The Shock Doctrine
The book The Shock Doctrine by Naomi Klein discusses and evaluates neo-liberal economic policies and free trade relations introduced by economists and political leaders in low developed, developing and underdeveloped countries around the world. The book criticizes heavily approaches and principles introduced by the Chicago School and Milton Friedman a Nobel Laureate. Naomi Klein suggests that the global picture is more complex than developed and understood by these economic schools of thoughts. The world is not only populated by poor people struggling along and global corporations closely integrated among themselves, and their respective advocates. The political logic of globally organized mass production, which transcends territorial borders, undermines states and replaces government planning with corporate planning, is perhaps dominant in the discourse conducted in public media. In practice, most people do not base their livelihood on working for global mass producers. The book consists of an introductory paragraph, seven pain parts devoted to different political and economic problems as a conclusion.
An introduction familiarizes readers with historical development of the last century and economic growth and decline affected the world during the last thirty years. Naomi Klein suggests that either economists work in the now contracting state apparatuses, which for this reason can draw on a vested interest in their defense against free market politics, or they work in small and medium-sized units, local in scope and ranging from one-person enterprises and upwards. Klein claims that: “Friedman first learned how to exploit a shock or crisis in the mid-70s, when he advised the dictator General Augusto Pinochet” (3). This is the case particularly in the Third World as it is likely to be in any economy predominantly based on agriculture and small-scale trading, but is also emerging as a significant phenomenon.
The first part “Two Doctor Shocks: Research and Development” metaphorically portrays the economic policies as a therapeutic shock used in psychology. This part describes experiments and investigations by Ewen Cameron and their impact on patients. Then, the author compares these practices with economic reforms and their impact on common people and the state. The author finds that the many and heterogeneous forms of small-scale local production are not easy to grasp under the sweeping categorizations so characteristic of global and national politics. Klein writes: “I am writing about shock. About how countries are shocked–by wars, terror attacks, coups d’etat and natural disasters. And then how they are shocked again–by corporations and politicians who exploit the fear and disorientation of this first shock through economic shock therapy” (26). The workers and enterprise owners who populate this sphere of economic life are also much more difficult to distinguish from each other and organize separately, than the magnates of mass production and the workers they employ. Politically, the interests of small-scale producers and traders therefore tend to be subsumed under those of other groups with which they overlap to a smaller or greater extent: peasants, farmers, workers, professionals or burghers, as the case may be. There is comparatively little work focusing on the internal and specific dynamics of local production systems and small-scale producers. During the current transformation of the world economy in particular, the problems and opportunities created in local economies therefore tend to be discussed on the basis of assumptions and stereotypes, if at all.
The second part, “The First Test: Birth Pangs” discusses economic decline and crisis in South America during 1970s. this part is intended to help in opening up this area of research. Like all beginnings, it is in some ways hesitant and indeterminate. However, the problems discussed, the adaptation of local economic systems to the restructuring of the global economy, affect the lives of millions of people in profound ways, which is why both authors and editors have found the exercise worthwhile. Klein uses the chock therapy as the red thread in order to show how local economies respond to deregulation and structural adjustment, under which heading we also subsume the changes taking place in America. The concrete issues and approaches which have guided the empirical work presented in this book address aspects of this more general problem. Conventionally, the effects of adjustment can be considered at three levels; micro, meso and macro.
Third part, “Surviving Democracy” concentrates on the British reforms and politics by Margaret Thatcher. The author states that economists have followed a similar classification and divided the contributions into three parts, each with its own distinctive theme, which focus, in turn, on enterprise level analysis, network/cluster analysis, and macro-level analysis. However, the middle level is, in this case, not inserted in order to account for everything that does not fit in the two others. Klein discusses reforms in Bolivia which provide an economic framework and addresses the micro- and macro-issues do so with a point of departure in the meso-level, more or less explicitly. The first theme is the adjustment strategies of individual proprietors and managers and how they are formed by the past and present environment in which they operate, locally and globally. The form of adjustment can therefore be expected to depend on the interpretation and judgment each proprietor makes of the changes happening around each enterprise, its concrete forms and how he or she can manage to stay afloat or expand in the circumstances.
The forth part, “Lost in Transition” discusses problems and weaknesses of shock therapy in Poland, Russia and South Africa. Unavoidably, the themes overlap: they provide foci, not borderlines. This follows logically from the concern of the authors to understand the problems faced and choices made by entrepreneurs in their situated and complex totality, rather than purvey abstract prescriptions for how they should behave in an ideal world. However, although the agenda of the authors is empirical and scientific rather than political and normative, this does not preclude reflections on the policy implications of the findings presented here, and these are summarized in the last part of this introduction. Also, this part pays a special attention to Asian crisis and its global impact on economy.
The fifth part, “Shocking Times” claims that capitalistic system and global production process ruin natural economic development and growth opportunities in many countries. The author introduces what remains a major concern throughout the book, namely the situated action of management within local political and economic contexts which refract the impact of structural adjustment in peculiar ways. In addition, he explores the usefulness of the concept of path-dependent action in a clustered context. The enterprises he studied have opted for a strategy of vertical integration in order to cope with an extremely volatile and turbulent business environment, which has become more so in the wake of structural adjustment and due to the vagaries of local politics. Klein criticizes US movement policies and economic reforms.
The sixth part, “Iraq: Full Cycle Overstock” applies psychological shock principles o the economic development of Iraq. Hence, rather than networking horizontally, Iraqi managers tend to stick to their basic strategy of self-reliance which served them well earlier. However, local business associations have become the vehicle of information interchange, stimulated common efforts to support vocational training in the area and supported collaborative improvements in design and quality. Although production links are still rare, other forms of networking suggest a new path for industrial development and that clusters imply positive effects even for firms which embody a vertically integrated production system. Klein suggests that leaders are also unfamiliar with the way small- and medium-sized enterprises operate. As a result, lending to small- and medium-sized enterprises tends to be seen as risky compared to other alternatives. Therefore, credit programmes are needed, which support small enterprises actively. Applicable legislation needs to be streamlined as well, in order to overcome both the adverse selection mechanisms evident now and the prevailing conception that lending to smaller enterprises is hazardous. On the basis of data gathered in two visits four years apart, he concludes that this has not been the case in the cluster he studied. The joint marketing efforts of firms in the cluster have not led to the dynamic development of the cluster or of single firms in it. Further, no successful initiatives have emerged through which marketing co-operation could be deepened and developed towards networked production and flexible specialization.
The seventh part, “Movable Green Zones”, summarizes findings of the previous discussions and singles out losers and winners of shock therapy. On the basis of this analysis the author reflects on the current state of cluster theorizing and concludes that factors other than geographical proximity must be brought in to explain the development of micro-enterprise clusters. Analysis of the networks established among proprietors in a cluster and the potential of such networks for supporting technical and organizational improvements is a particularly needed and important step forward in this context. The workings of trading networks depend on the position of the intermediaries as well. Some of them connect producers to equally poor consumers in other rural locations, and the producers are consequently locked in a position of providing traditional and cheap products, which hinders innovation. Other intermediaries connect producers to better-off urban consumers, and linking with them facilitates innovation. In both cases, the trade-off between quality and price as competitive assets appears clearly. Lastly, some producers sell directly to consumers. They can then invest the trading profit, which in this case accrues directly to the producer, in machinery and better hand tools.
The conclusion criticizes shock doctrines and proposes economic policies against it. This is particularly relevant in the case of tiles in which individual consumers make fairly large investments at long intervals. In the case of copper crafts, direct sales tend to be equal to small sales of cheap goods to other locals. Hence, both the network types, to which producers are connected, and the position of producers within these networks, are found to be important explanatory factors. On the one hand, the lifting of import restrictions has led to increased importation of machinery and vehicles, which in turn creates demand for supplementary products.
Personal Opinion section
Naomi Klein proposes impressive facts and claims against economic reforms and policies introduced by appraised schools of thoughts. Naomi Klein is right that shock therapy imposed and introduced by developed nations has changed economy of small and developing states. An example is the extra fenders needed because of wildlife on the roads and not provided by vehicle manufactures. In addition, importing components to assemble products, and the importation of materials for making components then exported for assembly elsewhere has become possible to a larger extent. The explanation of this diversity is found in the previous histories of the companies concerned, and their response to crisis. Some have reorganized their operations more or less completely, sometimes via the legal instrument of bankruptcy, whereas others have adapted more evolutionary strategies, building on the financial, human and social capital they already possess. In the latter case, scope may be increased because earlier niches have become less lucrative, or decreased, because one or more niches, such as for example security equipment, have become more lucrative, due to structural adjustment.
Naomi Klein presents evidence of her findings but does not perform careful economic analysis of causes and conditions which had led to shock therapy. It is wrong to accuse developed states and global powers like the USA in exploitation of Iraq and policies against native companies. The first of these is based on the growth in labor supply which, if not absorbed by established companies, swells the ranks of the informal sector. The second explanation is based on growing demand for cheap products, which creates opportunities for self-employment in the informal sector. Both types of explanation have a common root in population growth as the independent variable, but they identify different intermediary mechanisms. The third type of explanation is based on increased commercialization of agriculture. As the number of commercial transactions increases and the prevalence of household production decreases, opportunities are created for small enterprises, either in rural areas, which leads to an increase in non-agricultural activities, or in urban areas, due to the migration fuelled by increased efficiency of agriculture, land shortage, etc. The fourth type of explanation sees the increase in small informal enterprise as a part of an industrialization process which both creates openings for manufacturing enterprises but also increases the opportunities for trade in their products.
One way to decide which explanation works is to consider how well different predictions generated by each explanation fit available data, which are presented by Pedersen. However, no explanation predicts observed variations in the size and composition of the small enterprise sector particularly well, neither over time nor across countries. Pedersen concludes, on the basis of a detailed discussion of the data, that a composite theory is needed. It should include the effects of secular change as well as the effects of variation in population growth. An adequate theory should also be able to distinguish the short-term effects of structural adjustment programmes (the shocks) from their long-term effects on secular trends.
The author argues that against the present economic background the chances for the development of small enterprises are dismal. Many formally established manufacturers perceive small- and medium-sized enterprises as illegitimate competitors which should be eliminated. At the same time, a number of initiatives from the government and donors aimed at helping small- and medium-sized enterprises have encountered problems, ranging from inadequate repayment rates to completely missing the intended target group. However, the structural disadvantages of small enterprises are such that continued efforts to ameliorate the by now well-known problems of small entrepreneurs are needed. However, these tasks do not need to be carried out by central government agencies, and should be entrusted to local governments and non-governmental organizations (NGOs) both of which can more easily tailor support measures to the manifest needs of their clients.
The main weakness of the book and research is that Klein does not take into account historical development of the regions and natural economic development. The author draws on two different network approaches, social network analysis and analysis of socio/technical networks, and identifies a number of features which characterize the more dynamic local economic cultures in the South. The first of these is gradual mechanization based on the sharing of benefits in networks and clusters. When, for example, a wood lathe is acquired by one small enterprise, it can also supply all others with turned components of furniture. The second is division of labor and task specialization within clusters, often but not always connected to mechanization. The third is the mobilization of outside contacts to acquire technical information, and their fast diffusion within clusters. This is combined with innovative local interpretation of technologies leading to flexible production practices. Fourth, the presence of individuals who through the possession of core technologies or by organizational means (or both) act as brokers of information and opportunities is also essential. Lastly, the prevalence of craft production and polyvalent or all-round skills of workers is found in a large number of growing local economies.
Klein misinterprets development of the Post-Soviet Union states and the South Africa. These countries needed shock therapy in order to survive and prosper in new economic conditions. However, most local economies tend to be inward-oriented, and connections with the global economic culture are few and far between. The development of such connections is necessary for the sustained development of local economies, yet they rarely develop to the point where they can reach out to larger markets. Local demand is limited, and can be satisfied with elementary products, and the learning implied by dealing with demanding and discerning customers, which is a prerequisite for export activities, is absent in most cases. These obstacles are intensified by structural adjustment: cheap imports, particularly of textiles, flood African markets, for example. The original reason for inadequate learning, widespread poverty, has become more severe. Further, the main repositories of advanced technological capability, that is import substituting, government owned or parastatal companies, are folded down and very little has appeared instead. However, if clustering ensures smooth operation of the connections between local customers and local companies, and between them and their suppliers, it cannot, in itself, facilitate links with customers elsewhere. This information is then made available to all producers (and merchants as well). A further step is to establish marketing agencies which connect local producers with customers elsewhere, via government intervention, and eventually with government ownership. Klein comments: “Despite the fact that life was about to get a lot more expensive in an already desperately poor country, the plan froze government wages at their already low level for a year” (147). However, as in the case of merchants, the cut of the marketing agency is likely to be large, and in addition, such agencies have often turned out to be less than adequately effective in practice. In the case of customers with exacting demands according to fairly well defined standards, e.g. in food processing and exports of food products, government intervention can be necessary but then in the form of information about such standards, inspection of facilities and organizing appropriate educational and training efforts rather than direct marketing, which moreover can often been done better by, or at least in co-operation with, actors located in the importing country.
When effective, economic units can gather information about prospective customers, relay orders, represent producers at fairs and other such occasions, and organize training. The hard nut to crack is how to facilitate the establishment of such associations, and decide when this is feasible. Although the success stories here are legion, unpremeditated imposition of such forms from above, as for example has happened with co-operatives in several African countries, is counterproductive. Policies in this area are therefore limited to support to associations and co-operatives which form spontaneously. In spite of many limitations in research and analysis, this book would be interested to all individuals involved in global economy, politics and history research. This book proposes food for thought and forces readers critically appraise historical development issues and data. In essence, government agencies are reduced to working with existing collectives and organizations. However, it is by now well documented that clustering and networking frequently arise spontaneously among producers in the South. There is therefore no shortage of possible candidates for this type of support, and in the view of the current capacities of the relevant agencies and organizations, the supply of potential beneficiaries will not run out in the near future. However, most such interactive activities are not formalized in associations or organizations. This flows from the sad state of democratic participation in most countries rather than from any intrinsic economic logic. It is difficult to form an association in a country where arranging a public meeting without permission from the authorities is a prosecutable offence. In the long run, therefore, development strategies, which include the active participation of producers in managing their own mutual affairs call for political and not only economic reforms.