMF and the Washington Consensus grew around the world. In 1999, the World Trade Organization talks in Seattle were disrupted by protestors. During the talks, developing nations refused to acquiesce to greater trade liberalization, forcing advocates to scrap plans for a Free Trade Area of the Americas.