Saturday, November 17, 2007

Latin American economics:
The Nation
November 26, 2007

Latin America's Shock Resistance

By Naomi Klein

In less than two years, the lease on the largest and
most important US military base in Latin America will
run out. The base is in Manta, Ecuador, and Rafael
Correa, the country's leftist president, has pronounced
that he will renew the lease "on one condition: that
they let us put a base in Miami--an Ecuadorean base. If
there is no problem having foreign soldiers on a
country's soil, surely they'll let us have an
Ecuadorean base in the United States."

Since an Ecuadorean military outpost in South Beach is
a long shot, it is very likely that the Manta base,
which serves as a staging area for the "war on drugs,"
will soon shut down. Correa's defiant stand is not, as
some have claimed, about anti-Americanism. Rather, it
is part of a broad range of measures being taken by
Latin American governments to make the continent less
vulnerable to externally provoked crises and shocks.

This is a crucial development because for the past
thirty-five years in Latin America, such shocks from
outside have served to create the political conditions
required to justify the imposition of "shock therapy"--
the constellation of corporate-friendly "emergency"
economic measures like large-scale privatizations and
deep cuts to social spending that debilitate the state
in the name of free markets. In one of his most
influential essays, the late economist Milton Friedman
articulated contemporary capitalism's core tactical
nostrum, what I call the shock doctrine. He observed
that "only a crisis--actual or perceived--produces real
change. When that crisis occurs, the actions that are
taken depend on the ideas that are lying around."

Latin America has always been the prime laboratory for
this doctrine. Friedman first learned how to exploit a
large-scale crisis in the mid-1970s, when he advised
Chilean dictator Gen. Augusto Pinochet. Not only were
Chileans in a state of shock following Pinochet's
violent overthrow of Socialist President Salvador
Allende; the country was also reeling from severe
hyperinflation. Friedman advised Pinochet to impose a
rapid-fire transformation of the economy--tax cuts,
free trade, privatized services, cuts to social
spending and deregulation. It was the most extreme
capitalist makeover ever attempted, and it became known
as a Chicago School revolution, since so many of
Pinochet's top aides and ministers had studied under
Friedman at the University of Chicago. A similar
process was under way in Uruguay and Brazil, also with
the help of University of Chicago graduates and
professors, and a few years later, in Argentina. These
economic shock therapy programs were facilitated by far
less metaphorical shocks--performed in the region's
many torture cells, often by US-trained soldiers and
police, and directed against those activists who were
deemed most likely to stand in the way of the economic

In the 1980s and '90s, as dictatorships gave way to
fragile democracies, Latin America did not escape the
shock doctrine. Instead, new shocks prepared the ground
for another round of shock therapy--the "debt shock" of
the early '80s, followed by a wave of hyperinflation as
well as sudden drops in the prices of commodities on
which economies depended.

In Latin America today, however, new crises are being
repelled and old shocks are wearing off--a combination
of trends that is making the continent not only more
resilient in the face of change but also a model for a
future far more resistant to the shock doctrine.

When Milton Friedman died last year, the global quest
for unfettered capitalism he helped launch in Chile
three decades earlier found itself in disarray. The
obituaries heaped praise on him, but many were imbued
with a sense of fear that Friedman's death marked the
end of an era. In Canada's National Post, Terence
Corcoran, one of Friedman's most devoted disciples,
wondered whether the global movement the economist had
inspired could carry on. "As the last great lion of
free market economics, Friedman leaves a void ...There
is no one alive today of equal stature. Will the
principles Friedman fought for and articulated survive
over the long term without a new generation of solid,
charismatic and able intellectual leadership? Hard to

It certainly seemed unlikely. Friedman's intellectual
heirs in the United States--the think-tank neocons who
used the crisis of September 11 to launch a booming
economy in privatized warfare and "homeland security"--
were at the lowest point in their history. The
movement's political pinnacle had been the Republicans'
takeover of the US Congress in 1994; just nine days
before Friedman's death, they lost it again to a
Democratic majority. The three key issues that
contributed to the Republican defeat in the 2006
midterm elections were political corruption, the
mismanagement of the Iraq War and the perception, best
articulated by Jim Webb, a winning Democratic candidate
for the US Senate, that the country had drifted "toward
a class-based system, the likes of which we have not
seen since the nineteenth century."

Nowhere, however, was the economic project in deeper
crisis than where it had started: Latin America.
Washington has always regarded democratic socialism as
a greater challenge than totalitarian Communism, which
was easy to vilify and made for a handy enemy. In the
1960s and '70s, the favored tactic for dealing with the
inconvenient popularity of economic nationalism and
democratic socialism was to try to equate them with
Stalinism, deliberately blurring the clear differences
between the worldviews. A stark example of this
strategy comes from the early days of the Chicago
crusade, deep inside the declassified Chile documents.
Despite the CIA-funded propaganda campaign painting
Allende as a Soviet-style dictator, Washington's real
concerns about the Allende victory were relayed by
Henry Kissinger in a 1970 memo to Nixon: "The example
of a successful elected Marxist government in Chile
would surely have an impact on--and even precedent
value for--other parts of the world, especially in
Italy; the imitative spread of similar phenomena
elsewhere would in turn significantly affect the world
balance and our own position in it." In other words,
Allende needed to be taken out before his democratic
third way spread.

But the dream Allende represented was never defeated.
It was temporarily silenced, pushed under the surface
by fear. Which is why, as Latin America now emerges
from its decades of shock, the old ideas are bubbling
back up--along with the "imitative spread" Kissinger so

By 2001 the shift had become impossible to ignore. In
the mid-'70s, Argentina's legendary investigative
journalist Rodolfo Walsh had regarded the ascendancy of
Chicago School economics under junta rule as a setback,
not a lasting defeat, for the left. The terror tactics
used by the military had put his country into a state
of shock, but Walsh knew that shock, by its very
nature, is a temporary state. Before he was gunned down
by Argentine security agents on the streets of Buenos
Aires in 1977, Walsh estimated that it would take
twenty to thirty years until the effects of the terror
receded and Argentines regained their footing, courage
and confidence, ready once again to fight for economic
and social equality. It was in 2001, twenty-four years
later, that Argentina erupted in protest against IMF-
prescribed austerity measures and then proceeded to
force out five presidents in only three weeks.

"The dictatorship just ended!" people declared at the
time. They meant that it had taken seventeen years of
democracy for the legacy of terror to fade--just as
Walsh had predicted.

In the years since, that renewed courage has spread to
other former shock labs in the region. And as people
shed the collective fear that was first instilled with
tanks and cattle prods, with sudden flights of capital
and brutal cutbacks, many are demanding more democracy
and more control over markets. These demands represent
the greatest threat to Friedman's legacy because they
challenge his central claim: that capitalism and
freedom are part of the same indivisible project.

The staunchest opponents of neoliberal economics in
Latin America have been winning election after
election. Venezuelan president Hugo Chavez, running on
a platform of "Twenty-First-Century Socialism," was re-
elected in 2006 for a third term with 63 percent of the
vote. Despite attempts by the Bush Administration to
paint Venezuela as a pseudo-democracy, a poll that year
found 57 percent of Venezuelans happy with the state of
their democracy, an approval rating on the continent
second only to Uruguay's, where the left-wing coalition
party Frente Amplio had been elected to government and
where a series of referendums had blocked major
privatizations. In other words, in the two Latin
American states where voting had resulted in real
challenges to the Washington Consensus, citizens had
renewed their faith in the power of democracy to
improve their lives.

Ever since the Argentine collapse in 2001, opposition
to privatization has become the defining issue of the
continent, able to make governments and break them; by
late 2006, it was practically creating a domino effect.
Luiz Inacio Lula da Silva was re-elected as president
of Brazil largely because he turned the vote into a
referendum on privatization. His opponent, from the
party responsible for Brazil's major sell-offs in the
'90s, resorted to dressing up like a socialist NASCAR
driver, wearing a jacket and baseball hat covered in
logos from the public companies that had not yet been
sold. Voters weren't persuaded, and Lula got 61 percent
of the vote. Shortly afterward in Nicaragua, Daniel
Ortega, former head of the Sandinistas, made the
country's frequent blackouts the center of his winning
campaign; the sale of the national electricity company
to the Spanish firm Unión Fenosa after Hurricane Mitch,
he asserted, was the source of the problem. "Who
brought Unian Fenosa to this country?" he bellowed.
"The government of the rich did, those who are in the
service of barbarian capitalism."

In November 2006, Ecuador's presidential elections
turned into a similar ideological battleground. Rafael
Correa, a 43-year-old left-wing economist, won the vote
against Alvaro Noboa, a banana tycoon and one of the
richest men in the country. With Twisted Sister's
"We're Not Gonna Take It" as his official campaign
song, Correa called for the country "to overcome all
the fallacies of neoliberalism." When he won, the new
president of Ecuador declared himself "no fan of Milton
Friedman." By then, Bolivian President Evo Morales was
already approaching the end of his first year in
office. After sending in the army to take back the gas
fields from "plunder" by multinationals, he moved on to
nationalize parts of the mining sector. That year in
Chile, under the leadership of President Michelle
Bachelet--who had been a prisoner under Pinochet--high
school students staged a wave of militant protests
against the two-tiered educational system introduced by
the Chicago Boys. The country's copper miners soon
followed with strikes of their own.

In December 2006, a month after Friedman's death, Latin
America's leaders gathered for a historic summit in
Bolivia, held in the city of Cochabamba, where a
popular uprising against water privatization had forced
Bechtel out of the country several years earlier.
Morales began the proceedings with a vow to close "the
open veins of Latin America." It was a reference to
Eduardo Galeano's book Open Veins of Latin America:
Five Centuries of the Pillage of a Continent, a lyrical
accounting of the violent plunder that had turned a
rich continent into a poor one. The book was published
in 1971, two years before Allende was overthrown for
daring to try to close those open veins by
nationalizing his country's copper mines. That event
ushered in a new era of furious pillage, during which
the structures built by the continent's
developmentalist movements were sacked, stripped and
sold off.

Today Latin Americans are picking up the project that
was so brutally interrupted all those years ago. Many
of the policies cropping up are familiar:
nationalization of key sectors of the economy, land
reform, major investments in education, literacy and
healthcare. These are not revolutionary ideas, but in
their unapologetic vision of a government that helps
reach for equality, they are certainly a rebuke to
Friedman's 1975 assertion in a letter to Pinochet that
"the major error, in my opinion, believe that it
is possible to do good with other people's money."

Though clearly drawing on a long rebellious history,
Latin America's contemporary movements are not direct
replicas of their predecessors. Of all the differences,
the most striking is an acute awareness of the need for
protection from the shocks that worked in the past--the
coups, the foreign shock therapists, the US-trained
torturers, as well as the debt shocks and currency
collapses. Latin America's mass movements, which have
powered the wave of election victories for left-wing
candidates, are learning how to build shock absorbers
into their organizing models. They are, for example,
less centralized than in the '60s, making it harder to
demobilize whole movements by eliminating a few
leaders. Despite the overwhelming cult of personality
surrounding Chavez, and his controversial moves to
centralize power at the state level, the progressive
networks in Venezuela are at the same time highly
decentralized, with power dispersed at the grassroots
and community levels, through thousands of neighborhood
councils and co-ops. In Bolivia, the indigenous
people's movements that put Morales in office function
similarly and have made it clear that Morales does not
have their unconditional support: the barrios will back
him as long as he stays true to his democratic mandate,
and not a moment longer. This kind of network approach
is what allowed Chavez to survive the 2002 coup
attempt: when their revolution was threatened, his
supporters poured down from the shantytowns surrounding
Caracas to demand his reinstatement, a kind of popular
mobilization that did not happen during the coups of
the '70s.

Latin America's new leaders are also taking bold
measures to block any future US-backed coups that could
attempt to undermine their democratic victories. Chávez
has let it be known that if an extremist right-wing
element in Bolivia's Santa Cruz province makes good on
its threats against Morales's government, Venezuelan
troops will help defend Bolivia's democracy. Meanwhile,
the governments of Venezuela, Costa Rica, Argentina,
Uruguay and Bolivia have all announced that they will
no longer send students to the School of the Americas
(now called the Western Hemisphere Institute for
Security Cooperation)--the infamous police and military
training center in Fort Benning, Georgia, where so many
of the continent's notorious killers learned the latest
in "counterterrorism" techniques, then promptly
directed them against farmers in El Salvador and auto
workers in Argentina. Ecuador, in addition to closing
the US military base, also looks set to cut its ties
with the school. It's hard to overstate the importance
of these developments. If the US military loses its
bases and training programs, its power to inflict
shocks on the continent will be greatly eroded.

The new leaders in Latin America are also becoming
better prepared for the kinds of shocks produced by
volatile markets. One of the most destabilizing forces
of recent decades has been the speed with which capital
can pick up and move, or how a sudden drop in commodity
prices can devastate an entire agricultural sector. But
in much of Latin America these shocks have already
happened, leaving behind ghostly industrial suburbs and
huge stretches of fallow farmland. The task of the
region's new left, therefore, has become a matter of
taking the detritus of globalization and putting it
back to work. In Brazil, the phenomenon is best seen in
the million and a half farmers of the Landless Peoples
Movement (MST), who have formed hundreds of
cooperatives to reclaim unused land. In Argentina, it
is clearest in the movement of "recovered companies,"
200 bankrupt businesses that have been resuscitated by
their workers, who have turned them into democratically
run cooperatives. For the cooperatives, there is no
fear of facing an economic shock of investors leaving,
because the investors have already left.

Chavez has made the cooperatives in Venezuela a top
political priority, giving them first refusal on
government contracts and offering them economic
incentives to trade with one another. By 2006 there
were roughly 100,000 cooperatives in the country,
employing more than 700,000 workers. Many are pieces of
state infrastructure--toll booths, highway maintenance,
health clinics--handed over to the communities to run.
It's a reverse of the logic of government outsourcing:
rather than auctioning off pieces of the state to large
corporations and losing democratic control, the people
who use the resources are given the power to manage
them, creating, at least in theory, both jobs and more
responsive public services. Chavez's many critics have
derided these initiatives as handouts and unfair
subsidies, of course. Yet in an era when Halliburton
treats the US government as its personal ATM for six
years, withdraws upward of $20 billion in Iraq
contracts alone, refuses to hire local workers either
on the Gulf Coast or in Iraq, then expresses its
gratitude to US taxpayers by moving its corporate
headquarters to Dubai (with all the attendant tax and
legal benefits), Chavez's direct subsidies to regular
people look significantly less radical.

Latin America's most significant protection from future
shocks (and therefore from the shock doctrine) flows
from the continent's emerging independence from
Washington's institutions, the result of greater
integration among regional governments. The Bolivian
Alternative for the Americas (ALBA) is the continent's
retort to the Free Trade Area of the Americas, the now-
buried corporatist dream of a free-trade zone
stretching from Alaska to Tierra del Fuego. Though ALBA
is still in its early stages, Emir Sader, a Brazil-
based sociologist, describes its promise as "a perfect
example of genuinely fair trade: each country provides
what it is best placed to produce, in return for what
it most needs, independent of global market prices." So
Bolivia provides gas at stable discounted prices;
Venezuela offers heavily subsidized oil to poorer
countries and shares expertise in developing reserves;
and Cuba sends thousands of doctors to deliver free
healthcare all over the continent, while training
students from other countries at its medical schools.

This is a very different model from the kind of
academic exchange that began at the University of
Chicago in the mid-'50s, when hundreds of Latin
American students learned a single rigid ideology and
were sent home to impose it with uniformity across the
continent. The major benefit is that ALBA is
essentially a barter system in which countries decide
for themselves what any given commodity or service is
worth rather than letting traders in New York, Chicago
or London set the prices for them. That makes trade
less vulnerable to the kind of sudden price
fluctuations that have hurt Latin American economies
before. Surrounded by turbulent financial waters, Latin
America is creating a zone of relative economic calm
and predictability, a feat presumed impossible in the
globalization era.

When one country does face a financial shortfall, this
increased integration means that it does not
necessarily need to turn to the IMF or the US Treasury
for a bailout. That's fortunate because the 2006 US
National Security Strategy makes it clear that for
Washington, the shock doctrine is still very much
alive: "If crises occur, the IMF's response must
reinforce each country's responsibility for its own
economic choices," the document states. "A refocused
IMF will strengthen market institutions and market
discipline over financial decisions." This kind of
"market discipline" can only be enforced if governments
actually go to Washington for help. As former IMF
deputy managing director Stanley Fischer explained
during the Asian financial crisis, the lender can help
only if it is asked, "but when [a country is] out of
money, it hasn't got many places to turn." That is no
longer the case. Thanks to high oil prices, Venezuela
has emerged as a major lender to other developing
countries, allowing them to do an end run around
Washington. Even more significant, this December will
mark the launch of a regional alternative to the
Washington financial institutions, a "Bank of the
South" that will make loans to member countries and
promote economic integration among them.

Now that they can turn elsewhere for help, governments
throughout the region are shunning the IMF, with
dramatic consequences. Brazil, so long shackled to
Washington by its enormous debt, is refusing to enter
into a new agreement with the fund. Venezuela is
considering withdrawing from the IMF and the World
Bank, and even Argentina, Washington's former "model
pupil," has been part of the trend. In his 2007 State
of the Union address, President Nastor Kirchner (since
succeeded by his wife, Christina) said that the
country's foreign creditors had told him, "'You must
have an agreement with the International Fund to be
able to pay the debt.' We say to them, 'Sirs, we are
sovereign. We want to pay the debt, but no way in hell
are we going to make an agreement again with the IMF.'"
As a result, the IMF, supremely powerful in the 1980s
and '90s, is no longer a force on the continent. In
2005 Latin America made up 80 percent of the IMF's
total lending portfolio; the continent now represents
just 1 percent--a sea change in only two years.

The transformation reaches beyond Latin America. In
just three years, the IMF's worldwide lending portfolio
had shrunk from $81 billion to $11.8 billion, with
almost all of that going to Turkey. The IMF, a pariah
in countries where it has treated crises as profit-
making opportunities, is withering away.

The World Bank faces an equally precarious future. In
April Correa revealed that he had suspended all loans
from the Bank and declared the institution's
representative in Ecuador persona non grata--an
extraordinary step. Two years earlier, Correa
explained, the World Bank had used a $100 million loan
to defeat economic legislation that would have
redistributed oil revenues to the country's poor.
"Ecuador is a sovereign country, and we will not stand
for extortion from this international bureaucracy," he
said. Meanwhile, Evo Morales announced that Bolivia
would quit the World Bank's arbitration court, the body
that allows multinational corporations to sue national
governments for measures that cost them profits. "The
governments of Latin America, and I think the world,
never win the cases. The multinationals always win,"
Morales said.

When Paul Wolfowitz was forced to resign as president
of the World Bank in May, it was clear that the
institution needed to take desperate measures to rescue
itself from its profound crisis of credibility. In the
midst of the Wolfowitz affair, the Financial Times
reported that when World Bank managers dispensed advice
in the developing world, "they were now laughed at."
Add the collapse of the World Trade Organization talks
in 2006 (prompting declarations that "globalization is
dead"), and it appears that the three main institutions
responsible for imposing the Chicago School ideology
under the guise of economic inevitability are at risk
of extinction.

It stands to reason that the revolt against
neoliberalism would be in its most advanced stage in
Latin America. As inhabitants of the first shock lab,
Latin Americans have had the most time to recover their
bearings, to understand how shock politics work. This
understanding is crucial for a new politics adapted to
our shocking times. Any strategy based on exploiting
the window of opportunity opened by a traumatic shock--
the central tenet of the shock doctrine--relies heavily
on the element of surprise. A state of shock is, by
definition, a moment when there is a gap between fast-
moving events and the information that exists to
explain them. Yet as soon as we have a new narrative
that offers a perspective on the shocking events, we
become reoriented and the world begins to make sense

Once the mechanics of the shock doctrine are deeply and
collectively understood, whole communities become
harder to take by surprise, more difficult to confuse--

Naomi Klein is the author of "No Logo: Taking Aim at
the Brand Bullies" and "Fences and Windows: Dispatches
From the Front Lines of the Globalization Debate." (c)
2007 Independent Media Institute. All rights reserved.


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