The Shock Doctrine - The Rise of Disaste Part 4

CHAPTER 6.

SAVED BY A WAR.

THATCHERISM AND ITS USEFUL ENEMIES.

Sovereign is he who decides the state of emergency.

-Carl Schmitt, n.a.z.i lawyer1.

When Friedrich Hayek, patron saint of the Chicago School, returned from a visit to Chile in 1981, he was so impressed by Augusto Pinochet and the Chicago Boys that he sat down and wrote a letter to his friend Margaret Thatcher, prime minister of Britain. He urged her to use the South American country as a model for transforming Britain's Keynesian economy. Thatcher and Pinochet would later become firm friends, with Thatcher famously visiting the aging general under house arrest in England as he faced charges of genocide, torture and terrorism.

The British prime minister was well acquainted with what she called "the remarkable success of the Chilean economy," describing it as "a striking example of economic reform from which we can learn many lessons." Yet despite her admiration for Pinochet, when Hayek first suggested that she emulate his shock therapy policies, Thatcher was far from convinced. In February 1982, the prime minister bluntly explained the problem in a private letter to her intellectual guru: "I am sure you will agree that, in Britain with our democratic inst.i.tutions and the need for a high degree of consent, some of the measures adopted in Chile are quite unacceptable. Our reform must be in line with our traditions and our Const.i.tution. At times the process may seem painfully slow."2 The bottom line was that Chicago-style shock therapy just wasn't possible in a democracy like the U.K. Thatcher was three years into her first term, sinking in the polls and not about to guarantee a loss in the next election by doing anything as radical or unpopular as Hayek was suggesting.

For Hayek and the movement he represented, it was a disappointing a.s.sessment. The Southern Cone's experiment had generated such spectacular profits, albeit for a small number of players, that there was tremendous appet.i.te from increasingly global multinationals for new frontiers-and not just in developing countries but in rich ones in the West too, where states controlled even more lucrative a.s.sets that could be run as for-profit interests: phones, airlines, television airwaves, power companies. If anyone could have championed this agenda in the wealthy world, it would surely have been either Thatcher in England or the American president at the time, Ronald Reagan.

In 1981, Fortune Fortune magazine ran an article extolling the virtues of "Chile's Brave New World of Reaganomics." Praising Santiago's "glittering, luxury filled shops" and "s.h.i.+ny new j.a.panese cars," the article was oblivious to the pervasive repression and the explosion of shantytowns. "What can we learn from Chile's experiment in economic orthodoxy?" it asked, and quickly provided the correct answer: "If a small undeveloped country can live by the theory of compet.i.tive advantage, then surely our infinitely more resourceful economy can." magazine ran an article extolling the virtues of "Chile's Brave New World of Reaganomics." Praising Santiago's "glittering, luxury filled shops" and "s.h.i.+ny new j.a.panese cars," the article was oblivious to the pervasive repression and the explosion of shantytowns. "What can we learn from Chile's experiment in economic orthodoxy?" it asked, and quickly provided the correct answer: "If a small undeveloped country can live by the theory of compet.i.tive advantage, then surely our infinitely more resourceful economy can."3 However, as Thatcher's letter to Hayek made clear, it wasn't quite as simple as that. Elected leaders have to worry about what voters think of their job performance, which comes up for regular review. And in the early eighties, even with Reagan and Thatcher in power and Hayek and Friedman serving as influential advisers, it was not at all clear that the kind of radical economic agenda that had been imposed with such ferocious violence in the Southern Cone would ever be possible in Britain and the United States.

A decade earlier, Friedman and his movement had faced a great disappointment in the U.S. at the hands of none other than Richard Nixon, one that seemed to confirm this point. Even though Nixon had helped put the Chicago Boys in power in Chile, he had taken a very different route at home -an inconsistency Friedman would never forgive. When Nixon took office in 1969, Friedman thought his time had finally come to lead his domestic counterrevolution against the legacy of the New Deal. "Few presidents have come closer to expressing a philosophy compatible with my own," Friedman wrote of Nixon.4The two men met regularly in the Oval Office, and Nixon named several of Friedman's like-minded friends and colleagues to key economics posts. One was the University of Chicago professor George Shultz, whom Friedman helped recruit to work for Nixon; another was Donald Rumsfeld, then thirty-seven. In the sixties, Rumsfeld used to attend seminars at the University of Chicago, gatherings he later described in reverential terms. Rumsfeld called Friedman and his colleagues "a cl.u.s.ter of geniuses," while he and other self-described "young pups" would "come in and learn at their feet. ... I was so privileged."5 With true disciples making policy and a strong personal rapport with the president, Friedman had every reason to believe that his ideas were about to be put into practice in the most powerful economy in the world. With true disciples making policy and a strong personal rapport with the president, Friedman had every reason to believe that his ideas were about to be put into practice in the most powerful economy in the world.

But in 1971, the U.S. economy was in a slump; unemployment was high and inflation was pus.h.i.+ng prices way up. Nixon knew that if he followed Friedman's laissez-faire advice, millions of angry citizens would vote him out of a job. He decided to put caps on the prices of necessities such as rent and oil. Friedman was outraged: of all possible government "distortions," price controls were the absolute worst. He called them "a cancer that can destroy an economic system's capacity to function."6 Even more disgraceful, it was his own disciples who were the Keynesian enforcers: Rumsfeld was in charge of the wage-and-price-control program, and he answered to Shultz, who at the time was director of the Office of Management and Budget. At one point, Friedman called Rumsfeld at the White House and berated his former "young pup." According to Rumsfeld, Friedman instructed him, "You have got to stop doing what you are doing." The novice bureaucrat replied that it seemed to be working-inflation was going down, the economy was growing. Friedman fired back that that was the greatest crime of all: "People are going to think that you're doing it. . . they're going to learn the wrong lesson."7 They did indeed, and they reelected Nixon with 60 percent of the popular vote the following year. In his second term, the president proceeded to shred even more of Friedman's orthodoxies, pa.s.sing a slew of new laws imposing higher environmental and safety standards on industry. "We are all Keynesians now," Nixon famously proclaimed-the cruelest cut of all. They did indeed, and they reelected Nixon with 60 percent of the popular vote the following year. In his second term, the president proceeded to shred even more of Friedman's orthodoxies, pa.s.sing a slew of new laws imposing higher environmental and safety standards on industry. "We are all Keynesians now," Nixon famously proclaimed-the cruelest cut of all.8So deep was this betrayal that Friedman would later describe Nixon as "the most socialist of the presidents of the United States in the 20th century."9 Nixon's tenure was a stark lesson for Friedman. The University of Chicago professor had built a movement on the equation of capitalism and freedom, yet free people just didn't seem to vote for politicians who followed his advice. Worse, dictators.h.i.+ps-where freedom was markedly absent- were the only governments who were ready to put pure free-market doctrine into practice. So while they griped about being betrayed at home, Chicago School luminaries junta-hopped their way through the seventies. Almost everywhere that right-wing military dictators.h.i.+ps were in power, the University of Chicago's presence could be felt. Harberger worked as a consultant to Bolivia's military regime in 1976 and accepted an honorary degree from Argentina's University of Tuc.u.man in 1979, a time when universities were under the control of the junta.10And farther afield, he advised Suharto and the Berkeley Mafia in Indonesia. Friedman wrote an economic liberalization program for the repressive Chinese Communist Party when it decided to convert to a market economy.11 Stephen Haggard, a staunch neoliberal political scientist at the University of California, conceded the "sad fact" that "some of the widest-ranging reform efforts in the developing world were undertaken following military coups" - in addition to the Southern Cone and Indonesia, he listed Turkey, South Korea and Ghana. Other success stories took place not after military coups but in one-party states like Mexico, Singapore, Hong Kong and Taiwan. In direct contradiction of Friedman's central claim, Haggard concluded that "good things-such as democracy and market-oriented economic policy-do not always go together."12 Indeed, in the early eighties, Indeed, in the early eighties, there was not a single case there was not a single case of a multiparty democracy going full-tilt free market. of a multiparty democracy going full-tilt free market.

Leftists in the developing world have long argued that genuine democracy, with fair rules preventing corporations from buying elections, would necessarily result in governments committed to the redistribution of wealth. The logic is simple enough: in these countries, there are far more poor people than rich ones. Policies that directly redistribute land and raise wages, not trickle-down economics, are in the clear self-interest of a poor majority. Give all citizens the vote and a reasonably fair process, and they will elect the politicians who appear most likely to deliver jobs and land, not more free-market promises.

For all these reasons, Friedman had spent a fair bit of time staring down an intellectual paradox: as the heir to Adam Smith's mantle, he believed pa.s.sionately that humans are governed by self-interest and that society works best when self-interest is allowed to govern almost all activities-except when it comes to a little activity called voting. Since most people in the world are either poor or live below the average income in their countries (including in the U.S.), it is in their short-term self-interest to vote for politicians promising to redistribute wealth from the top of the economy down to them.13 Friedman's longtime friend Allan Meltzer, a fellow monetarist economist, put the conundrum this way: "Votes are more equally distributed than income. . . . Voters with incomes at the median or below gain by transferring income to themselves." Meltzer described this reaction as "part of the cost of democratic government and political freedom" but said that "the Friedmans [Milton and his wife, Rose] swam against this strong current. They could not stop or reverse it, but they influenced far more than most the ways in which people and politicians think and act." Friedman's longtime friend Allan Meltzer, a fellow monetarist economist, put the conundrum this way: "Votes are more equally distributed than income. . . . Voters with incomes at the median or below gain by transferring income to themselves." Meltzer described this reaction as "part of the cost of democratic government and political freedom" but said that "the Friedmans [Milton and his wife, Rose] swam against this strong current. They could not stop or reverse it, but they influenced far more than most the ways in which people and politicians think and act."14 Across the Atlantic, Thatcher was attempting an English version of Fried-manism by championing what has become known as "the owners.h.i.+p 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 home-lessness, but polls showed that more than half of the new owners did switch their party affiliation to the Tories.15 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.16She 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.17With 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 ma.s.s privatization and breaking the blue-collar unions. It was in those trying circ.u.mstances 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.

That was an especially disturbing prospect on Wall Street because, in the early eighties, authoritarian regimes were starting to collapse around the world -Iran, Nicaragua, Ecuador, Peru, Bolivia-and many more would follow in what the conservative political scientist Samuel Huntington would term the "third wave" of democracy.18 These were worrying developments - what would prevent the emergence of another Allende, winning votes and support with populist policies? These were worrying developments - what would prevent the emergence of another Allende, winning votes and support with populist policies?

Was.h.i.+ngton had watched as that very scenario played out in both Iran and Nicaragua in 1979. In Iran, the U.S.-backed shah was overthrown by a coalition of leftists and Islamists. While the stories of hostages and ayatol-lahs made the news, the economic side of the program was also raising alarms in Was.h.i.+ngton. The Islamic regime, which had not yet transitioned to full-blown authoritarianism, nationalized the banking sector and then brought in a land redistribution program. It also imposed controls on imports and exports, a reversal of the shah's free-trade policies.19 Five months later in Nicaragua, the U.S.-backed dictators.h.i.+p of Anastasio Somoza Dabayle fell to a popular revolt that installed the left-wing Sandinista government. It controlled imports and, like the Iranians, nationalized the banking industry. Five months later in Nicaragua, the U.S.-backed dictators.h.i.+p of Anastasio Somoza Dabayle fell to a popular revolt that installed the left-wing Sandinista government. It controlled imports and, like the Iranians, nationalized the banking industry.

It added up to a grim prognosis for the dream of a global free market. By the early eighties, Friedmanites were facing the prospect that their revolution, less than a decade old, could not survive a new populist wave.

War to the Rescue

Six weeks after Thatcher wrote that letter to Hayek, something happened that changed her mind and altered the destiny of the corporatist crusade: 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 cl.u.s.ter 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."20 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 s.h.i.+ps 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.")21 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 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 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." 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."22 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.23 Thatcher praised the "Falklands spirit" gripping the nation, which in practice meant that shouts of "Ditch the b.i.t.c.h!" subsided while "Up Your Junta!" T-s.h.i.+rts sold briskly. Thatcher praised the "Falklands spirit" gripping the nation, which in practice meant that shouts of "Ditch the b.i.t.c.h!" subsided while "Up Your Junta!" T-s.h.i.+rts sold briskly.24 Neither London nor Buenos Aires made any serious attempt to avoid a showdown. Thatcher brushed aside the United Nations much as Bush and Blair did in the run-up to the war in Iraq, uninterested in sanctions or negotiations. Glorious victory was the only outcome that either side had any interest in. Neither London nor Buenos Aires made any serious attempt to avoid a showdown. Thatcher brushed aside the United Nations much as Bush and Blair did in the run-up to the war in Iraq, uninterested in sanctions or negotiations. Glorious victory was the only outcome that either side had any interest in.

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.25Her 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 a decisive victory in the following year's election.26 The British military's counterinvasion of the Falklands was code-named 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."27 With British workers now categorized as "the enemy within," Thatcher unleashed the full force of the state on the strikers, including, in a single confrontation, eight thousand truncheon-wielding riot police, many on horseback, to storm a plant picket line, leading to roughly seven hundred injuries. Over the course of the long strike, the number of injuries reached into the thousands. As the With British workers now categorized as "the enemy within," Thatcher unleashed the full force of the state on the strikers, including, in a single confrontation, eight thousand truncheon-wielding riot police, many on horseback, to storm a plant picket line, leading to roughly seven hundred injuries. Over the course of the long strike, the number of injuries reached into the thousands. As the Guardian Guardian reporter Seumas Milne doc.u.ments in his definitive account of the strike, reporter Seumas Milne doc.u.ments in his definitive account of the strike, The Enemy Within: Thatcher's Secret War against the Miners, The Enemy Within: Thatcher's Secret War against the Miners, the prime minister pressed the security services to intensify surveillance of the union and, in particular, its militant president, Arthur Scargill. What ensued was "the most ambitious counter-surveillance operation ever mounted in Britain." The union was infiltrated by multiple agents and informers, and all its phones were bugged, as were the homes and even the fish-and-chips shop frequented by its leaders.h.i.+p. the prime minister pressed the security services to intensify surveillance of the union and, in particular, its militant president, Arthur Scargill. What ensued was "the most ambitious counter-surveillance operation ever mounted in Britain." The union was infiltrated by multiple agents and informers, and all its phones were bugged, as were the homes and even the fish-and-chips shop frequented by its leaders.h.i.+p.

The chief executive of the union was alleged, on the floor of the House of Commons, to have been an MI5 agent sent in to "destabilize and sabotage the union," though he denied the charge.28 Nigel Lawson, U.K. chancellor of the exchequer during the strike, explained that the Thatcher government considered the union to be its enemy. "It was just like arming to face the threat of Hitler in the late 1930s," Lawson said a decade later. "One had to prepare."29 As in the Falklands, there was little interest in bargaining, just a focused determination to break the union, regardless of the cost (and with three thousand extra police a day, the cost was enormous). Colin Naylor, an acting police sergeant who was on the front lines of the conflict, described it as "a civil war." As in the Falklands, there was little interest in bargaining, just a focused determination to break the union, regardless of the cost (and with three thousand extra police a day, the cost was enormous). Colin Naylor, an acting police sergeant who was on the front lines of the conflict, described it as "a civil war."30 By 1985, Thatcher had won this war too: workers were going hungry and couldn't hold out; in the end 966 people were fired.31 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. 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.32 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 ma.s.sive privatization initiative (in Bush's case, the privatization of security, warfare and reconstruction), Thatcher used her war to launch the first ma.s.s privatization auction in a Western democracy. This was the real Operation Corporate, one with historic implications. Thatcher's successful harnessing of the Falklands War was the first definitive evidence that a Chicago School economic program did not need military dictators.h.i.+ps and torture chambers in order to advance. She had proved that with a large enough political crisis to rally around, a limited version of shock therapy could be imposed in a democracy.

Still, Thatcher had needed an enemy to unite the country, a set of extraordinary circ.u.mstances that justified her use of emergency measures and repression-a crisis that made her look tough and decisive rather than cruel and regressive. The war had served her purpose perfectly, but the Falklands War was an anomaly in the early eighties, a throwback to earlier colonial conflicts. If the eighties were really going to be the dawn of a new age of peace and democracy, as many claimed, then Falklands-type clashes would be far too infrequent to form the basis of a global political project.

It was in 1982 that Milton Friedman wrote the highly influential pa.s.sage 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."33 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." 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."34 The kind of crisis Friedman had in mind was not military but economic. What he understood was that in normal circ.u.mstances, 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. .h.i.ts 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 name of responding to a national emergency. Crises are, in a way, democracy-free zones-gaps in politics as usual when the need for consent and consensus do not seem to apply.

The idea that market crashes can act as catalysts for revolutionary change has a long history on the far left, most notably in the Bolshevik theory that hyperinflation, by destroying the value of money, takes the ma.s.ses one step closer to the destruction of capitalism itself.35 This theory explains why a certain breed of sectarian leftist is forever calculating the exact conditions This theory explains why a certain breed of sectarian leftist is forever calculating the exact conditions under which capitalism will reach "the crisis," much as evangelical Christians calibrate signs of the coming Rapture. In the mid-eighties, this Communist idea began to experience a powerful revival, picked up by Chicago School economists who argued that just as market crashes could precipitate left-wing revolutions, so too could they be used to spark right-wing counterrevolutions, a theory that became known as "the crisis hypothesis."36 Friedman's interest in crisis was also a clear attempt to learn from the victories of the left after the Great Depression: when the market crashed, Keynes and his disciples, previously voices in the wilderness, had been ready and waiting with their ideas, their New Deal solutions. In the seventies and early eighties, Friedman and his corporate underwriters had attempted to mimic this process with their unique brand of intellectual disaster preparedness. They painstakingly built up a new network of right-wing think tanks, including Heritage and Cato, and produced the most significant vehicle to disseminate Friedman's views, the ten-part PBS miniseries Free to Choose - Free to Choose - underwritten by some of the largest corporations in the world, including Getty Oil, Firestone Tire Rubber Co., PepsiCo, General Motors, Bechtel and General Mills. underwritten by some of the largest corporations in the world, including Getty Oil, Firestone Tire Rubber Co., PepsiCo, General Motors, Bechtel and General Mills.37 When the next crisis. .h.i.t, Friedman was determined that it would be his Chicago Boys who would be the ones ready with their ideas and their solutions. When the next crisis. .h.i.t, Friedman was determined that it would be his Chicago Boys who would be the ones ready with their ideas and their solutions.

At the time he first articulated the crisis theory in the early eighties, the U.S. was in a recession-a double whammy of high inflation and unemployment. And Chicago School policies, now known as Reaganomics, certainly held sway in Was.h.i.+ngton. But even Reagan didn't dare implement the kind of sweeping shock therapy that Friedman dreamed of, the kind he had prescribed in Chile.

Once again, it would be a Latin American country that would be the testing ground for Friedman's crisis theory-and this time, it wouldn't be a Chicago Boy who would lead the way, but a new breed of shock doctor, one more suited to the new democratic age.

CHAPTER 7.

THE NEW DOCTOR SHOCK.

ECONOMIC WARFARE REPLACES DICTATORs.h.i.+P.

Bolivia's situation could well be compared with the case of a person who has cancer. He knows he faces that most dangerous and painful operation which monetary stabilization and a number of other measures will undoubtedly be. Yet he has no alternative.

-Cornelius Zondag, U.S. economic adviser to Bolivia, 1956.1.

The use of cancer in political discourse encourages fatalism and justifies "severe" measures-as well as strongly reinforcing the widespread notion that the disease is necessarily fatal. The concept of disease is never innocent. But it could be argued that the cancer metaphors are in themselves implicitly genocidal. -Susan Sontag, -Susan Sontag, Illness as Metaphor, Illness as Metaphor, 1977 19772 In 1985, Bolivia was part of the democratic wave sweeping the developing world. For eighteen of the previous twenty-one years, Bolivians had been living under some form of dictators.h.i.+p. Now they were getting the chance to choose their president in national elections.

Winning control over Bolivia's economy at this particular juncture looked less like a prize than a punishment, however: its debt was so high that the amount Bolivia owed in interest surpa.s.sed its entire national budget. A year earlier, in 1984, Ronald Reagan's administration pushed the country 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 The New York Times reported, "When the army marched into the Chapare in August, closing the narcodol-lar 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. reported, "When the army marched into the Chapare in August, closing the narcodol-lar 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.3 It was in those volatile circ.u.mstances, 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.4 Sachs had been heavily influenced by Keynes's writings on the connection between hyperinflation and the spread of fascism in Germany after the First World War. The peace agreement imposed on Germany had sent it into severe economic crisis -including a hyperinflation rate of 3.25 million percent in 1923-which was then compounded by the Great Depression a few years later. With an unemployment rate of 30 percent and generalized rage at what seemed a global conspiracy, the country was fertile ground for n.a.z.ism.

Sachs liked to quote Keynes's warning that "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."5 He shared Keynes's view that it was the sacred duty of economists to suppress those forces of destruction at all costs. "The thing I got from Keynes," Sachs says, "was this deep sadness and sense of risk that things can go completely awry. And how incredibly stupid it was of us to leave Germany in a state of disrepair." He shared Keynes's view that it was the sacred duty of economists to suppress those forces of destruction at all costs. "The thing I got from Keynes," Sachs says, "was this deep sadness and sense of risk that things can go completely awry. And how incredibly stupid it was of us to leave Germany in a state of disrepair."6 Sachs also told journalists that he regarded Keynes's lifestyle as a politically engaged, globe-trotting economist as a model for his own career. Sachs also told journalists that he regarded Keynes's lifestyle as a politically engaged, globe-trotting economist as a model for his own career.

Although Sachs shared Keynes's belief in the power of economics to fight poverty, he was also a product of Reagan's America, which was, in 1985, in the midst of a Friedman-inspired backlash against all that Keynes represented. Chicago School precepts about the supremacy of the free market had rapidly become the unquestioned orthodoxy in Ivy League economics departments, including Harvard's, and Sachs was definitely not immune. He admired Friedman's "faith in markets, his constant insistence on proper monetary management," calling it "far more accurate than fuzzy structuralist or pseudo-Keynesian arguments one hears a lot in the developing world."7 Those "fuzzy" arguments were the same ones that in Latin America had been suppressed by violence a decade earlier-the conviction that in order to escape poverty, the continent needed to break the colonial owners.h.i.+p structures with such interventionist policies as land reform, trade protections and subsidies, nationalization of natural resources, and cooperatively run workplaces. Sachs had little time for such structural changes. So although he knew next to nothing about Bolivia and its long history of colonial exploitation, the suppression of its indigenous inhabitants and the hard-won gains of its 1952 revolution, he was convinced that in addition to hyperinflation, Bolivia suffered from "socialist romanticism"-the same delusion of developmentalism that an earlier generation of U.S.-trained economists had tried to stamp out in the Southern Cone. Those "fuzzy" arguments were the same ones that in Latin America had been suppressed by violence a decade earlier-the conviction that in order to escape poverty, the continent needed to break the colonial owners.h.i.+p structures with such interventionist policies as land reform, trade protections and subsidies, nationalization of natural resources, and cooperatively run workplaces. Sachs had little time for such structural changes. So although he knew next to nothing about Bolivia and its long history of colonial exploitation, the suppression of its indigenous inhabitants and the hard-won gains of its 1952 revolution, he was convinced that in addition to hyperinflation, Bolivia suffered from "socialist romanticism"-the same delusion of developmentalism that an earlier generation of U.S.-trained economists had tried to stamp out in the Southern Cone.8 Where Sachs parted ways with Chicago School orthodoxy was that he believed free-market policies needed to be supported by debt relief and generous aid-for the young Harvard economist, the invisible hand was not enough. This discrepancy eventually led Sachs to part ways from his more laissez-faire colleagues and devote his efforts exclusively to aid. But that split was years away. In Bolivia, Sachs's hybrid ideology merely made for some strange contradictions. For instance, when he got off the plane in La Paz, breathing the thin Andean air for the first time, he imagined himself as a latter-day Keynes arriving to save the Bolivian people from the "chaos and disorder" of hyperinflation.20 Although the core tenet of Keynesianism is that countries in severe economic recession should spend money to stimulate the economy, Sachs took the opposite approach, advocating government austerity and price increases in the midst of the crisis-the same recipe for contraction that Although the core tenet of Keynesianism is that countries in severe economic recession should spend money to stimulate the economy, Sachs took the opposite approach, advocating government austerity and price increases in the midst of the crisis-the same recipe for contraction that BusinessWeek BusinessWeek had described in Chile as a "Dr. Strangelove world of deliberately induced depression." had described in Chile as a "Dr. Strangelove world of deliberately induced depression."9 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. In a speech to the Bolivian-American Chamber of Commerce, Sachs again predicted that hyperinflation could be ended in a day, reporting that "the crowd was startled, and delighted, at the prospect."10 Like Friedman, Sachs was a firm believer that, with a sudden policy jolt, "an economy can be reoriented from a dead end, a dead end of socialism or a dead end of ma.s.s corruption or a dead end of central planning, to a normal market economy." Like Friedman, Sachs was a firm believer that, with a sudden policy jolt, "an economy can be reoriented from a dead end, a dead end of socialism or a dead end of ma.s.s corruption or a dead end of central planning, to a normal market economy."11 At the time Sachs made these bold promises, the results of Bolivia's elections were still up in the air. The former dictator Hugo Banzer was acting as if he had won, but his rival in the race, Victor Paz Estenssoro, hadn't yet given up. During the campaign, Paz Estenssoro had provided few concrete details about how he planned to deal with inflation. But he had served three times before as Bolivia's elected president, most recently in 1964, before he was overthrown in a coup. It was Paz who had been the face of Bolivia's de-velopmentalist transformation, nationalizing the large tin mines, beginning to distribute land to indigenous peasants, defending the right of all Bolivians to vote. Like Argentina's Juan Peron, Paz was a complicated, omnipresent fixture on the political landscape, often switching allegiances abruptly in order to hold on to power or make a comeback. During the 1985 campaign, an aging Paz pledged allegiance to his "nationalist revolutionary" past and made vague statements about fiscal responsibility. He was not a socialist, but he was no Chicago School neoliberal - or so Bolivians believed.12 Since the final decision about who would be named president was up to Congress, this was a period of high-stakes backroom negotiations and horse-trading between the parties, the Congress and the Senate. One newly elected senator ended up playing a pivotal role: Gonzalo Sanchez de Lozada (known in Bolivia as Goni). He had lived in the United States for so long that he spoke Spanish with a heavy American accent and had returned to Bolivia to become one of the country's wealthiest businessmen. He owned Comsur, the second-largest private mine in the country, soon to be the largest. As a young man, Goni had studied at the University of Chicago, and though he was not an economist, he was strongly influenced by Friedman's ideas and recognized that they held tremendously profitable implications in the mining sector, which in Bolivia was still largely controlled by the state. When Sachs laid out his shock plans to Banzer's team, Goni was impressed.

The details of the backroom negotiations have never been disclosed, but the results are clear enough. On August 6, 1985, it was Paz who was sworn in as president of Bolivia. Only four days later, Paz appointed Goni to head up a top-secret bipartisan emergency economic team charged with radically restructuring the economy. The group's starting point was Sachs's shock therapy, but it would go much further than anything he had suggested. In fact, it would propose dismantling the entire state-centered economic model that Paz himself had constructed decades earlier. At this point Sachs was back at Harvard, but he says he "was happy to hear that the ADN [Banzer's party] had shared a copy of our stabilization plan with the new president and his team."13 Paz's party had no idea that their leader had struck this backroom deal. With the exception of the minister of finance and the minister of planning, who were part of the secret group, Paz did not even tell his newly elected cabinet about the existence of the emergency economic team.14 For seventeen days straight, the emergency team met in the living room of Goni's palatial home. "We holed ourselves up there in a cautious and almost clandestine way," recalled the planning minister, Guillermo Bedregal, in an interview given in 2005, revealing these details for the first time.2115 What they were contemplating was a radical overhaul of a national economy so sweeping that nothing like it had ever been attempted in a democracy. President Paz was convinced that his only hope was to move as fast and suddenly as possible. That way, Bolivia's notoriously militant trade unions and peasant groups would be caught off guard and wouldn't have a chance to organize a response, or so he hoped. As Goni recalled, Paz "kept saying, 'If you are going to do it, do it now. I can't operate twice.'" What they were contemplating was a radical overhaul of a national economy so sweeping that nothing like it had ever been attempted in a democracy. President Paz was convinced that his only hope was to move as fast and suddenly as possible. That way, Bolivia's notoriously militant trade unions and peasant groups would be caught off guard and wouldn't have a chance to organize a response, or so he hoped. As Goni recalled, Paz "kept saying, 'If you are going to do it, do it now. I can't operate twice.'"16 The reason for Paz's postelection about-face remains something of a mystery. He died in 2001 and never did explain whether he had agreed to adopt Banzer's shock therapy program in exchange for being awarded the presidency, or whether he had undergone a heartfelt ideological conversion. Some insight was provided to me by Edwin Corr, the U.S. amba.s.sador to Bolivia at the time. He recalled that he had met with all the political parties and made it clear that U.S. aid would flow if they went the shock route. The reason for Paz's postelection about-face remains something of a mystery. He died in 2001 and never did explain whether he had agreed to adopt Banzer's shock therapy program in exchange for being awarded the presidency, or whether he had undergone a heartfelt ideological conversion. Some insight was provided to me by Edwin Corr, the U.S. amba.s.sador to Bolivia at the time. He recalled that he had met with all the political parties and made it clear that U.S. aid would flow if they went the shock route.

After seventeen days, Bedregal, the planning minister, had the draft of a textbook shock therapy program. It called for the elimination of food subsidies, the canceling of almost all price controls and a 300 percent hike in the price of oil.17 Despite the fact that life was about to get a lot more expensive in an already desperately poor country, the plan froze government wages at their already low levels for a year. It also called for deep cuts to government spending, flung open Bolivia's borders to unrestricted imports and called for a downsizing of state companies, the precursor to privatization. Bolivia had missed the neoliberal revolution imposed on the rest of the Southern Cone in the seventies; now it was going to make up for lost time. Despite the fact that life was about to get a lot more expensive in an already desperately poor country, the plan froze government wages at their already low levels for a year. It also called for deep cuts to government spending, flung open Bolivia's borders to unrestricted imports and called for a downsizing of state companies, the precursor to privatization. Bolivia had missed the neoliberal revolution imposed on the rest of the Southern Cone in the seventies; now it was going to make up for lost time.

When the members of the emergency team had finished drafting the new laws, they still weren't ready to share them with Bolivia's elected representatives, let alone its voters, who had never cast their ballots for such a plan. They had one more task to complete. As a group, they drove over to the office of the International Monetary Fund's representative in Bolivia and told him what they were planning to do. His response was at once encouraging and harrowing: "This is what every official at the IMF has dreamed about. But if it doesn't work, luckily I have diplomatic immunity and I can catch a plane and flee."18 The Bolivians proposing the plan had no such escape hatch, and several were terrified of how the public was going to react. "They are going to kill us," predicted Fernando Prado, the youngest member of the group. Bedre-gal, the plan's main author, attempted to stiffen spines by comparing the team to fighter pilots attacking an enemy. "We have to be like the pilot of Hiros.h.i.+ma. When he dropped the atomic bomb he didn't know what he was doing, but when he saw the smoke he said: 'Oops, sorry!' And that's exactly what we have to do, launch the measures and then: Oops, sorry!"19 The idea that policy change should be like launching a surprise military attack is a recurring theme for economic shock therapists. In Shock and Awe: Achieving Rapid Dominance, Shock and Awe: Achieving Rapid Dominance, the U.S. military doctrine published in 1996 that eventually formed the basis of the 2003 invasion of Iraq, the authors state that the invading force should "seize control of the environment and paralyze or so overload an adversary's perceptions and understanding of events so that the enemy would be incapable of resistance." the U.S. military doctrine published in 1996 that eventually formed the basis of the 2003 invasion of Iraq, the authors state that the invading force should "seize control of the environment and paralyze or so overload an adversary's perceptions and understanding of events so that the enemy would be incapable of resistance."20 Economic shock works according to a similar theory: the premise is that people can develop responses to gradual change-a slashed health program here, a trade deal there-but if dozens of changes come from all directions at once, a feeling of futility sets in, and populations go limp. Economic shock works according to a similar theory: the premise is that people can develop responses to gradual change-a slashed health program here, a trade deal there-but if dozens of changes come from all directions at once, a feeling of futility sets in, and populations go limp.

Hoping to induce that sense of hopelessness, the Bolivian planners required all of their radical measures to be adopted at the same time, and all within the first hundred days of the new government. Rather than presenting each section of the plan as its own individual law (the new tax code, the new pricing law and so on), Paz's team insisted on bundling the entire revolution into a single executive decree, D.S. 21060. It contained 220 separate laws and covered every aspect of economic life in the country, making it the equivalent, in scope and ambition, to "The Brick," the hefty blueprint written by the Chicago Boys in preparation for Pinochet's coup. According to its authors, the entire program had to be accepted or rejected; it couldn't be amended. It was the economic equivalent of Shock and Awe.

When the doc.u.ment was complete, the team made five copies: one for Paz, one for Goni and one for the treasury minister. The destination of the other two copies revealed how certain Paz and his team were that many Bolivians would regard the plan as an act of war: one was for the head of the army and the other was for the chief of police. Paz's cabinet, however, was still in the dark. They continued to be under the mistaken impression that they were working for the same man who had nationalized the mines and redistributed land all those years ago.

Three weeks after being sworn in as president, Paz finally called his cabinet together to let them in on the surprise he had in store. He ordered the doors closed to the governing chambers and "instructed the secretaries to hold all of the ministers' telephone calls." Bedregal read the full sixty pages to the stunned audience. He was so nervous, he confessed, that he "even got a nosebleed only minutes later." Paz informed his cabinet members that the decree was not up for debate; in yet another backroom deal, he had already secured support from Banzer's right-wing opposition party. If they disagreed, he said, they could resign.

"I don't agree," announced the minister of industry.

"Please leave," Paz replied. The minister stayed. With inflation still soaring and strong hints that a shock therapy approach would be rewarded with significant financial aid from Was.h.i.+ngton, no one dared leave. Two days later, in a televised presidential address t.i.tled "Bolivia Is Dying," Paz dropped Bolivia's "Brick" on a completely unsuspecting public.

Sachs was correct in predicting that price increases would end hyperinflation. Within two years, inflation was down to 10 percent, impressive by any standard.21 The broader legacy of Bolivia's neoliberal revolution is far more contentious. All economists agree that rapid inflation is enormously damaging, unsustainable and must be controlled-a process that imposes significant pain during the adjustment. The debate is over how a credible program can be achieved, as well as who, in any given society, is forced to bear the brunt of that pain. Ricardo Grinspun, a professor of economics specializing in Latin America at York University, explains that an approach in the Keynesian or develop-mentalist tradition seeks to mobilize support and share the burden through "a negotiated process involving key stakeholders-government, employers, farmers, unions and so on. In this way, the parties come to agreements over income policies, like wages and prices, at the same time that stabilization measures are implemented." In sharp contrast, says Grinspun, "the orthodox approach is to s.h.i.+ft all the social cost onto the poor through shock therapy." That, he told me, is precisely what happened in Bolivia. The broader legacy of Bolivia's neoliberal revolution is far more contentious. All economists agree that rapid inflation is enormously damaging, unsustainable and must be controlled-a process that imposes significant pain during the adjustment. The debate is over how a credible program can be achieved, as well as who, in any given society, is forced to bear the brunt of that pain. Ricardo Grinspun, a professor of economics specializing in Latin America at York University, explains that an approach in the Keynesian or develop-mentalist tradition seeks to mobilize support and share the burden through "a negotiated process involving key stakeholders-government, employers, farmers, unions and so on. In this way, the parties come to agreements over income policies, like wages and prices, at the same time that stabilization measures are implemented." In sharp contrast, says Grinspun, "the orthodox approach is to s.h.i.+ft all the social cost onto the poor through shock therapy." That, he told me, is precisely what happened in Bolivia.

Just as Friedman had promised in Chile, freer trade 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.22 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 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.23 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.24In 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 cla.s.s were discarded from the economy altogether and turned into surplus people. In 1987, Bolivian peasants, known as campesinos, were earning, on average, just $140 a year, less than one-fifth of the "average income."25 That is the problem with measuring only the "average": it effectively erases these sharp divisions. That is the problem with measuring only the "average": it effectively erases these sharp divisions.

A leader of the peasants' union explained that "the government's statistics don't reflect the growing number of families forced to live in tents; the thousands of malnourished kids who get only a piece of bread and a cup of tea a day; the hundreds of campesinos who have come to the capital in search of work and end up begging on the streets."26 That was the hidden story of Bolivia's shock therapy: hundreds of thousands of full-time jobs with pensions were eliminated, replaced with precarious ones with no protections at all. Between 1983 and 1988, the number of Bolivians eligible for social security dropped by 61 percent. That was the hidden story of Bolivia's shock therapy: hundreds of thousands of full-time jobs with pensions were eliminated, replaced with precarious ones with no protections at all. Between 1983 and 1988, the number of Bolivians eligible for social security dropped by 61 percent.27 Sachs, who returned to Bolivia as an adviser in the midst of the transition, opposed raising salaries to keep up with the price of food and gasoline and instead favored an emergency fund to help the hardest hit-a Band-Aid on what had become a gaping wound. Sachs returned to Bolivia at Paz Estenssoro's request and was working directly for the president. He is remembered as an unyielding presence. According to Goni (who would later become president of Bolivia), Sachs helped to stiffen the resolve of policy makers when public pressure was building against the human cost of shock therapy. "In his visits [Sachs] said, Took, all this gradualist stuff, it just doesn't work. When it really gets out of control you've got to stop it, like a medicine. You've got to take some radical steps; otherwise your patient is going to die."28 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. By 1989, an estimated one in ten workers was turning to work in some aspect of the coca or cocaine industries.30 These workers would include the family of Evo Morales, future president of Bolivia and a former leader of the militant coca growers' union. 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. "For now," a foreign banker observed, "the Bolivian economy is hooked on cocaine." 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. "For now," a foreign banker observed, "the Bolivian economy is hooked on cocaine."32 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 Boston Magazine.33 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 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 The Economist described it. described it.34 "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. "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. Sachs was fully aware of the historical significance of what he had accomplished. "Bolivia was really the first, in my view, combination of democratic reform combined with economic inst.i.tutional change," he said years later. "And Bolivia much more than Chile showed that you could combine political liberalization and democracy with economic liberalization. That's an extr