What is the Shock Doctrine Chicago School of Economics, and how it has Adversely Affected the World’s Economies?

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I just finished reading the book “The Shock Doctrine”, and I have to admit it was an eye opener. The whole concept of Shock Economics seems to me to be quite barbaric and cold hearted. I have included a brief synopsis of the book to give you an idea of the subject matter covered in it. While the book discusses some very interesting material, it does tend to drone on, and it took quite a biot of effort to get through the entire volume. Though I am not hear to critque the book, just to discuss the subject matter.

One of the first quotes that I came across in the book, while it did not come as a great shock to me, it did help to show how little value people in power place on the sufferings of the common man. This quote is from Richard Baker, a Republican Congressman and it was made after Hurricane Katrina, “We finally cleaned up the public housing in New Orleans. We couldn’t do it , but God did.” The next quote is by Joseph Conjura a wealthy developer and was in reply to the statement made by Richard Baker, “I think we have a clean slate to start agin. And with that clean slate we have some very big opportunities.”

Disaster capitalist have no interest in repairing what was, but replacing it with new things.

In THE SHOCK DOCTRINE, Naomi Klein explodes the myth that the global free market triumphed democratically. Exposing the thinking, the money trail and the puppet strings behind the world-changing crises and wars of the last four decades, The Shock Doctrine is the gripping story of how America’s “free market” policies have come to dominate the world– through the exploitation of disaster-shocked people and countries.

At the most chaotic juncture in Iraq’s civil war, a new law is unveiled that would allow Shell and BP to claim the country’s vast oil reserves…. Immediately following September 11, the Bush Administration quietly out-sources the running of the “War on Terror” to Halliburton and Blackwater…. After a tsunami wipes out the coasts of Southeast Asia, the pristine beaches are auctioned off to tourist resorts…. New Orleans’s residents, scattered from Hurricane Katrina, discover that their public housing, hospitals and schools will never be reopened…. These events are examples of “the shock doctrine”: using the public’s disorientation following massive collective shocks – wars, terrorist attacks, or natural disasters — to achieve control by imposing economic shock therapy. Sometimes, when the first two shocks don’t succeed in wiping out resistance, a third shock is employed: the electrode in the prison cell or the Taser gun on the streets.

Based on breakthrough historical research and four years of on-the-ground reporting in disaster zones, The Shock Doctrine vividly shows how disaster capitalism – the rapid-fire corporate reengineering of societies still reeling from shock – did not begin with September 11, 2001. The book traces its origins back fifty years, to the University of Chicago under Milton Friedman, which produced many of the leading neo-conservative and neo-liberal thinkers whose influence is still profound in Washington today. New, surprising connections are drawn between economic policy, “shock and awe” warfare and covert CIA-funded experiments in electroshock and sensory deprivation in the 1950s, research that helped write the torture manuals used today in Guantanamo Bay.

The Shock Doctrine follows the application of these ideas through our contemporary history, showing in riveting detail how well-known events of the recent past have been deliberate, active theatres for the shock doctrine, among them: Pinochet’s coup in Chile in 1973, the Falklands War in 1982, the Tiananmen Square Massacre in 1989, the collapse of the Soviet Union in 1991, the Asian Financial crisis in 1997 and Hurricane Mitch in 1998.

Synopsis[edit]

The book is divided into seven parts with a total of 21 chapters.

Part 1 begins with a chapter on psychiatric shock therapy and the covert experiments conducted by the psychiatrist Ewen Cameron in collusion with the Central Intelligence Agency. The second chapter introduces Milton Friedman and his Chicago school of economics, whom Klein describes as leading a laissez-faire capitalist movement committed to creating free markets that are even less regulated than those that existed before the Great Depression.

Part 2 discusses the use of “shock doctrine” to transform South American economies in the 1970s, focusing on the 1973 coup in Chile led by General Augusto Pinochet and influenced by a prominent group of Chilean economists, known as the Chicago Boys, who had been trained at the University of Chicago in the Economics department, funded by the CIA, and advised by Milton Friedman. Klein connects torture with economic shock therapy.

Part 3 covers attempts to apply the shock doctrine without the need for extreme violence against sections of the population. Klein says that Margaret Thatcher applied mild shock “therapy” facilitated by the Falklands War, while free market reform in Bolivia was possible due to a combination of pre-existing economic crises and the charisma of Jeffrey Sachs.

Part 4 reports on how Klein thinks the shock doctrine was applied in Poland, China, South Africa, Russia, and the Four Asian Tigers. In Poland she discusses how the left-leaning trade union Solidarity won the country’s 1989 legislative elections, but subsequently employed the shock doctrine due to IMF pressure. The section on China discusses the 1989 Tiananmen Square Protests, and the liberalization of China’s economy. In South Africa she explains that the negotiations to end apartheid resulted in economic policy that went against the core of the Freedom Charter. In Russia she describes how Boris Yeltsin took power after the collapse of the Soviet Union and crafted an economic policy that turned Russia into an oligarchy. Finally, she says that during the 1997 Asian financial crisis the Tiger Nations were forced to sell off numerous state enterprises to private, foreign companies.

Part 5 introduces the “Disaster Capitalism Complex”, a complex series of networks and influence employed by private companies that allows them to profit from disasters. She mirrors this new Disaster Capitalism Complex with the Military Industrial Complex and explains that both employ the blurring of the line between private and public, through tactics like the revolving door.

Part 6 discusses the use of “shock and awe” in the 2003 invasion of Iraq and the subsequent occupation of Iraq, which Klein describes as the most comprehensive and full-scale implementation of the shock doctrine ever attempted, with mass privatization of Iraqi state-owned enterprises (including thousands of men being laid off) which is argued as contributing to the insurgency, since many of the unemployed became embittered toward the US as a result and joined insurgent groups afterward.

Part 7 is about winners and losers of economic shock therapy – how small groups will often do very well by moving into luxurious gated communities while large sections of the population are left with decaying public infrastructure, declining incomes and increased unemployment. Klein describes economic policy after Hurricane Katrina, the 2004 Sri Lanka Tsunami, and the apartheid-style policy of the Israeli government toward Palestinians.

The Conclusion details the backlash against the “shock doctrine” and economic institutions which, in Klein’s view, encourage it – like the World Bank and IMF. South America and Lebanon post-2006 are shown in a positive light, where politicians are already rolling back free-market policies, with some mention of the increased campaigning by community-minded activists in South Africa and China.

What Is an Economic Shock?

An economic shock refers to any change to fundamental macroeconomic variables or relationships that has a substantial effect on macroeconomic outcomes and measures of economic performance, such as unemployment, consumption, and inflation. Shocks are often unpredictable and are usually the result of events thought to be beyond the scope of normal economic transactions.

Economic shocks have widespread and lasting effects on the economy, and, according to real business cycle theory (RBC), are thought to be the root cause of recessions and economic cycles.

Understanding Economic Shocks

Economic shocks can be classified as primarily impacting the economy through either the supply or demand side. They can also be classified by their origin within or impact upon a specific sector of the economy. Finally, shocks can be considered either real or nominal shocks, depending on whether they originate from changes in real economic activity or changes in the nominal values of financial variables.

Because markets and industries are interconnected in the economy, large shocks to either supply or demand in any sector of the economy can have a far-reaching macroeconomic impact. Economic shocks can be positive (helpful) or negative (harmful) to the economy, though for the most part economists, and normal people, are more concerned about negative shocks.

Types of Economic Shocks

Supply Shocks

A supply shock is an event that makes production across the economy more difficult, more costly, or impossible for at least some industries. A rise in the cost of important commodities such as oil can cause fuel prices to skyrocket, making it expensive to use for business purposes.

Natural disasters or weather events, such as hurricanes, floods, or major earthquakes, can induce supply shocks, too, as can man-made events such as wars or major terrorism incidents. Economists sometimes refer to most supply-side shocks as “technological shocks.”

Demand Shocks

Demand shocks happen when there is a sudden and considerable shift in the patterns of private spending, either in the form of consumer spending or investment spending from businesses. An economic downturn in the economy of a major export market can create a negative shock to business investment, particularly in export industries.

A crash in stock or home prices can cause a negative demand shock as households react to a loss of wealth by cutting back sharply on consumption spending. Supply shocks to consumer commodities with price inelastic demand, such as food and energy, can also lead to a demand shock by reducing consumers’ real incomes. Economists sometimes refer to demand-side shocks as “non-technological shocks.”

Financial Shocks

A financial shock is one that originates from the financial sector of the economy. Because modern economies are so deeply dependent on the flow of liquidity and credit to fund normal operations and payrolls, financial shocks can impact every industry in an economy.

A stock market crash, a liquidity crisis in the banking system, unpredictable changes in monetary policy, or the rapid devaluation of a currency would be examples of financial shocks. Financial shocks are the primary form of nominal shocks, though their effects clearly can have a serious impact on real economic activity.

Policy Shocks

Policy shocks are changes in government policy that have a profound economic effect. The economic impact of a policy shock might even be the goal of a government action. It could be an expected side effect or an entirely unintended consequence as well.

Fiscal policy is, in effect, a deliberate economic demand shock, positive or negative, intended to smooth out aggregate demand over time. The imposition of tariffs and other barriers to trade can create a positive shock for domestic industries but a negative shock to domestic consumers. Sometimes even a potential change in policy or an increase in uncertainty about future policy can create an economic shock before or without an actual policy change.

Technology Shocks

A technology shock results from technological developments that affect productivity. The introduction of computers and internet technology and the resulting increase in productivity across many different occupations is an example of a positive technology shock.

Economists often use the term technology in a much broader sense, so that many of the above examples of economic shocks, such as a rise in energy prices, would also fall under the category of technology shocks. However, people also often refer to shocks specifically originating from the technology sector as technology shocks.

In economics, shock therapy is a group of policies intended to be implemented simultaneously in order to liberalize the economy, including liberalization of all prices, privatization, trade liberalization, and stabilization via tight monetary policies and fiscal policies. In the case of post-Communist states, it was implemented in order to transition from a command economy to a market economy.

Overview

Shock therapy is a program intended to economically liberalize a mixed economy or transition a planned economy or developmentalist economy to a free-market economy through sudden and dramatic neoliberal reform. Shock therapy policies generally include ending price controls, stopping government subsidies, privatizing state-owned industries, and tighter fiscal policies, such as higher tax rates and lowered government spending. In essence, shock therapy policies can be distilled to price liberalization accompanied by strict austerity.

The first instance of shock therapy was the neoliberal reforms of Chile under Pinochet, carried out after the military coup by Augusto Pinochet. The reforms were based on the liberal economic ideas centered on the University of Chicago, which became known as the Chicago Boys. The term is also applied to Bolivia‘s case. Bolivia successfully tackled hyperinflation in 1985 under President Victor Paz Estenssoro and Minister of Planning Gonzalo Sánchez de Lozada, using the ideas of economist Jeffrey Sachs.

Economic liberalism rose to prominence after the 1960s and liberal shock therapy became increasingly used as a response to economic crises, for example by the International Monetary Fund (IMF) in the 1997 Asian Financial Crisis. Shock therapy has been controversial, with its proponents arguing that it helped to end economic crises, stabilized economies, and paved the way for economic growth, while its critics including economist Joseph Stiglitz believed that it helped deepen them unnecessarily and created unnecessary social suffering.

In post-Soviet Russia and other post-Communist states, neoliberal reforms based on the Washington Consensus resulted in a surge in excess mortality and decreasing life expectancy, along with rising economic inequality, corruption, and poverty. Isabella Weber of the University of Massachusetts said: “As a result of shock therapy, Russia experienced a rise in mortality beyond that of any previous peacetime experiences of an industrialized country.” The Gini ratio increased by an average of 9 points for all post-Communist states. The average post-Communist state had returned to 1989 levels of per-capita GDP by 2005, although some are still far behind that. In Russia, the average real income for 99 percent of people was lower in 2015 than in 1991. According to William Easterly, successful market economies rest on a framework of law, regulation, and established practice, which cannot be instantaneously created in a society that was formerly authoritarian, heavily centralised, and subject to state ownership of assets. German historian Philipp Ther asserted that the imposition of shock therapy had little to do with future economic growth.

West Germany, 1948

Background

Germany ended the European Theatre of World War II with its unconditional surrender on the 8 May 1945. April 1945 to July 1947 saw the Allied occupation of Germany implement Joint Chiefs of Staff directive 1067 (JCS 1067). This directive aimed to transfer Germany’s economy from one centered on heavy industry to a pastoral one to prevent Germany from having the capacity for war. Civilian industries that might have military potential, which in the modern era of “total war” included virtually all, were severely restricted. The restriction of the latter was set to Germany’s approved peacetime needs, which were set on the average European standard. To achieve this, each type of industry was subsequently reviewed to see how many factories Germany required under these minimum level of industry requirements.

It soon became obvious that this policy was not sustainable. Germany could not grow enough food for itself, and malnutrition was becoming increasingly common. The European post-war economic recovery did not materialise and it became increasingly obvious that the European economy had depended on German industry. In July 1947, President Harry S. Truman rescinded on “national security grounds” the punitive JCS 1067, which had directed the U.S. forces of occupation in Germany to “take no steps looking toward the economic rehabilitation of Germany.” It was replaced by JCS 1779, which instead stressed that “[a]n orderly, prosperous Europe requires the economic contributions of a stable and productive Germany.”

By 1948, Germany suffered from rampant hyperinflation. The currency of the time (the Reichsmark) had no public confidence, and thanks to that and price controls, black market trading boomed and bartering proliferated. Banks were over their heads in debt and surplus currency abounded. Thanks to the introduction of JCS 1779 and the first Allied attempts to set up German governance, something could be done about this. Ludwig Erhard, an economist, who had spent much time working on the problem of post war recovery, had worked his way up the administration created by the occupying American forces until he became the Director of Economics in the Bizonal Economic Council in the joint British and American occupied zones (which later, with the addition of the French occupied territory, became the basis for West Germany).

Economic reforms

Currency reform took effect on June 20, 1948, through the introduction of the Deutsche Mark to replace the Reichsmark and by transferring to the Bank deutscher Länder the sole right to print money.

Under the German Currency Conversion Law on 27 June, private non-bank credit balances were converted at a rate of 10 RM to 1 DM, with half remaining in a frozen bank account. Although the money stock was very small in terms of national product, the adjustment in the price structure immediately led to sharp price increases, fueled by the high velocity of money through the system. As a result, on 4 October, the military governments wiped out 70% of the remaining frozen balances, resulting in an effective exchange of 10:0.65. Holders of financial assets (including many small-time savers) were dispossessed and the banks’ debt in Reichsmarks was eliminated, transferred instead into claims on the Lander and later the Federal Government. Wages, rents, pensions and other recurring liabilities were transferred at 1:1. On the day of the currency reform, Ludwig Erhard announced, despite the reservations of the Allies, that rationing would be considerably relaxed and price controls abolished.

Results

In the short term, the currency reforms and abolition of price controls helped end hyperinflation. The new currency enjoyed considerable confidence and was accepted by the public as a medium of payment. The currency reforms had ensured that money was once scarcer, and the relaxation of price controls created incentives for production, sales and earning this money. The removal of price controls also meant shops filled up with goods again, which was a huge psychological factor in the adoption of the new currency.

As would later also occur in the post-Soviet states, shock therapy resulted in redistribution from the bottom-up, benefiting those who held non-monetary assets. Although Erhard’s price liberalization excluded rents and essential goods, it still caused an increase in inflation and resulted in a general strike. A turn from a free market to a social market economy followed under the Jedermann Programm, and by late 1948 “the German transition followed a dual-track pattern with a planned core and a market-coordinated periphery.”

Chile, 1975

Economic reforms

The government welcomed foreign investment and eliminated protectionist trade barriers, forcing Chilean businesses to compete with imports on an equal footing, or else go out of business. The main copper company, Codelco, remained in government hands due to the nationalization of copper completed by Salvador Allende but private companies were allowed to explore and develop new mines.

In the short term, the reforms stabilized the economy. In the long term, Chile has had higher GDP growth than its neighboring countries but with a noticeable increase of income inequality.

Bolivia, 1985

Background

Between 1979 and 1982, Bolivia was ruled by a series of coups, countercoups, and caretaker governments, including the notorious dictatorship of Luis García Meza Tejada. This period of political instability set the stage for the hyperinflation that later crippled the country. In October 1982, the military convened a Congress elected in 1980 to lead choose a new Chief Executive. The country elected Hernán Siles Zuazo, under whose term the galloping hyperinflationary process started. Zuazo received scant support from the political parties or members of congress, most of whom were eager to flex their newly acquired political muscles after so many years of authoritarianism. Zuazo refused to take extra-constitutional powers (as previous military governments had done in similar crises) and concentrated on preserving the democracy instead, shortening his term by one year in response to his unpopularity and the crisis racking his country. On 6 August 1985, President Víctor Paz Estenssoro was elected.

Prelude to Decree 21060

On 29 August, just three weeks after the election of Víctor Paz Estenssoro as President, and the appointment of Gonzalo Sánchez de Lozada, the architect of shock therapy, as Planning Minister, Decree 21060 was passed. Decree 21060 covered all aspects of the Bolivian economy, later referred to as shock therapy. In the run-up to the decree, Gonzalo Sánchez de Lozada recalled what the new government set out to do, saying: “People felt you couldn’t stop hyperinflation in a democracy; that you had to have a military government, an authoritarian government to take all these tough steps that had to be taken. Bolivia was the first country to stop hyperinflation in a democracy without depriving people of their civil rights and without violating human rights.”

About the three weeks between the inauguration of the President and decree 21060, he said: “We spent one week saying, ‘Do we really need to do something? Do we really need radical change?’ and then another week debating shock treatment versus gradualism. Finally, we took one week to write it all up.” Once they had decided to act, de Lozada recalled of “a big discussion whether you could stop hyperinflation or inflation, period, by taking gradual steps”. He added: “Many people said you had to take it slowly. You have to cure the patient. Shock treatment means you have a very sick patient [and] you have to operate before the patient dies. You have to get the cancer out, or you have to stop the infection.” He explained: “That’s why we coined the phrase that inflation is like a tiger and you have only one shot; if you don’t get it with that one shot, it’ll get you. You have a credibility that you have to achieve. If you keep to gradualism, people don’t believe you, and the hyperinflation just keeps roaring stronger. So shock therapy is get it over, get it done, stop hyperinflation, and then start rebuilding your economy so you achieve growth.”

Decree 21060

Decree 21060 included the following measures:

Allowing the peso to float.
Ending price controls and eliminating subsidies to the public sector.
Laying off two-thirds of the employees of the state oil and tin companies and freezing the pay of the remaining employees and public sector workers.
Liberalising import tariffs by imposing a uniform 20% tariff.
Stopping the payment of foreign debt under a deal negotiated with the IMF.

Alberto Fujimori served as President of Peru from 28 July 1990 to 17 November 2000. A controversial figure, Fujimori has been credited with the creation of Fujimorism, defeating the Shining Path insurgency in Peru and restoring its macroeconomic stability. However, he was criticized for his authoritarian way of ruling the country (especially after 1992) and was accused of human rights violations. Even amid his prosecution in 2008 for crimes against humanity relating to his presidency, two-thirds of Peruvians polled voiced approval for his leadership in that period.

Fujimori’s economic policy was largely adopted from the advice of Peruvian economist Hernando de Soto, who prescribed economic guidelines – including the loosening of economic regulation, the introduction of austerity measures and the utilization of neoliberal policies – that were ultimately adopted by the Fujimori administration and established in the 1993 Constitution of Peru. The policies utilized by de Soto and Fujimori resulted with increased misery for poor Peruvians as de Soto’s prescribed “Fujishock” caused increased prices and little change to the poverty rate. Eventually, the policies resulted in Peru becoming macro-economically stable following the period of price controls and increased regulation established during the Lost Decade.

Background

A dark horse candidate, Fujimori won the 1990 presidential election under the banner of the new party Cambio 90 (“cambio” meaning “change”), beating world-renowned writer Mario Vargas Llosa in a surprising upset. He capitalized on profound disenchantment with previous president Alan García and his American Popular Revolutionary Alliance party (APRA). He exploited popular distrust of Vargas Llosa’s identification with the existing Peruvian political establishment, and uncertainty about Vargas Llosa’s plans for neoliberal economic reforms. Fujimori won much support from the poor, who had been frightened by Vargas Llosa’s austerity proposals.

During the campaign, Fujimori was nicknamed El Chino, which roughly translates to “Chinaman“; it is common for people of any East Asian descent to be called chino in Peru, as elsewhere in Latin America, both derogatively and affectionately. Although he is of Japanese heritage, Fujimori has suggested that he was always gladdened by the term, which he perceived as a term of affection. With his election victory, he became the first person of East Asian descent to become head of government of a Latin American nation, and just the third of East Asian descent to govern a South American state, after Arthur Chung of Guyana and Henk Chin A Sen of Suriname (each of whom had served as head of state, rather than head of government).

First term: July 28, 1990 – July 28, 1995

Fujishock

During his first term in office, Fujimori enacted wide-ranging neoliberal reforms, known as Fujishock. During the presidency of Alan García, the economy had entered a period of hyperinflation and the political system was in crisis due to the country’s internal conflict, leaving Peru in “economic and political chaos”. It was Fujimori’s objective to pacify the nation and restore economic balance. This program bore little resemblance to his campaign platform and was in fact more drastic than anything Vargas Llosa had proposed. Nonetheless, the Fujishock succeeded in restoring Peru to the global economy, though not without immediate social cost.

The immediate target of the first Fujimori Administration, was to stop the runaway course of inflation. Beyond that, the goals included repudiating protection and import substitution, returning to full participation in the world trading and financial systems, eliminating domestic price controls and subsidies, raising public revenue and holding government spending strictly to the levels of current revenue, initiating a social emergency program to reduce the shock of adjustment for the poor, and devoting a higher share of the country’s resources to rural investment and correction of the causes of rural poverty. In practice, new measures came out in bits and pieces, dominated by immediate concern to stop inflation; actions taken in the first year did not complete the program. Reforms have permitted an economic growth since 1993, except for a slump after the 1997 Asian financial crisis.

Fujimori’s initiative relaxed private sector price controls, drastically reduced government subsidies and government employment, eliminated all exchange controls, and also reduced restrictions on investment, imports, and capital flow. Tariffs were radically simplified, the minimum wage was immediately quadrupled, and the government established a $400 million poverty relief fund. The latter measure seemed to anticipate the economic agony that was to come, as electricity costs quintupled, water prices rose eightfold, and gasoline prices rose 3000%.

The IMF was impressed by these measures, and guaranteed loan funding for Peru. Inflation began to fall rapidly and foreign investment capital flooded in. Fujimori’s privatization campaign featured the selling off of hundreds of state-owned enterprises, and the replacing of the country’s troubled currency, the inti, with the Nuevo Sol. The Fujishock restored macroeconomic stability to the economy and triggered a considerable long-term economic upturn in the mid-1990s. In 1994, the Peruvian economy grew at a rate of 13%, faster than any other economy in the world.

1992 Peruvian coup d’état

During Fujimori’s first term in office, APRA and Vargas Llosa’s party, FREDEMO, remained in control of both chambers of Congress (the Chamber of Deputies and Senate), hampering the government’s ability to enact economic reforms. Fujimori also found it difficult to combat the threat posed by the Maoist guerrilla organization Shining Path (Spanish: Sendero Luminoso), due largely to what he perceived to be the intransigence and obstructionism of Congress. By March 1992, Congress met with the approval of only 17% of the electorate, according to one poll (the presidency stood at 42%, in the same poll).

In response to the political deadlock, on 5 April 1992, Fujimori with the support of the military carried out a presidential coup, also known as the autogolpe (auto-coup or self-coup) or Fujigolpe (Fuji-coup) in Peru. He shut down Congress, suspended the constitution, and purged the judiciary. The coup was welcomed by the public, according to numerous polls. Not only was the coup itself marked by favorable public opinion in several independent polls, but also public approval of the Fujimori administration jumped significantly in the wake of the coup. Fujimori often cited this public support in defending the coup, which he characterized as “not a negation of real democracy, but on the contrary… a search for an authentic transformation to assure a legitimate and effective democracy.” Fujimori believed that Peruvian democracy had been nothing more than “a deceptive formality – a facade”; he claimed the coup was necessary to break with the deeply entrenched special interests that were hindering him from rescuing Peru from the chaotic state in which García had left it. Fujimori’s coup was immediately met with the near-unanimous condemnation by the international community. The Organization of American States denounced the coup and demanded a return to “representative democracy“, despite Fujimori’s claims that his coup represented a “popular uprising”. Various foreign ministers of OAS member states reiterated this condemnation of the autogolpe. They proposed an urgent effort to promote the re-establishment of “the democratic institutional order” in Peru. Following negotiations involving the OAS, the government, and opposition groups, Alberto Fujimori’s initial response was to hold a referendum to ratify the auto-coup, which the OAS rejected. Fujimori then proposed scheduling elections for a Democratic Constituent Congress (CCD), which would be charged with drafting a new constitution, to be ratified by a national referendum. Despite the lack of consensus among political forces in Peru regarding this proposal, the ad hoc OAS meeting of ministers nevertheless approved Fujimori’s offer in mid-May, and elections for the CCD were held on 22 November 1992.

Various states acted to condemn the coup individually. Venezuela broke off diplomatic relations, and Argentina withdrew its ambassador. Chile joined Argentina in requesting that Peru be suspended from the Organization of American States. International financiers delayed planned or projected loans, and the United States, Germany and Spain suspended all non-humanitarian aid to Peru. The coup appeared to threaten the economic recovery strategy of reinsertion, and complicated the process of clearing arrears with the International Monetary Fund.

Whereas Peruvian–U.S. relations early in Fujimori’s presidency had been dominated by questions of coca eradication, Fujimori’s autogolpe immediately became a major obstacle to international relations, as the United States immediately suspended all military and economic aid to Peru, with exceptions for counter-narcotic and humanitarian-related funds. Two weeks after the self-coup, the George H.W. Bush administration changed its position and officially recognized Fujimori as the legitimate leader of Peru.

Post-coup period

With FREDEMO dissolved and APRA’s leader, Alan García, exiled to Colombia, Fujimori sought to legitimize his position. He called elections for a Democratic Constitutional Congress that would serve as a legislature and a constituent assembly. While APRA and Popular Action attempted to boycott this, the Popular Christian Party (PPC, not to be confused with PCP Partido Comunista del Peru) and many left-leaning parties participated in this election. His supporters won a majority in this body, and drafted a new constitution in 1993. A referendum was scheduled, and the coup and the Constitution of 1993 were approved by a narrow margin of between four and five percent.

Later in the year, on 13 November, there was a failed military coup, led by General Jaime Salinas Sedó. Salinas asserted that his efforts were a matter of turning Fujimori over for trial, for violating the Peruvian constitution.

In 1994, Fujimori separated from his wife Susana Higuchi in a noisy, public divorce. He formally stripped her of the title First Lady in August 1994, appointing their elder daughter First Lady in her stead. Higuchi publicly denounced Fujimori as a “tyrant” and claimed that his administration was corrupt. They formally divorced in 1995.

Second term: July 28, 1995 – July 28, 2000

The 1993 Constitution allowed Fujimori to run for a second term, and in April 1995, at the height of his popularity, Fujimori easily won reelection with almost two-thirds of the vote. His major opponent, former Secretary-General of the United Nations Javier Pérez de Cuéllar, won only 22 percent of the vote. Fujimori’s supporters won comfortable majorities in the legislature. One of the first acts of the new congress was to declare an amnesty for all members of the Peruvian military or police accused or convicted of human rights abuses between 1980 and 1995.

During his second term, Fujimori signed a peace agreement with Ecuador over a border dispute that had simmered for more than a century. The treaty allowed the two countries to obtain international funds for developing the border region. Fujimori also settled some unresolved issues with Chile, Peru’s southern neighbor, outstanding since the Treaty of Lima of 1929.

The 1995 election was the turning point in Fujimori’s career. Peruvians now began to be more concerned about freedom of speech and the press. However, before he was sworn in for a second term, Fujimori stripped two universities of their autonomy and reshuffled the national electoral board. This led his opponents to call him “Chinochet,” a reference to his previous nickname and to Chilean ruler Augusto Pinochet.

According to a poll by the Peruvian Research and Marketing Company conducted in 1997, 40.6% of Lima residents considered President Fujimori an authoritarian.

High growth during Fujimori’s first term petered out during his second term. “El Niño” phenomena had a tremendous impact on the Peruvian economy during the late 1990s. Nevertheless, total GDP growth between 1992 and 2001, inclusive, was 44.60%, that is, 3.76% per annum; total GDP per capita growth between 1991 and 2001, inclusive, was 30.78%, that is, 2.47% per annum. Also, studies by INEI, the national statistics bureau show that the number of Peruvians living in poverty increased dramatically (from 41.6% to more than 70%) during Alan García’s term, but they actually decreased (from more than 70% to 54%) during Fujimori’s term. Furthermore, FAO reported Peru reduced undernourishment by about 29% from 1990 to 1992 to 1997–99.

Peru was reintegrated into the global economic system, and began to attract foreign investment. The sell-off of state-owned enterprises led to improvements in some service industries, notably local telephony, mobile telephony and Internet. For example, before privatization, a consumer or business would need to wait up to 10 years to get a local telephone line installed from the monopolistic state-run telephone company, at a cost of $607 for a residential line. A couple of years after privatization, the wait was reduced to just a few days. Peru’s Physical land based telephone network had a dramatic increase in telephone penetration from 2.9% in 1993 to 5.9% in 1996 and 6.2% in 2000, and a dramatic decrease in the wait for a telephone line. Average wait went from 70 months in 1993 (before privatization) to two months in 1996 (after privatization). Privatization also generated foreign investment in export-oriented activities such as mining and energy extraction, notably the Camisea gas project and the copper and zinc extraction projects at Antamina.

By the end of the decade, Peru’s international currency reserves were built up from nearly zero at the end of García’s term to almost US$10 billion. Fujimori also left a smaller state bureaucracy and reduced government expenses (in contrast to the historical pattern of bureaucratic expansion), a technically minded (but widely perceived as politicized) administration of public entities like SUNAT (the tax collection agency), a large number of new schools (not only in Lima but in Peru’s small towns), more roads and highways, and new and upgraded communications infrastructure.These improvement led to the revival of tourism, agroexport, industries and fisheries.

In addition to the nature of democracy under Fujimori, Peruvians were becoming increasingly interested in the myriad criminal allegations involving Fujimori and his chief of the National Intelligence Service, Vladimiro Montesinos. A 2002 report by Health Minister Fernando Carbone would later suggest that Fujimori was involved in the forced sterilizations of up to 300,000 indigenous women from 1996 to 2000, as part of a population control program. A 2004 World Bankpublication would suggest that, in this period, Montesinos’ abuse of the power accorded him by Fujimori “led to a steady and systematic undermining of the rule of law”.

Third term: July 28, 2000 – November 17, 2000

The 1993 constitution limits a presidency to two terms. Shortly after Fujimori began his second term, his supporters in Congress passed a law of “authentic interpretation” which effectively allowed him to run for another term in 2000. A 1998 effort to repeal this law by referendum failed. In late 1999, Fujimori announced that he would run for a third term. Peruvian electoral bodies, which were politically sympathetic to Fujimori, accepted his argument that the two-term restriction did not apply to him, as it was enacted while he was already in office.

Exit polls showed Fujimori fell short of the 50% required to avoid an electoral runoff, but the first official results showed him with 49.6% of the vote, just short of outright victory. Eventually, Fujimori was credited with 49.89%—20,000 votes short of avoiding a runoff. Despite reports of numerous irregularities, the international observers recognized an adjusted victory of Fujimori. His primary opponent, Alejandro Toledo, called for his supporters to spoil their ballots in the runoff by writing “No to fraud!” on them (voting is mandatory in Peru). International observers pulled out of the country after Fujimori refused to delay the runoff.

In the runoff, Fujimori won with 51.1% of the valid votes. While votes for Toledo declined from 40.24% of the valid votes cast in the first round to 25.67% of the valid votes in the second round, invalid votes jumped from 2.25% of the total votes cast in the first round to 29.93% of total votes in the second round. The large percentage of votes cast as invalid suggested that many Peruvians took Toledo’s advice to spoil their ballots.

(The 51.1 and 25 figures are as percentages of valid votes, that is, excluding invalid votes. Thus, there were 29.93% invalid votes and 70.07% valid votes. Of this 70.07%, 51.1% were for Fujimori and 25.67% for Toledo.)

Although Fujimori had won the runoff with only a bare majority, rumors of irregularities led most of the international community to shun his third swearing-in on 28 July. For the next seven weeks, there were daily demonstrations in front of the presidential palace.

As a conciliatory measure, Fujimori appointed former opposition candidate Federico Salas as the new prime minister. However, opposition parties in Parliament refused to support this move while Toledo campaigned vigorously to have the election annulled. At this point, a corruption scandal involving Vladimiro Montesinos broke out, and exploded into full force on the evening of 14 September 2000, when the cable television station Canal N broadcast footage of Montesinos apparently bribing opposition congressman Alberto Kouri for his defection to Fujimori’s Perú 2000 party. This video was presented by Fernando Olivera, leader of the FIM (Independent Moralizing Front), who purchased it from one of Montesinos’s closest allies (nicknamed by the Peruvian press El Patriota).

Fujimori’s support virtually collapsed, and a few days later he announced in a nationwide address that he would shut down the SIN and call new elections—in which he would not be a candidate. On 10 November, Fujimori won approval from Congress to hold elections on 8 April 2001. On 13 November, Fujimori left Peru for a visit to Brunei to attend the Asia-Pacific Economic Cooperation forum. On 16 November, Valentín Paniagua took over as president of Congress after the pro-Fujimori leadership lost a vote of confidence. On 17 November, Fujimori traveled from Brunei to Tokyo, where he submitted his presidential resignation via fax. The Peruvian Congress refused to accept his resignation, voting instead 62 yea –9 nay to remove Fujimori from the office of the president of Peru on the grounds that he was “permanently morally disabled.”

On November 19, Fujimori’s government ministers presented their resignations en masse. Because Fujimori’s first vice president, Francisco Tudela, had resigned a few days earlier, his successor Ricardo Márquez was called the new president. Congress, however, refused to recognize him, as he was an ardent Fujimori loyalist; Márquez resigned two days later. Paniagua was voted by the Peruvian Congress as the next in line, and became interim president to oversee the April elections.

Reception

Criticism

Detractors have observed that Fujimori was able to encourage large-scale mining projects with foreign corporations and push through mining-friendly legislation laws because the post auto-coup political picture greatly facilitated the process.

Some analysts state that some of the GDP growth during the Fujimori years reflects a greater rate of extraction of non-renewable resources by transnational companies; these companies were attracted by Fujimori by means of near-zero royalties, and, by the same fact, little of the extracted wealth has stayed in the country. Peru’s mining legislation, they claim, has served as a role model for other countries that wish to become more mining-friendly.

Fujimori’s privatization program also remains shrouded in controversy. A congressional investigation in 2002, led by socialist opposition congressman Javier Diez Canseco, stated that of the US$9 billion raised through the privatizations of hundreds of state-owned enterprises, only a small fraction of this income ever benefited the Peruvian people.

The one instance of organised labour‘s success in impeding reforms, namely the teacher’s union resistance to education reform, was based on traditional methods of organisation and resistance: strikes and street demonstrations.

Some scholars claim that Fujimori’s government became a “dictatorship” after the auto-coup, permeated by a network of corruption organized by his associate Montesinos, who now faces dozens of charges that range from embezzlement to drug trafficking to murder (Montesinos is currently on trial in Lima). Fujimori’s style of government has also been described as “populist authoritarianism”. Numerous governments and human rights organizations such as Amnesty International, have welcomed the extradition of Fujimori to face human rights charges. As early as 1991, Fujimori had himself vocally denounced what he called “pseudo-human rights organizations” such as Amnesty International and Americas Watch, for allegedly failing to criticize the insurgencies targeting civilian populations throughout Peru against which his government was struggling.

In the 2004 Global Transparency Report, Fujimori made into the list of the World’s Most Corrupt Leaders. He was listed seventh and he was said to have amassed $600 million.

Popular support

Fujimori still enjoys a measure of support within Peru. A poll conducted in March 2005 by the Instituto de Desarrollo e Investigación de Ciencias Económicas (IDICE) indicated that 12.1% of the respondents intended to vote for Fujimori in the 2006 presidential election. A poll conducted on 25 November 2005, by the Universidad de Lima indicated a high approval (45.6%) rating of the Fujimori period between 1990 and 2000, attributed to his counterinsurgency efforts (53%).

According to a more recent Universidad de Lima survey, Fujimori still retains public support, ranking fifth in personal popularity among other political figures. Popular approval for his decade-long presidency (1990–2000) has reportedly grown (from 31.5% in 2002 to 49.5% in May 2007). Despite accusations of corruption and human rights violations, nearly half of the individuals interviewed in the survey approved of Fujimori’s presidential regime. In a 2007 Universidad de Lima survey of 600 Peruvians in Lima and the port of Callao, 82.6% agreed that the former president should be extradited from Chile to stand trial in Peru. During his campaign, Alejandro Toledo promised Peruvians higher wages, a fight against poverty, anti-corruption measures, higher pensions, more employment, military reform, development of tourism, and industrialization. As Peru’s top economist Pedro Pablo Kuczynski noted “Toledo comes after almost 30 years of either dictatorships or governments that weren’t so democratic. People expect Toledo to solve all the problems of the last 30 years, which included an enormous increase in relative poverty.” Toledo’s inability to fulfill many of these promises created widespread dissatisfaction. His approval ratings were consistently low throughout his presidency, sometimes sinking into single digits.

Post-Soviet states

With the exception of Belarus, the Eastern European states adopted shock therapy. Nearly all of these post-Soviet states suffered deep and prolonged recessions after shock therapy, with poverty increasing more than tenfold. The resulting crisis of the 1990s was twice as intense as the Great Depression in the countries of Western Europe and the United States in the 1930s. The hypothesized one time jump in prices intended as part of shock therapy actually led to a lengthy period of extremely high inflation with a drop in output and subsequent low growth rates. Shock therapy devalued the modest wealth accumulated by individuals under socialism and amounted to a regressive redistribution of wealth in favor of elites who held non-monetary assets. Contrary to the expectation of shock therapy proponents, Russia’s rapid transition to the market increased corruption, rather than alleviating it.

The cost to human life was profound, as Russia suffered the worst peace time increase in mortality experienced by any industrialized country. For the years 1987 and 1988, roughly 2% of Russia population lived in poverty (surviving on less than $4 a day), by 1993-1995, it was 50%. According to Kristen Ghodsee and Mitchell A. Orenstein, a significant body of scholarship demonstrates that the rapid privatization schemes associated with neoliberal economic reforms did result in poorer health outcomes in former Eastern Bloc countries during the transition to capitalism, with the World Health Organization itself stating “IMF economic reform programs are associated with significantly worsened tuberculosis incidence, prevalence, and mortality rates in post-communist Eastern European and former Soviet countries.” They add that Western institutions and economists were indifferent to the consequences of the shock therapy they were advocating as their priorities included permanently dismantling the state socialist system and integrating these countries into the emerging global capitalist economy, and that many citizens of the former Eastern Bloc countries came to believe that Western powers were deliberately inflicting this suffering upon them as punishment for defying Western ideals about liberal democracy and market economics.

Arguments exist whether these adverse outcomes were due to the general collapse of the Soviet economy (which began before 1989) or the policies subsequently implemented or a combination of both. Sachs himself resigned from his post as advisor, after stating that he felt his advice was unheeded and his policy recommendations were not actually put into practice. In addition to his criticism of the way in which Russian authorities handled the reforms, Sachs has also criticized the U.S. and the IMF for not providing large-scale financial aid to Russia, which he felt was integral to the success of the reforms.

Advocates of shock therapy view Poland as the success story of shock therapy in the post-communist states and claim that shock therapy was not applied appropriately in Russia, while critics claim that Poland’s reforms were the most gradualist of all the countries and contrast China’s reforms with those of Russia and their vastly different effects. Some research suggests that the very fast pace of ‘shock therapy’ privatization mattered and had a particularly harsh effect on the death rate in Russia.

Background in Poland

After the failure of the Communist government in the elections of June 4, 1989, it became clear that the previous regime was no longer legitimate. The unofficial talks at Magdalenka and then the Polish Round Table talks of 1989 allowed for a peaceful transition of power to the democratically elected government.

The economic situation was that inflation was high, peaking at around 600%, and the majority of state-owned monopolies and holdings were largely ineffective and completely obsolete in terms of technology. Although there was practically no unemployment in Poland, wages were low and the shortage economy led to a lack of even the most basic foodstuffs in the shops. Unlike the other post-communist countries, however, Poland did have some experience with a capitalist economy, as there was still private property in agriculture and food was still sold in farmers’ markets.

In September 1989 a commission of experts was formed under the presidency of Leszek Balcerowicz, Poland’s leading economist, Minister of Finance and deputy Premier of Poland. Among the members of the commission were Jeffrey Sachs, Stanisław Gomułka, Stefan Kawalec and Wojciech Misiąg.

Balcerowicz Plan

On October 6 the program was presented on public television and in December the Sejm passed a packet of 11 acts, all of which were signed by the president on December 31, 1989. These were:

Act on Financial Economy Within State-owned Companies, which allowed for state-owned businesses to declare bankruptcy and ended the fiction by which companies were able to exist even if their effectiveness and accountability was close to none.
Act on Banking Law, which forbade financing the state budget deficit by the national central bank and forbade the issue of new currency.
Act on Credits, which abolished the preferential laws on credits for state-owned companies and tied interest rates to inflation.
Act on Taxation of Excessive Wage Rise, introducing the so-called popiwek tax limiting the wage increase in state-owned companies in order to limit hyperinflation.
Act on New Rules of Taxation, introducing common taxation for all companies and abolishing special taxes that could previously have been applied to private companies through means of administrative decision.
Act on Economic Activity of Foreign Investors, allowing foreign companies and private people to invest in Poland and export their profits abroad.
Act on Foreign Currencies, introducing internal exchangeability of the zloty and abolishing the state monopoly in international trade.
Act on Customs Law, creating a uniform customs rate for all companies.
Act on Employment, regulating the duties of unemployment agencies.
Act on Special Circumstances Under Which a Worker Could be Laid Off, protecting the workers of state firms from being fired in large numbers and guaranteeing unemployment grants and severance pay.

Privatization of companies was left until later.

Results in Poland

In the short term, the reforms smothered the building hyperinflation before it reached high levels, ended food shortages, restored goods on the shelves of shops and halved the absence of employees in the work place. However, the reforms also caused many state companies to close at once, leaving their workers unemployed, and government statistics show this change as unemployment rose from 0.3% in January 1990 (just after the reforms) to 6.5% by the end of that year, and a shrinking in the GDP for the next two consecutive years by 9.78% in the first and 7.02%.

In the long term, the reforms paved the way for economic recovery, with the GDP growing steadily to about 6–7% between 1995–7, falling to a low of 1.2% in 2001 before rising back up to the 6–7% region by 2007, often led by small service businesses, long suppressed by the Communist government. However, despite GDP indicating prosperity for Poland, the unemployment rate continued to rise steadily, peaking at 16.9% in July 1994 before steadily falling down to a low of 9.5% in August 1998 before rising once more to a high of 20.7% in February 2003, from which it had fallen until the year 2008. During the early years, the unemployment rate is thought to have been lower due to many of those claiming unemployment working in the grey (informal) economy, although this can account for no more than 5% of the unemployment rate.

Ownership of consumables (cars, TVs, VCRs, washing machines, refrigerators, personal computers, etc.) boomed, as did consumption of fruit and vegetables, meat and fish. However, the huge economic adjustment Poland underwent created massive anxiety.

As of 2008, the GNP was 77% higher than in 1989 Moreover, inequality in Poland actually decreased right after the economic reforms were implemented, although it rose back up again in later years. Today, although Poland is confronted with a variety of economic problems, it still has a higher GDP than during communist times, and a gradually developing economy. Poland was converging towards the EU in regards to income level in 1993–2004. According to Financial Times, Poland’s shock therapy paved the way for entrepreneurs and helped to build an economy that was less vulnerable to external shock than Poland’s neighbours. In 2009, while the rest of Europe was in recession, Poland continued to grow, without a single quarter of negative growth.

Theory

Origins of the term “shock therapy”

The term was popularized by Naomi Klein. In her 2007 book The Shock Doctrine, she argues that neoliberal free market policies (as advocated by the economist Milton Friedman) have risen to prominence globally because of a strategy of “shock therapy”. She argues these policies are often unpopular, result in greater inequality and are accompanied by political and social “shocks” such as military coups, state sponsored terror, sudden unemployment and the suppression of labor.

The economist Jeffrey Sachs (sometimes credited with coining the term) says he never picked the term “shock therapy”, does not much like it, and asserts that the term “was something that was overlaid by journalism and public discussion” and that the term “sounds a lot more painful in a way than what it is”. Sachs’ ideas on what has been referred by non-economists as “shock therapy” were based on studying historic periods of monetary and economic crisis and noting that a decisive stroke could end monetary chaos, often in a day.

Pace of privatization

Shock therapy proponents Sachs and Lipton argued in 1990, “The great conundrum is how to privatize a vast array of firms in a manner that is equitable, swift, politically viable, and likely to create an effective structure of corporate control.” They recommended that the pace “must be rapid, but not reckless,” and should “probably be carried out by many means.” In the view of shock therapy proponents, trade liberalization requires domestic price liberalization first; thus a “big bang” in price liberalization underlying both privatization and trade liberalization forms the “shock” in the moniker “shock therapy.”

In practice, the rapid application of shock therapy proved generally disastrous in the post-Soviet states.

Departure from “the invisible hand”

Although economists have sometimes referred to shock therapy “creating” markets, shock therapy does not in fact create such new structures or institutions. The hope among shock therapy proponents is instead that the destruction of a command or planned economy would automatically result in a market economy. The expectation was that after the command economy or planned economy was “shocked to death,” the “invisible hand” might emerge.

The expectations that a market economy would emerge following the imposition of shock therapy differ from Adam Smith’s original metaphor of the “invisible hand”. Smith viewed the market as emerging slowly as the institutions that facilitate market exchange develop, and with the “invisible hand” the price mechanism could emerge.

Illusionary shock

Illusion therapy refers to the imposition of shock economic policies on economy in a way that the society doesn’t feel the shock or assumes that the dramatic change in policies is not as shocking or radical as it is in the real world. The first experience of illusion therapy has been documented after the implementation of Iran’s subsidy reform project.

Economic shock therapy was enforced by suppressing democracy and by disappearing and torturing anyone who stood in the way.

In 2006 President George W. Bush signed the Defense Authorization Act. Tucked into its 1400 pages is a rider that went almost unnoticed at the time. It gave the president the power to declare martial law and “employ the armed forces, including the National Guard, overriding the wishes of state governors, in the evennt of a “public emergency” in order to “restore public order” and “suppress” the disorder. That emergency could be a hurricane, a mass protest (George Floyd) or a “public health emergency” (COVID-19), in which case the armycould be used to impose quarantines and to safeguard vaccine supplies. Before the act the president had these martial law powers only in the face of an insurrection.

The recipe now used for endless worldwide war is the same one that the Bush administration offered as a business prospectus in the nascent disaster capitalism complex after September 11. It is not a war that can be won by any country, but winning is not the point. The point is to create security inside fortress states bolstered by endless low-level conflict outside their walls. Secure the perimeter, protect the principal.

“Disaster Capitalism” thrives in conditions of low-intensity grinding conflict.

Palestine and Israel

What Israel has constructed is a system designed to keep workers from working, a network of open holding pens for millions of people who have been categorized as surplus humanity. This is taking place around the world, and it amounts to approximately 25 to 60 percent of the population, depending on the location and circumstances. This has been the hallmark of the Chicago School crusade since the “misery villages” began mushrooming troughout the Southern Cone in the seventies.

Resources

“The Shock Doctrine: The Rise of Disster Capitalism.” By Naomi Klein; tsd.naomiklein.org, “The Shock Doctrine.” By Naomi Klein; en.wikipedia.org, The Shock Doctrine.” By Wikipedia Editors; en.wikipedia.org, “Shock therapy (economics).” By Wikipedia Editors; en.wikipedia.org, “Economic policy of the Alberto Fujimori administration.” By Wikipedia Editors; investopedia.com, “What Is an Economic Shock & Effects of Different Types.” By Investopedia Team; “The Road to Ruin: The Global Elite’s Secret Plan dor the Next Financial Crisis.” By James Rickards;

Synopsis[edit]

What Is an Economic Shock?

Understanding Economic Shocks

Types of Economic Shocks

Supply Shocks

Demand Shocks

Financial Shocks

Policy Shocks

Technology Shocks

Overview

West Germany, 1948

Background

Economic reforms

Results

Chile, 1975

Economic reforms

Bolivia, 1985

Background

Prelude to Decree 21060

Decree 21060

Background

First term: July 28, 1990 – July 28, 1995

Fujishock

1992 Peruvian coup d’état

Post-coup period

Second term: July 28, 1995 – July 28, 2000

Third term: July 28, 2000 – November 17, 2000

Reception

Criticism

Popular support

Post-Soviet states

Background in Poland

Balcerowicz Plan

Results in Poland

Theory

Origins of the term “shock therapy”

Pace of privatization

Departure from “the invisible hand”

Illusionary shock

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