Part 5 (1/2)

Argentina was not unique in this regard. By 1999, the Chicago School international alumni included more than twenty-five government ministers and more than a dozen central bank presidents from Israel to Costa Rica, an extraordinary level of influence for one university department.35 In Argentina, as in so many other countries, the Chicago Boys formed a kind of ideological pincer around the elected government, one group squeezing from within, another exerting its pressure from Was.h.i.+ngton. For instance, the IMF delegations to Buenos Aires were often led by Claudio Loser, the Argentine Chicago Boy, which meant that when he met with the finance ministry and the central bank, the meetings were not adversarial negotiations but collegial discussions among friends, former cla.s.smates at the University of Chicago and recent coworkers on Nineteenth Street. A book published in Argentina about the effect of this global economic fraternity is aptly t.i.tled In Argentina, as in so many other countries, the Chicago Boys formed a kind of ideological pincer around the elected government, one group squeezing from within, another exerting its pressure from Was.h.i.+ngton. For instance, the IMF delegations to Buenos Aires were often led by Claudio Loser, the Argentine Chicago Boy, which meant that when he met with the finance ministry and the central bank, the meetings were not adversarial negotiations but collegial discussions among friends, former cla.s.smates at the University of Chicago and recent coworkers on Nineteenth Street. A book published in Argentina about the effect of this global economic fraternity is aptly t.i.tled Buenos Muchachos, Buenos Muchachos, a reference to Martin Scorsese's mafia cla.s.sic, a reference to Martin Scorsese's mafia cla.s.sic, Goodfellas, Goodfellas,36 The members of this fraternity were in enthusiastic agreement about what needed to be done with Argentina's economy-and how to pull it off. The Cavallo Plan, as it came to be called, was based on the clever packaging trick that both the World Bank and the IMF had perfected: harnessing the chaos and desperation of a hyperinflation crisis to pa.s.s privatization off as an integral part of the rescue mission. So, to stabilize the money system, Cavallo quickly made ma.s.sive cuts to public spending and launched another new currency, the Argentine peso, pegged to the U.S. dollar. Within a year, inflation was down to 17.5 percent and was virtually eliminated a few years later.37This dealt with the runaway currency but ”obfuscated” the other half of the program.

Argentina's dictators.h.i.+p, for all its commitment to pleasing foreign investors, had left large and desirable pieces of the economy in state hands, from the national airline to Patagonia's impressive oil reserves. As far as Cavallo and his Chicago Boys were concerned, the revolution was only half finished, and they were determined to use the economic crisis to complete their work.

In the early nineties, the Argentine state sold off the riches of the country so rapidly and so completely that the project far surpa.s.sed what had taken place in Chile a decade earlier. By 1994, 90 percent of all state enterprises had been sold to private companies, including Citibank, Bank Boston, France's Suez and Vivendi, Spain's Repsol and Telefonica. Before making the sales, Menem and Cavallo had generously performed a valuable service for the new owners: they had fired roughly 700,000 of their workers, according to Cavallo's own estimates; some put the number much higher. The oil company alone lost 27,000 workers during the Menem years. An admirer of Jeffrey Sachs, Cavallo called this process ”shock therapy.” Menem had an even more brutal phrase for it: in a country still traumatized by ma.s.s torture, he called it ”major surgery without anesthetic.”2438 In the midst of the transformation, Time Time magazine put Menem on its cover, his face grinning out of the middle of a sunflower, under the headline ”Menem's Miracle.” magazine put Menem on its cover, his face grinning out of the middle of a sunflower, under the headline ”Menem's Miracle.”39 And it was a miracle-Menem and Cavallo had pulled off a radical and painful privatization program without sparking a national revolt. How had they done it? And it was a miracle-Menem and Cavallo had pulled off a radical and painful privatization program without sparking a national revolt. How had they done it?

Years later, Cavallo explained. ”At the time of hyperinflation it's terrible for the people, particularly for low-income people and small savers, because they see that in a few hours or in a few days they are being told their salaries got destroyed by the price increases, which take place at an incredible speed. That is why the people ask the government, 'Please do something.' And if the government comes with a good stabilization plan, that is the opportunity to also accompany that plan with other reforms. . . the most important reforms were related to the opening up of the economy and to the deregulation and the privatization process. But the only way to implement all those reforms was, at that time, to take advantage of the situation created by hyperinflation, because the population was ready to accept drastic changes in order to eliminate hyperinflation and to go back to normality.”40 In the long term, Cavallo's program in its entirety would prove disastrous for Argentina. His method of stabilizing the currency-pegging the peso to the U.S. dollar-made it so expensive to produce goods inside the country that local factories could not compete with the cheap imports flooding the country. So many jobs were lost that well over half the country would eventually be pushed below the poverty line. In the short term, however, the plan worked brilliantly: Cavallo and Menem had smuggled privatization in while the country was in shock from hyperinflation. Crisis had done its job.

What Argentina's leaders pulled off in this period was a psychological more than an economic technique. As Cavallo, a junta veteran, well understood, in moments of crisis, people are willing to hand over a great deal of power to anyone who claims to have a magic cure-whether the crisis is a financial meltdown or, as the Bush administration would later show, a terrorist attack.

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

PART 4.

LOST IN TRANSITION.

WHILE WE WEPT, WHILE WE TREMBLED, WHILE WE DANCED.

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

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

CHAPTER 9.

SLAMMING THE DOOR ON HISTORY.

A CRISIS IN POLAND, A Ma.s.sACRE IN CHINA.

I live in a Poland that is now free, and I consider Milton Friedman to be one of the main intellectual architects of my country's liberty.

-Leszek Balcerowicz, former finance minister of Poland, November 20061.

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

-William Browder, a U.S. money manager, on investing in Poland in the early days of capitalism2.

We certainly must not stop eating for fear of choking.

-People's Daily, the official state newspaper, on the need to continue free-market reforms after the Tiananmen Square ma.s.sacre the official state newspaper, on the need to continue free-market reforms after the Tiananmen Square ma.s.sacre3 Before the Berlin Wall fell, becoming the defining symbol of the collapse of Communism, there was another image that held out the promise of Soviet barriers coming down. It was Lech Walesa, a laid-off electrician with a handlebar moustache and disheveled hair, climbing over a steel fence festooned with flowers and flags in Gdansk, Poland. The fence protected the Lenin s.h.i.+pyards and the thousands of workers who had barricaded themselves inside to protest a Communist Party decision to raise the price of meat.

The workers' strike was an unprecedented show of defiance against the Moscow-controlled government, which had ruled Poland for thirty-five years. No one knew what would happen: Would Moscow send tanks? Would they fire on the strikers and force them to work? As the strike wore on, the s.h.i.+pyard became a pocket of popular democracy within an authoritarian country, and the workers expanded their demands. They no longer wanted their work lives controlled by party apparatchiks claiming to speak for the working cla.s.s. They wanted their own independent trade union, and they wanted the right to negotiate, bargain and strike. Not waiting for permission, they voted to form that union and called it Solidarnosc, Solidarity.4That was 1980, the year the world fell in love with Solidarity and with its leader, Lech Walesa.

Walesa, then thirty-six, was so in tune with the aspirations of Poland's workers that they seemed in spiritual communion. ”We eat the same bread!” he bellowed into the microphone in the Gdansk s.h.i.+pyard. It was a reference not only to Walesa's own una.s.sailable blue-collar credentials but also to the powerful role that Catholicism played in this trail-blazing new movement. With religion frowned upon by party officials, the workers wore their faith as a badge of courage, lining up to take Communion behind the barricades. Walesa, a bracing mix of bawdy and pious, opened the Solidarity office with a wooden crucifix in one hand and a bouquet of flowers in the other. When it came time to sign the first landmark labor agreement between Solidarity and the government, Walesa marked his name with ”a giant souvenir pen bearing the likeness of John Paul II.” The admiration was mutual; the Polish pope told Walesa that his prayers were with Solidarity.5 Solidarity spread through the country's mines, s.h.i.+pyards and factories with ferocious speed. Within a year, it had 10 million members-almost half of Poland's working-age population. Having won the right to bargain, Solidarity started making concrete headway: a five-day work week instead of six, and more say in the running of factories. Tired of living in a country that wors.h.i.+pped an idealized working cla.s.s but abused actual workers, Solidarity members denounced the corruption and brutality of the party functionaries who answered not to the people of Poland but to remote and isolated bureaucrats in Moscow. All the desire for democracy and self-determination suppressed by one-party rule was being poured into local Solidarity unions, sparking a ma.s.s exodus of members from the Communist Party.

Moscow recognized the movement as the most serious threat yet to its Eastern empire. Inside the Soviet Union, opposition was still coming largely from human rights activists, many of whom were on the political right. But Solidarity's members couldn't easily be dismissed as stooges of capitalism-they were workers with hammers in their hands and coal dust in their pores, the people who should, according to Marxist rhetoric, have been the party's base.25 Even more threatening, Solidarity's vision was everything the party was not: democratic where it was authoritarian; dispersed where it was centralized; partic.i.p.atory where it was bureaucratic. And its 10 million members had the power to bring Poland's economy to a standstill. As Walesa taunted, they might lose their political battles, ”but we will not be compelled to work. Because if people want us to build tanks, we will build streetcars. And trucks will go backward if we build them that way. We know how to beat the system. We are pupils of that system.” Even more threatening, Solidarity's vision was everything the party was not: democratic where it was authoritarian; dispersed where it was centralized; partic.i.p.atory where it was bureaucratic. And its 10 million members had the power to bring Poland's economy to a standstill. As Walesa taunted, they might lose their political battles, ”but we will not be compelled to work. Because if people want us to build tanks, we will build streetcars. And trucks will go backward if we build them that way. We know how to beat the system. We are pupils of that system.”

Solidarity's commitment to democracy inspired even party insiders to rebel. ”Once I was so naive as to think that a few evil men were responsible for the errors of the party,” Marian Arendt, a member of the Central Committee, told a Polish newspaper. ”Now I no longer have such illusions. There is something wrong in our whole apparatus, in our entire structure.”6 In September 1981, Solidarity's members were ready to take their movement to the next stage. Nine hundred Polish workers gathered once again in Gdansk for the union's first national congress. There, Solidarity turned into a revolutionary movement with aspirations to take over the state, with its own alternative economic and political program for Poland. The Solidarity plan stated, ”We demand a self-governing and democratic reform at every management level and a new socioeconomic system combining the plan, self-government and the market.” The centrepiece was a radical vision for the huge state-run companies, which employed millions of Solidarity members, to break away from governmental control and become democratic workers' cooperatives. ”The socialized enterprise,” the program stated, ”should be the basic organizational unit in the economy. It should be controlled by the workers council representing the collective and should be operatively run by the director, appointed through compet.i.tion and recalled by the council.”7 Walesa opposed this demand, fearing it was such a challenge to party control that it would provoke a crackdown. Others argued that the movement needed a goal, a positive hope for the future, not just an enemy. Walesa lost the debate, and the economic program became official Solidarity policy. Walesa opposed this demand, fearing it was such a challenge to party control that it would provoke a crackdown. Others argued that the movement needed a goal, a positive hope for the future, not just an enemy. Walesa lost the debate, and the economic program became official Solidarity policy.

Walesa's fears of a crackdown turned out to be well founded. Solidarity's mounting ambition frightened and infuriated Moscow. Under intense pressure, Poland's leader, General Wojciech Jaruzelski, declared martial law in December 1981. Tanks rolled through the snow to surround factories and mines, Solidarity's members were rounded up in the thousands, and its leaders, including Walesa, were arrested and imprisoned. As Time Time reported, ”Soldiers and police used force to clear out resisting workers, leaving at least seven dead and hundreds injured when miners in Katowice fought back with axes and crowbars.” reported, ”Soldiers and police used force to clear out resisting workers, leaving at least seven dead and hundreds injured when miners in Katowice fought back with axes and crowbars.”8 Solidarity was forced underground, but during the eight years of police-state rule, the movement's legend only grew. In 1983, Walesa was awarded the n.o.bel Peace Prize, although his activities were still restricted and he could not accept the prize in person. ”The Peace Prize laureate's seat is empty,” the representative from the n.o.bel Committee said at the ceremony. ”Let us therefore try even harder to listen to the silent speech from his empty place.”

The empty s.p.a.ce was a fitting metaphor because, by that time, everyone seemed to see what they wanted in Solidarity: the n.o.bel Committee saw a man who ”espoused no other weapon than the peaceful strike weapon.”9 The left saw redemption, a version of socialism that was not tainted by the crimes of Stalin or Mao. The right saw evidence that Communist states would meet even moderate expressions of dissent with brutal force. The human rights movement saw prisoners jailed for their beliefs. The Catholic Church saw an ally against Communist atheism. And Margaret Thatcher and Ronald Reagan saw an opening, a crack in the Soviet armor, even though Solidarity was fighting for the very rights that both leaders were doing their best to stamp out at home. The longer the ban lasted, the more powerful the Solidarity mythology became. The left saw redemption, a version of socialism that was not tainted by the crimes of Stalin or Mao. The right saw evidence that Communist states would meet even moderate expressions of dissent with brutal force. The human rights movement saw prisoners jailed for their beliefs. The Catholic Church saw an ally against Communist atheism. And Margaret Thatcher and Ronald Reagan saw an opening, a crack in the Soviet armor, even though Solidarity was fighting for the very rights that both leaders were doing their best to stamp out at home. The longer the ban lasted, the more powerful the Solidarity mythology became.

By 1988, the terror of the initial crackdown had eased, and Polish workers were once again staging huge strikes. This time, with the economy in free fall, and the new, moderate regime of Mikhail Gorbachev in power in Moscow, the Communists gave in. They legalized Solidarity and agreed to hold snap elections. Solidarity split in two: there was now the union and a new wing, Citizens' Committee Solidarity, that would partic.i.p.ate in the elections. The two bodies were inextricably linked; Solidarity leaders were the candidates, and because the electoral platform was vague, the only specifics of what a Solidarity future might look like were provided by the union's economic program. Walesa himself didn't run, choosing to maintain his role as head of the union wing, but he was the face of the campaign, which ran under the slogan ”With us, you're safer.”10 The results were humiliating for the The results were humiliating for the Communists and glorious for Solidarity: of the 261 seats in which Solidarity ran candidates, it won 260 of them.26 Walesa, maneuvering behind the scenes, had the post of prime minister filled by Tadeusz Mazowiecki. He had little of Walesa's charisma, but as the editor of the Solidarity weekly newspaper, he was considered one of the movement's leading intellectuals. Walesa, maneuvering behind the scenes, had the post of prime minister filled by Tadeusz Mazowiecki. He had little of Walesa's charisma, but as the editor of the Solidarity weekly newspaper, he was considered one of the movement's leading intellectuals.

The Shock of Power

As Latin Americans had just learned, authoritarian regimes have a habit of embracing democracy at the precise moment when their economic projects are about to implode. Poland was no exception. The Communists had been mismanaging the economy for decades, making one disastrous, expensive mistake after another, and it was at the point of collapse. ”To our misfortune, we have won!” Walesa famously (and prophetically) declared. When Solidarity took office, debt was $40 billion, inflation was at 600 percent, there were severe food shortages and a thriving black market. Many factories were making products that, with no buyers in sight, were destined to rot in warehouses.11 For Poles, the situation made for a cruel entry into democracy. Freedom had finally come, but few had the time or the inclination to celebrate because their paychecks were worthless. They spent their days lining up for flour and b.u.t.ter if there happened to be any in the stores that week. For Poles, the situation made for a cruel entry into democracy. Freedom had finally come, but few had the time or the inclination to celebrate because their paychecks were worthless. They spent their days lining up for flour and b.u.t.ter if there happened to be any in the stores that week.

All summer following its triumph at the polls, the Solidarity government was paralyzed by indecision. The speed of the collapse of the old order and the sudden election sweep had been shocks in themselves: in a matter of months, Solidarity activists went from hiding from the secret police to being responsible for paying the salaries of those same agents. And now they had the added shock of discovering that they barely had enough money to make the payroll. Rather than building the post-Communist economy they had dreamed of, the movement had the far more pressing task of avoiding a complete meltdown and potential ma.s.s starvation.

Solidarity's leaders knew they wanted to put an end to the state's viselike grip on the economy, but they weren't at all clear about what could replace it. For the movement's militant rank and file, this was the chance to test their economic program: if the state-run factories were converted to workers' cooperatives, there was a chance they could become economically viable again-worker management could be more efficient, especially without the added expense of party bureaucrats. Others argued for the same gradual approach to transition that Gorbachev was advocating at the time in Moscow- slow expansion of the areas in which supply-and-demand monetary rules apply (more legal shops and markets), combined with a strong public sector modeled on Scandinavian social democracy.

But as had been the case in Latin America, before anything else could happen, Poland needed debt relief and some aid to get out of its immediate crisis. In theory, that's the central mandate of the IMF: providing stabilizing funds to prevent economic catastrophes. If any government deserved that kind of lifeline it was the one headed by Solidarity, which had just pulled off the Eastern Bloc's first democratic ouster of a Communist regime in four decades. Surely, after all the Cold War railing against totalitarianism behind the Iron Curtain, Poland's new rulers could have expected a little help.