Part 7 (2/2)

This approach, Eisenberg points out, was not born of altruism. ”The Soviet Union was like a loaded gun. The economy was in crisis, there was a substantial German left, and they [the West] had to win the allegiance of the German people fast. They really saw themselves battling for the soul of Germany.”

Eisenberg's account of the battle of ideologies that created the Marshall Plan points to a persistent blind spot in Sachs's work, including his recent laudable efforts to dramatically increase aid spending for Africa. Rarely are ma.s.s popular movements even mentioned. For Sachs, the making of history is a purely elite affair, a matter of getting the right technocrats settled on the right policies. Just as shock therapy programs are drafted in secret bunkers in La Paz and Moscow, so, apparently, should a $30 billion aid program for the Soviet republics have materialized based solely on the commonsense arguments he was making in Was.h.i.+ngton. As Eisenberg notes, however, the original Marshall Plan came about not out of benevolence, or even reasoned argument, but fear of popular revolt.

Sachs admires Keynes, but he seems uninterested in what made Keyne-sianism finally possible in his own country: the messy, militant demands of trade unionists and socialists whose growing strength turned a more radical solution into a credible threat, which in turn made the New Deal look like an acceptable compromise. This unwillingness to recognize the role of ma.s.s movements in pressuring reluctant governments to embrace the very ideas he advocates has had serious ramifications. For one, it meant that Sachs could not see the most glaring political reality confronting him in Russia: there was never going to be a Marshall Plan for Russia because there was only ever a Marshall Plan because of because of Russia. When Yeltsin abolished the Soviet Union, the ”loaded gun” that had forced the development of the original plan was disarmed. Without it, capitalism was suddenly free to lapse into its most savage form, not just in Russia but around the world. With the Soviet collapse, the free market now had a global monopoly, which meant all the ”distortions” that had been interfering with its perfect equilibrium were no longer required. Russia. When Yeltsin abolished the Soviet Union, the ”loaded gun” that had forced the development of the original plan was disarmed. Without it, capitalism was suddenly free to lapse into its most savage form, not just in Russia but around the world. With the Soviet collapse, the free market now had a global monopoly, which meant all the ”distortions” that had been interfering with its perfect equilibrium were no longer required.

This was the real tragedy of the promise made to the Poles and Russians- that if they followed shock therapy they would suddenly wake up in a ”normal European country.” Those normal European countries (with their strong social safety nets, workers' protections, powerful trade unions and socialized health care) emerged as a compromise between Communism and capitalism. Now that there was no need for compromise, all those moderating social policies were under siege in Western Europe, just as they were under siege in Canada, Australia and the U.S. Such policies were not about to be introduced in Russia, certainly not subsidized with Western funds.

This liberation from all constraints is, in essence, Chicago School economics (otherwise known as neoliberalism or, in the U.S., neoconservatism): not some new invention but capitalism stripped of its Keynesian appendages, capitalism in its monopoly phase, a system that has let itself go-that no longer has to work to keep us as customers, that can be as antisocial, antidemocratic and boorish as it wants. As long as Communism was a threat, the gentlemen's agreement that was Keynesianism would live on; once that system lost ground, all traces of compromise could finally be eradicated, thereby fulfilling the purist goal Friedman had set out for his movement a half century earlier.

That was the real point of f.u.kuyama's dramatic ”end of history” announcement at the University of Chicago lecture in 1989: he wasn't actually claiming that there were no other ideas in the world, but merely that, with Communism collapsing, there were no other ideas sufficiently powerful to const.i.tute a head-to-head compet.i.tor.

So while Sachs saw the collapse of the Soviet Union as a liberation from authoritarian rule and was ready to roll up his sleeves and start helping, his Chicago School colleagues saw it as a freedom of a different sort-as the final liberation from Keynesianism and the do-gooder ideas of men like Jeffrey Sachs. Seen in that light, the do-nothing att.i.tude that so infuriated Sachs when it came to Russia was not ”sheer laziness” but laissez-faire in action: let it go, do nothing. By not lifting a finger to help, all the men charged with Russian policy-from d.i.c.k Cheney, as Bush Sr.'s defense secretary, to Lawrence Summers, Treasury undersecretary, to Stanley Fischer at the IMF-were indeed doing something: they were practicing pure Chicago School ideology, letting the market do its worst. Russia, even more than Chile, was what this ideology looked like in practice, a foreshadowing of the get-rich-or-die-trying dystopia that many of these same players would create a decade later in Iraq.

The new rules of the game were on display in Was.h.i.+ngton, D.C., on January 13, 1993. The occasion was a small but important conference, by invitation only, on the tenth floor of the Carnegie Conference Center on Dupont Circle, a seven-minute drive from the White House and a stone's throw from the headquarters of the IMF and the World Bank. John Williamson, the powerful economist known for shaping the missions of both the bank and the fund, had convened the event as a historic gathering of the neoliberal tribe. In attendance was an impressive array of the star ”technopols” who were at the forefront of the campaign to spread the Chicago doctrine throughout the world. There were present and former finance ministers from Spain, Brazil and Poland, central bank heads from Turkey and Peru, the chief of staff for the president of Mexico and a former president of Panama. There was Sachs's old friend and hero, Leszek Balcerowicz, architect of Poland's shock therapy, as well as his Harvard colleague Dani Rodrik, the economist who had proven that every country that had accepted neoliberal restructuring had been in deep crisis. Anne Krueger, future first deputy managing director of the IMF, was there, and although Jose Pinera, Pinochet's most evangelical minister, couldn't make it because he was trailing in Chile's presidential election, he sent a detailed paper in his place. Sachs, who was still advising Yeltsin at the time, was to deliver the keynote address.

All day long, the conference partic.i.p.ants had been indulging in that favorite economists' pastime of strategizing how to get reluctant politicians to embrace policies that are unpopular with voters. How soon after elections should shock therapy be launched? Are center-left parties more effective than right-wing ones because the attack is unexpected? Is it better to warn the public or take people by surprise with ”voodoo politics”? Though the conference was called ”The Political Economy of Policy Reform”-so willfully bland a t.i.tle that it seemed designed to deflect media interest-one partic.i.p.ant remarked slyly that what it was really about was ”Machiavellian economics.”8 Sachs listened to all this talk for several hours, and after dinner he went to the podium to give his address, t.i.tled, in true Sachsian fas.h.i.+on, ”Life in the Economic Emergency Room.”9 He was visibly agitated. The crowd was ready to hear a speech from one of their idols, the man who had carried the torch of shock therapy into the democratic era. Sachs was in no mood for self-congratulation. Instead, he was determined to use the speech, he later explained to me, to try to get this powerful crowd to grasp the gravity of what was unfolding in Russia. He was visibly agitated. The crowd was ready to hear a speech from one of their idols, the man who had carried the torch of shock therapy into the democratic era. Sachs was in no mood for self-congratulation. Instead, he was determined to use the speech, he later explained to me, to try to get this powerful crowd to grasp the gravity of what was unfolding in Russia.

He reminded his audience of the infusions of aid that had gone to Europe and j.a.pan after the Second World War, ”vital for j.a.pan's later magnificent success.” He told a story about getting a letter from an a.n.a.lyst at the Heritage Foundation-ground zero of Friedmanism-who ”believed strongly in Russia's reforms but not in foreign aid for Russia. This is a common view of free-market ideologues-of which I am one,” Sachs said. ”It is plausible but it is mistaken. The market cannot do it all by itself; international help is crucial.” The laissez-faire obsession was taking Russia into catastrophe, where, he said, ”no matter how valiant, brilliant, and lucky are Russia's reformers, they won't make it without large-scale external a.s.sistance ... we are close to missing a historic opportunity.”

Sachs got a round of applause, of course, but the response was tepid. Why was he praising such lavish social spending? This crowd was on a global crusade to dismantle the New Deal, not to forge a new one. In the conference sessions that followed, not a single partic.i.p.ant supported Sachs's challenge, and several spoke out against it.

What he was trying to do with the speech, Sachs told me, was ”explain what a real crisis was like ... to convey a sense of urgency.” People who make policy from Was.h.i.+ngton, he said, often ”don't understand what economic chaos is. They don't understand the disarray that comes.” He wanted to confront them with the reality that ”there's also a dynamic that things get farther and farther out of control, until you have other disasters, until Hitler comes back in power, until you have civil war, or ma.s.s famine or whatever it is. . . . You need to do emergency things to help, because an unstable situation definitely has a path of increasing instability, not just a path to normal equilibrium.”

I couldn't help thinking that Sachs wasn't giving his audience enough credit. The people in that room were well versed in Milton Friedman's crisis theory, and many had applied it in their own countries. Most understood perfectly how wrenching and volatile an economic meltdown could be, but they were taking a different lession from Russia: that a painful and disorienting political situation was forcing Yeltsin to rapidly auction off the riches of the state, a distinctly favorable outcome.

It was left to John Williamson, the host of the conference, to steer the discussion back to those pragmatic priorities. Sachs was the one with the star power at the event, but it was Williamson who was the crowd's real guru. Balding and untelegenic but thrillingly politically incorrect, Williamson was the one who coined the phrase ”the Was.h.i.+ngton Consensus”-perhaps the most quoted and contentious three words in modern economics. He is famous for his tightly structured closed-door conferences and seminars, each designed to test one of his bold hypotheses. At the conference in January, he had a pressing agenda: he wanted to test what he called the ”crisis hypothesis” once and for all.10 In his lecture, Williamson offered no warnings of the imperative to save any country from crisis; in fact, he spoke rhapsodically of cataclysmic events. He reminded his audience of the indisputable evidence that only when countries are truly suffering do they agree to swallow their bitter market medicine; only when they are in shock do they lie down for shock therapy. ”These worst of times give rise to the best of opportunities for those who understand the need for fundamental economic reform,” he declared.11 With his unparalleled knack for verbalizing the subconscious of the financial world, Williamson casually pointed out that this raised some intriguing questions: One will have to ask whether it could conceivably make sense to think of deliberately provoking a crisis so as to remove the political logjam to reform. For example, it has sometimes been suggested in Brazil that it would be worthwhile stoking up a hyperinflation so as to scare everyone into accepting those changes. .. . Presumably no one with historical foresight would have advocated in the mid-1930s that Germany or j.a.pan go to war in order to get the benefits of the supergrowth that followed their defeat. But could a lesser crisis have served the same function? Is it possible to conceive of a pseudo-crisis that could serve the same positive function without the cost of a real crisis?12 Williamson's remarks represented a major leap forward for the shock doctrine. In a room filled with enough finance ministers and central bank chiefs to hold a major trade summit, the idea of actively creating a serious crisis so that shock therapy could be pushed through was now being openly discussed.

At least one conference partic.i.p.ant felt obliged to distance himself in his own speech from these risque ideas. ”Williamson's suggestion that it might be a good move to provoke an artificial crisis in order to trigger reform should best be read as an idea designed to provoke and tease,” said John Toye, a British economist from the University of Suss.e.x.13 There was no evidence that Williamson was teasing. In fact, there was plenty of evidence that his ideas were already being acted on at the highest levels of financial decision making in Was.h.i.+ngton and beyond. There was no evidence that Williamson was teasing. In fact, there was plenty of evidence that his ideas were already being acted on at the highest levels of financial decision making in Was.h.i.+ngton and beyond.

The month after Williamson's conference in Was.h.i.+ngton, we caught a glimpse of the new enthusiasm for ”pseudo crisis” in my country, although few understood it as part of a global strategy at the time. In February 1993, Canada was in the midst of financial catastrophe, or so one would have concluded by reading the newspapers and watching TV. ”Debt Crisis Looms,” screamed a banner front-page headline in the national newspaper, the Globe and Mail. Globe and Mail. A major national television special reported that ”economists are predicting that sometime in the next year, maybe two years, the deputy minister of finance is going to walk into cabinet and announce that Canada's credit has run out. . . . Our lives will change dramatically.” A major national television special reported that ”economists are predicting that sometime in the next year, maybe two years, the deputy minister of finance is going to walk into cabinet and announce that Canada's credit has run out. . . . Our lives will change dramatically.”14 The phrase ”debt wall” suddenly entered the vocabulary. What it meant was that, although life seemed comfortable and peaceful now, Canada was spending so far beyond its means that, very soon, powerful Wall Street firms like Moody's and Standard and Poor's would downgrade our national credit rating from its perfect Triple A status to something much lower. When that happened, hypermobile investors, liberated by the new rules of globalization and free trade, would simply pull their money from Canada and take it somewhere safer. The only solution, we were told, was to radically cut spending on such programs as unemployment insurance and health care. Sure enough, the governing Liberal Party did just that, despite having just been elected on a platform of job creation (Canada's version of ”voodoo politics”).

Two years after the deficit hysteria peaked, the investigative journalist Linda McQuaig definitively exposed that a sense of crisis had been carefully stoked and manipulated by a handful of think tanks funded by the largest banks and corporations in Canada, particularly the C. D. Howe Inst.i.tute and the Fraser Inst.i.tute (which Milton Friedman had always actively and strongly supported).15 Canada did have a deficit problem, but it wasn't caused by spending on unemployment insurance and other social programs. According to Statistics Canada, it was caused by high interest rates, which exploded the worth of the debt much as the Volcker Shock had ballooned the developing world's debt in the eighties. McQuaig went to Moody's Wall Street head office and spoke with Vincent Truglia, the senior a.n.a.lyst in charge of issuing Canada's credit rating. He told her something remarkable: that he had come under constant pressure from Canadian corporate executives and bankers to issue d.a.m.ning reports about the country's finances, something he refused to do because he considered Canada an excellent, stable investment. ”It's the only country that I handle where, usually, nationals from that country want the country downgraded even more -on a regular basis. They think it's rated too highly.” He said he was used to getting calls from country representatives telling him he had issued too low a rating. ”But Canadians usually, if anything, disparage their country far more than foreigners do.” Canada did have a deficit problem, but it wasn't caused by spending on unemployment insurance and other social programs. According to Statistics Canada, it was caused by high interest rates, which exploded the worth of the debt much as the Volcker Shock had ballooned the developing world's debt in the eighties. McQuaig went to Moody's Wall Street head office and spoke with Vincent Truglia, the senior a.n.a.lyst in charge of issuing Canada's credit rating. He told her something remarkable: that he had come under constant pressure from Canadian corporate executives and bankers to issue d.a.m.ning reports about the country's finances, something he refused to do because he considered Canada an excellent, stable investment. ”It's the only country that I handle where, usually, nationals from that country want the country downgraded even more -on a regular basis. They think it's rated too highly.” He said he was used to getting calls from country representatives telling him he had issued too low a rating. ”But Canadians usually, if anything, disparage their country far more than foreigners do.”

That's because, for the Canadian financial community, the ”deficit crisis” was a critical weapon in a pitched political battle. At the time Truglia was getting those strange calls, a major campaign was afoot to push the government to lower taxes by cutting spending on social programs such as health and education. Since these programs are supported by an overwhelming majority of Canadians, the only way the cuts could be justified was if the alternative was national economic collapse-a full-blown crisis. The fact that Moody's kept giving Canada the highest possible bond rating-the equivalent of an A++- was making it extremely difficult to maintain the apocalyptic mood.

Investors, meanwhile, were getting confused by the mixed messages: Moody's was upbeat about Canada, but the Canadian press contantly presented the national finances as catastrophic. Truglia got so fed up with the politicized statistics coming out of Canada, which he felt were calling his own research into question, that he took the extraordinary step of issuing a ”special commentary” clarifying that Canada's spending was ”not out of control,” and he even aimed some veiled shots at the dodgy math practiced by right-wing think tanks. ”Several recently published reports have grossly exaggerated Canada's fiscal debt position. Some of them have double counted numbers, while others have made inappropriate international comparisons. . . . These inaccurate measurements may have played a role in exaggerated evaluations of the severity of Canada's debt problems.” With Moody's special report, word was out that there was no looming ”debt wall”-and Canada's business community was not pleased. Truglia says that when he put out the commentary, ”one Canadian . . . from a very large financial inst.i.tution in Canada called me up on the telephone screaming at me, literally screaming at me. That was unique.”*16 By the time Canadians learned that the ”deficit crisis” had been grossly manipulated by the corporate-funded think tanks, it hardly mattered-the budget cuts had already been made and locked in. As a direct result, social programs for the country's unemployed were radically eroded and have never recovered, despite many subsequent surplus budgets. The crisis strategy was * It must be said that Truglia is a rarity on Wall Street-bond and credit ratings are often influenced by political pressure, and are used to increase the pressure to enact ”market reforms.” used again and again in this period. In September 1995, a video was leaked to the Canadian press of John Sn.o.belen, Ontario's minister of education, telling a closed-door meeting of civil servants that before cuts to education and other unpopular reforms could be announced, a climate of panic needed to be created by leaking information that painted a more dire picture than he ”would be inclined to talk about.” He called it ”creating a useful crisis.” used again and again in this period. In September 1995, a video was leaked to the Canadian press of John Sn.o.belen, Ontario's minister of education, telling a closed-door meeting of civil servants that before cuts to education and other unpopular reforms could be announced, a climate of panic needed to be created by leaking information that painted a more dire picture than he ”would be inclined to talk about.” He called it ”creating a useful crisis.”17

”Statistical Malpractice” in Was.h.i.+ngton

By 1995, political discourse in most Western democracies was saturated with talk of debt walls and imminent economic collapse, demanding ever-deeper cuts and more ambitious privatizations, with the Friedmanite think tanks always out front crying crisis. At Was.h.i.+ngton's most powerful financial inst.i.tutions, however, there was a willingness not only to create an appearance of crisis through the media but also to take concrete measures to generate crises that were all too real. Two years after Williamson made his observations about ”stoking up” crisis, Michael Bruno, chief economist of development economics at the World Bank, publicly echoed the same line, once again without attracting media scrutiny. In a lecture to the International Economic a.s.sociation in Tunis in 1995, later published as a paper by the World Bank, Bruno informed five hundred a.s.sembled economists from sixty-eight countries that there was a growing consensus about ”the idea that a large enough crisis may shock otherwise reluctant policymakers into inst.i.tuting productivity-enhancing reforms.”3918 Bruno pointed to Latin America as ”a prime example of seemingly beneficial deep crises” and to Argentina in particular, where, he said, President Carlos Menem and his finance minister, Domingo Cavallo, were doing a fine job of ”taking advantage of the emergency atmosphere” to push through deep privatization. Just in case the audience missed the point, Bruno said, ”I have emphasized one major theme: the political economy of deep crises tends to yield radical reforms with positive outcomes.” Bruno pointed to Latin America as ”a prime example of seemingly beneficial deep crises” and to Argentina in particular, where, he said, President Carlos Menem and his finance minister, Domingo Cavallo, were doing a fine job of ”taking advantage of the emergency atmosphere” to push through deep privatization. Just in case the audience missed the point, Bruno said, ”I have emphasized one major theme: the political economy of deep crises tends to yield radical reforms with positive outcomes.”

In light of this fact, he argued that international agencies needed to do more than just take advantage of existing economic crises to push through the Was.h.i.+ngton Consensus-they needed to preemptively cut off aid to make those crises worse. ”An adverse shock (such as a drop in government revenue or in external transfers) may actually increase increase welfare because it shortens the delay [before reforms are adopted]. The notion that 'things have to get worse before they can get better' emerges naturally. ... In fact, a high-inflation crisis may leave a country better off than if it had muddled along through less severe crises.” welfare because it shortens the delay [before reforms are adopted]. The notion that 'things have to get worse before they can get better' emerges naturally. ... In fact, a high-inflation crisis may leave a country better off than if it had muddled along through less severe crises.”

Bruno conceded that deepening or creating a serious economic meltdown was frightening-government salaries would go unpaid, public infrastructure would rot-but, Chicago disciple that he was, he urged his audience to embrace this destruction as the first stage of creation. ”Indeed, as the crisis deepens the government may gradually wither away,” government may gradually wither away,” Bruno said. ”This development has a positive outcome; namely, at the time of reform the power of entrenched groups may have been weakened-and a leader who opts for the long-run solution over short-term expediency may win support for reform.” Bruno said. ”This development has a positive outcome; namely, at the time of reform the power of entrenched groups may have been weakened-and a leader who opts for the long-run solution over short-term expediency may win support for reform.”19 The Chicago School crisis addicts were certainly on a speedy intellectual trajectory. Only a few years earlier, they had speculated that a hyperinflation crisis could create the shocking conditions required for shock policies. Now a chief economist at the World Bank, an inst.i.tution funded, by this time, with tax dollars from 178 countries and whose mandate was to rebuild and strengthen struggling economies, was advocating the creation of failed states because of the opportunities they provided to start over in the rubble.20 For years, there had been rumors that the international financial inst.i.tutions had been dabbling in the art of ”pseudo-crisis,” as Williamson put it, in order to bend countries to their will, but it was difficult to prove. The most extensive testimony came from Davison Budhoo, an IMF staffer turned whistle-blower, who accused the organization of cooking the books in order to doom the economy of a poor but strong-willed country.

Budhoo was a Grenadian-born, London School of Economics-trained economist who stood out in Was.h.i.+ngton thanks to an unconventional approach to personal style: he let his hair stand straight on end, a la Albert Einstein, and preferred the windbreaker to the pinstripe suit. He had worked at the IMF for twelve years, where his job was designing structural adjustment programs for Africa, Latin America and his native Caribbean. After the organization took its sharp right turn during the Reagan/Thatcher era, the independent-minded Budhoo felt increasingly ill at ease in his place of work. The fund was packed with zealous Chicago Boys under the leaders.h.i.+p of its managing director, the staunch neoliberal Michel Camdessus. When Budhoo quit in 1988, he decided to devote himself to exposing the secrets of his former workplace. It began when he wrote a remarkable open letter to Camdessus, adopting the j'accuse j'accuse tone of Andre Gunder Frank's letters to Friedman a decade earlier. tone of Andre Gunder Frank's letters to Friedman a decade earlier.

Showing an enthusiasm for language rare for senior fund economists, the letter began: ”Today I resigned from the staff of the International Monetary Fund after over twelve years, and after 1000 days of official Fund work in the field, hawking your medicine and your bag of tricks to governments and to peoples in Latin America and the Caribbean and Africa. To me resignation is a priceless liberation, for with it I have taken the first big step to that place where I may hope to wash my hands of what in my mind's eye is the blood of millions of poor and starving peoples. . . . The blood is so much, you know, it runs in rivers. It dries up, too; it cakes all over me; sometimes I feel that there is not enough soap in the whole world to cleanse me from the things that I did do in your name.”21 He then went on to build his case. Budhoo accused the fund of using statistics as ”lethal” weapons. He exhaustively doc.u.mented how, as a fund employee in the mid-eighties, he was involved in elaborate ”statistical malpractices” to exaggerate the numbers in IMF reports on oil-rich Trinidad and Tobago in order to make the country look far less stable than it actually was. Budhoo contended that the IMF had more than doubled a crucial statistic measuring the labor costs in the country, making it appear highly unproductive -even though, as he said, the fund had the correct information on hand. In another instance, he claimed that the fund ”invented, literally out of the blue,” huge unpaid government debts.22 Those ”gross irregularities,” which Budhoo claims were deliberate and not mere ”sloppy calculations,” were taken as fact by the financial markets, which promptly cla.s.sified Trinidad as a bad risk and cut off its financing. The country's economic problems-triggered by a drop in the price of oil, its primary export-quickly became calamitous, and it was forced to beg the IMF for a bailout. The fund then demanded that it accept what Budhoo described as the IMF's ”deadliest medicine”: layoffs, wage cuts and the ”whole gamut” of structural adjustment policies. He described the process as the ”deliberate blocking of an economic lifeline to the country through subterfuge” in order to see ”Trinidad and Tobago destroyed economically first, and converted thereafter.”

In his letter, Budhoo, who died in 2001, made it clear that his dispute was over more than the treatment of one country by a handful of officials. He characterized the IMF's entire program of structural adjustment as a form of ma.s.s torture in which ” 'screaming-in-pain' governments a

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