FinancialGuy Writes!

Today’s European Voice (11/06/09) had a story suggesting that Latvia is in for shock therapy. This did not seem to be as seriously regarded in the paper as might be justified.

In 2007, Canadian journalist Naomi Klein published “The Shock Doctrine: The Rise Of Disaster Capitalism”. In this extraordinary book, Klein argues that the influence of Milton Friedman and his ‘Chicago School’ economics has had a profound and terrifying impact in many parts of the world.

Her theory is based on lots of research and interviews with some very well placed people.

As she puts it, shock therapy uses a combination of drugs and electricity to create a ‘blank slate’ on the minds of mental patients. The economic equivalent is Friedman’s shock therapy for entire nations! The aim is to create an economic ‘blank slate’.

An economic blank slate involves forcing through a swathe of free market legislation to open the economy to global competition. This is done in return for IMF and World Bank loans.

It would be reasonable to say that the evidence put forward by Klein does not paint a pretty picture. Examples from Chile, Argentina, Russia, Poland, South Africa and more describe legislative changes made without the knowledge of national lawmakers, massive loans that are near impossible to repay and terrifying human rights abuses that are required to keep a revolting population in line.

In short, she does not at any point suggest that economic shock therapy is successful…

Personally, having read the book I was left with a number of impressions. Firstly, I was horrified to read just what is involved in torture – that was not nice. Secondly, I was appaled at some of the seemingly ridiculous decisions made to open economies that were clearly not in a position to be opened. Lastly, I came to the conclusion that should I ever hear the words ‘shock’ and ‘therapy’ used in the news about a country in which I was in, that I would pack and leave within the month before all hell broke loose.

This opens up a potentially worrying situation though. The usual rules of engagement for Chicago School economics would require an overhaul of the Latvian economy and legislation. This would almost certainly create a conflict between money lenders and the European Union.

It would also force up the prices of everyday living expenses for the Latvian people – probably as the Lat is devalued. All in all, the outlook would not be good.

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