NARRATOR: The terrible events of September 11 showed how a whole world might be driven deeper into recession. Argentina's economic meltdown has raised new fears about the perils of the interconnected global economy. BILL CLINTON, U.S. President, 1993-2001: You can't get away from the fact that globalization makes us interdependent, so it's not an option to shed it. So is it going to be, on balance, ba lance, positive or negative? NARRATOR: This is the story of how the new global economy was born. For much of the 20th century, people blamed free-market capitalism for the ills of inflation, recession, depression, depression, and mass unemployment. So governments everywhere sought to curb market forces and rein in the ir economies. The first to change direction were Ronald Reagan in America and Margaret Thatcher in Britain. In the 1980s, markets were deregulated. State-owned industries were privatized. It was the start of a world revolution. JEFFREY SACHS, Professor, Harvard University: Part of what happened is a capitalist revolution. At the end of the 20th century, the market economy, the capitalist system, became the only model for the vast majority of the world. NARRATOR: The world changed its mind. In the Soviet Union and its satellites, in the emerging markets of Asia, and in the state-dominated economies of Latin America, governments everywhere moved away from state control and towards free markets. DANIEL YERGIN, Author, Commanding Heights: This free-market revolution has really led to the new global economy. It excites some and terrifies others. NARRATOR: That revolution was wrenching. Tonight on Commanding Heights: The Agony of Reform. NARRATOR: Much of the world once modeled itself on the Soviet Union. Here, Lenin's revolution industrialized a backward country within a single generation. The Soviet system, ruthless and centrally planned, gave birth to vast industrial complexes like Norilsk. DANIEL YERGIN: Norilsk symbolized every stage of Soviet economic history, from the original prison camp and the t he beginnings of Soviet industrialization right up to the collapse of the economy in the 1990s. So much of its history had been tied up with the fact that it was a prison camp. Even in the early 1950s, 100,000 1 00,000 political prisoners were working in its mines and factories. NARRATOR: Millions rode the slow train to the t he prison camps. Vassily Romashkin's crime against the state was to check out the wrong book from the public library.
VASSILY ROMASHKIN, Former Political Prisoner: They sent me over to Norilsk after the trial. The trial lasted about 10 minutes. My wife and I said our good-byes. NARRATOR: The prisoners' slave labor became a crucial component of the Soviet economy. VASSILY ROMASHKIN: When they took us to work, they'd say, "Attention, you enemies of the people. A step to the left or to the right, and we will shoot you without warning." A chill went up my spine, and I thought, "You are the enemies of the people." NARRATOR: The Soviet system of central planning meant that the Kremlin controlled every aspect of the economy. The aim was to make the Soviet Union strong and self-sufficient. The Soviet Union became an industrial giant, a military superpower, and a threat to the West. GEORGE SHULTZ, U.S. Secretary of State, 1982-1989: Russia looked very formidable. The essence of Soviet power was its ballistic missiles. They could wipe out any country in the world in 30 minutes' time. So that's a lot of power. MARGARET THATCHER, British Prime Minister, 1979-1990: Communism was gaining the world over, gaining by b y its main methods, military threat from military might. CHARLES POWELL, British Foreign Affairs Advisor, 1983-1991: We all thought the Soviet Union was still a vast powerful economy, a huge military power, a threat to world peace, determined to extend its influence around the world. NARRATOR: Soviet influence was everywhere in Eastern Europe, in Africa, and Latin America. Socialism, planning, state control, government ownership -- these became the gospel. In Asia, A sia, the apparent success of communist China seemed to show the way. But the truth about the Soviet economy lay concealed behind the "Iron Curtain." Onscreen title: The Iron Curtain
NARRATOR: Minefields, barbed wire, searchlights, and lookout towers sealed the Soviet bloc off from the outside world. In the 1980s British intelligence recruited a Russian double agent to penetrate this wall of secrecy. But Soviet intelligence, the KGB, became suspicious and put him under house arrest. News reached London that its top spy was in mortal danger. Charles Powell was foreign policy advisor to Prime Minister Margaret Thatcher. CHARLES POWELL: The news of the intention to spring him came to me in Downing Street. I couldn't tell anyone else because no one else knew about it. NARRATOR: It was so sensitive that Powell needed the prime minister's personal approval to activate an escape plan.
CHARLES POWELL: Oleg Gordievsky was perhaps the most valuable agent, because he understood the Soviet system from inside. NARRATOR: In Moscow, the net was closing in on Oleg Gordievsky. OLEG GORDIEVSKY, KGB Defector: At that time I decided to use my secret longstanding plan of escape. I sent a signal to the British intelligence. NARRATOR: Gordievsky evaded his KGB watchers and made his way to a forest near the Finnish border. OLEG GORDIEVSKY: In the morning, I started to move toward the site in the woods, and there I waited. I waited for the arrival of car, driven by two British people who picked me up, put me in the boat, and drove to the border. It was a very small car, a very small boat. On the border, we started to stop. One stop. Second stop. Third stop. NARRATOR: They were approaching the moment of maximum danger. OLEG GORDIEVSKY: The KGB and Soviet customs checks of the cars. I heard the voices. I heard even the KGB dogs barking. And to my great luck, it went without any accident. NARRATOR: But one of the British agents, a woman, threw the guard dogs off the scent by feeding them potato chips. Three days later, Gordievsky was in London and the debriefings began. OLEG GORDIEVSKY: When I was a British agent inside the KGB, the British intelligence service didn't have time to ask me about economy, because they were interested about strategic problems. The arms-control questions were so overwhelming, the West neglected the important foundation of the argument: the economy. NARRATOR: Gordievsky told his British spymasters that the Soviet Union was under great pressure, devoting more than a third of its entire economy to military spending. OLEG GORDIEVSKY: And the analyst said no, I can't put such a huge figure down because nobody would believe it. Later, economists realized that the Soviet Union had been spending at least 50 percent on the military. CHARLES POWELL: Gordievsky's information was shared with President Reagan and the Americans, and he was able to play, behind the scenes, a role of extraordinary influence. NARRATOR: Thanks to Gordievsky's intelligence, Western leaders realized that Soviet military might rested on a crumbling economy. OLEG GORDIEVSKY: The Communist administration reported that the economy was growing. It was not the case. The economy started to go down all the time, and the deficit was covered only with the help of the oil
prices. And the extra money made it possible to claim that they were successful. And they were deceiving the world. NARRATOR: Soviet satellites circled the world, and nuclear submarines prowled the oceans. But after seven decades of communism, the real story of the Soviet economy was one of empty shelves and a standard of living that was a fraction of Western Europe's. GRIGORY YAVLINSKY, Economic Reformer: Soviet economy was neither nor. It was not a Stalinist economy anymore, but it was not a market economy, so it was no water, no fire. It was a mess. NARRATOR: An independent-minded young economist, Grigory Yavlinsky, wrote a report on why workers in state mines were so unproductive. GRIGORY YAVLINSKY: The people don't want to work. The people have no incentives. The economy inside which the people have no incentives have no future. So you can do two things: Take a gun and put this gun to his head like it was at the Stalin's time, or you have to give him incentives, because he wants to improve the life of his family, and he can't. NARRATOR: Factory managers at Norilsk could see the economy was not working, because the workers were not working. VALERY KOVALCHUK, Former Norilsk Factory Manager: You can't work properly under socialism. There is no incentive. And sadly, that's the only thing that gets us going. People come to work and just go through the motions. They doze off, read papers, do the crosswords. The state goes on paying them, the state gets poorer, the people get corrupted, then bankruptcy. And that's what happened -- the collapse of a great empire. Onscreen title: New Delhi, India
NARRATOR: Like the Soviet Union, India had used central planning to industrialize its peasant economy and conquer poverty. Now India, like government-dominated economies all over the world, was running into difficulty. YASHWANT SINHA, Indian Finance Minister: The government of India went into business in a big way, and they decided to control whatever was there in the private sector also as firmly and fiercely as they could. NARRATOR: The British raj was gone. Now people were subjected to the "Permit Raj," because everything needed a government permit. India became a byword for red tape and bureaucracy. Businessmen found it almost impossible to get things done. NARAYANA MURTHY, Chairman, Infosys Technologies: It used to take us about 12 to 24 months and about 50 visits to Delhi to get a license to import a computer worth $1,500. NARRATOR: Since it was impossible to work with the system, people learned to work around it.
P. CHIDAMBARAM, Indian Finance Minister, 1996-1998: Every license, every permit, was procured by corrupt means. INTERVIEWER: A bribe? P. CHIDAMBARAM: Well, "bribe" is the simpler word, I suppose. NARRATOR: Self-sufficiency was India's ideal. To protect its own manufacturing industry, India shut out foreign imports. P. CHIDAMBARAM: Because of this protected market, the Indian people were being given shoddy goods and services at very high prices. Enterprise was stifled, and growth was crippled. JAIRAM RAMESH, Indian Government Advisor, 1991-1998: The economic environment was simply not conducive to efficiency or profitability. We were in a shortage economy. My father waited 15 years to buy a car. NARRATOR: Take India's beloved Ambassador car. It is made by Hindustan Motors, which started manufacturing in the same year as Japan's Toyota. Fifty years later, Toyota makes five million cars a year. Hindustan sells 18,000 Ambassadors, and still to the same design. MANMOHAN SINGH, Finance Minister, 1991-1996: If you have a controlled economy, cut off from the rest of the world by infinite protection, nobody has any incentive to, in a way... nobody has any incentive to increase productivity, to bring new ideas. NARRATOR: Overprotected, over-administered, overplanned, the Permit Raj was quite literally a brake on the Indian economy. Onscreen title: Latin America
NARRATOR: In Latin America, radically different leaders shared India's suspicion of the world economy. In the 1940s and '50s, it was Juan Peron and his wife, Evita. In the 1960s, it was communist Cuba's charismatic Fidel Castro. And in the 1970s, it was Chile's Marxist president Salvador Allende. Though rich in raw materials, Latin America seemed doomed to perpetual poverty. The dependency theory of economic development seemed to offer a way out. DANIEL YERGIN: The dependency theory said that if you want to get high economic growth in your country, what you need to do is put up barriers, tariffs that restrict the flow of import into the country, develop and build your own domestic industries, and that if you don't do that, you're going to be victimized by world trade. The theory was very attractive. It said you would develop on your own, and you would be more self-sufficient. The reality is that you cut yourself off from flows of technology, flows of investment, from flows of know-how, and instead of getting ahead you were falling back. MOISES NAIM, Editor, Foreign Policy Magazine: Because they are not threatened by competition, you create very lazy, noncompetitive companies that produce not very good goods at higher prices. It may
create jobs here and there, but in the long term it may create even more poverty. Onscreen title: Santiago, Chile
NARRATOR: By the early 1970s, Latin American economies were in trouble. Chile elected the Marxist president Salvador Allende. Allende's solution was not less government intervention, but more. Businesses were nationalized or expropriated. Price controls were imposed. Civil unrest grew as the economy spun out of control. RICARDO LAGOS, President, Chile: We have a tremendous inflation. Chilean society became extremely polarized. It's true it was polarized before Allende, but during Allende's period the society was extremely polarized. NARRATOR: It all ended in a military coup. As air force jets straffed the presidential palace, Allende was trapped inside. This was the last picture taken of him alive. Allende supporters, union leaders, and left-wing students were rounded up in the national football stadium. Hundreds were never seen again. Chile's military junta was led by Gen. Augusto Pinochet. Many middle-class Chileans saw him as a savior. JAVIER VIAL, President, Association of Banks, 1973: I think that Pinochet's plan was basically the plan to manage an army. He didn't have an economic policy to manage a country. ARNOLD HARBERGER, Professor Emeritus, University of Chicago: After a year, year and half of military government, you still had 20 percent permonth built-in inflation that wouldn't go away until something structurally changed. NARRATOR: One of those who plotted the coup went to talk to Pinochet face to face. ROBERTO KELLY, Junta Economic Planner: I told him, "You've been called Chile's savior, but you will go down in history as the man that buried Chile." He was very shocked by this, and he said, "Okay, you've got 48 hours to come up with a national plan to fix the economy." ARNOLD HARBERGER: The only people who had a serious blueprint of how to get out of this were this group called the Chicago Boys. NARRATOR: The Chicago Boys were a group of economists at Chile's Catholic University who had been sent to the University of Chicago as exchange students. There, they absorbed the ideas of the "Chicago School" of economics, with its almost revolutionary belief in free markets. MILTON FRIEDMAN, Professor Emeritus, University of Chicago: What characterized the Chicago School was a strong belief in minimal
government and an emphasis on free market as a way to control the economy. NARRATOR: Professors like Arnold Harberger and Milton Friedman taught their students to distrust state planning and government control. When the Chicago Boys returned to Chile, they brought with them ideas that were a direct challenge to the dependency theory. ARNOLD HARBERGER: This small group stayed together through the Allende years. And they used to meet I think every Tuesday for lunch. And they would keep a kind of running document which said how they would reform this economy, how this economy has to be reformed, what is to be done to get out of the swamp that they were putting themselves in. SERGIO DE CASTRO, Finance Minister, Chile, 1974-1982: Unfortunately, due to the idiosyncrasies of the military mind, the generals preferred a controlled economy; that is, an economy that would obey orders. NARRATOR: Javier Vial, an influential businessman sympathetic to the junta, was trying to push the military in the direction of the free market. JAVIER VIAL: So I called Milton Friedman and invited him to come to Chile. NARRATOR: So Milton Friedman, the most famous free-market economist in the world, came to lecture in Chile. MILTON FRIEDMAN: I went down to Chile and spent five days giving a series of lectures on the Chilean problem, particularly the problem of inflation and how they should proceed to do something about it. NARRATOR: Friedman's first talk was at the Catholic University. His theme: the inescapable link between free markets and freedom. MILTON FRIEDMAN: The emphasis of that talk was that free markets would undermine political centralization and political control. ARNOLD HARBERGER: He said that that you cannot have a repressive government for long within a genuinely free economic system. NARRATOR: But Friedman was also persuaded to visit the grim conference center from which Pinochet ruled Chile. Friedman told Pinochet that he needed to take decisive and immediate action to defeat inflation. JAVIER VIAL: Friedman says: "Well, I'm going to give you an example. If you cut the tail to a dog in pieces, step by step you will kill the dog. This is the same as inflation. You have to cut it at once, and then the country will start moving." ARNOLD HARBERGER: Milton's presence probably helped to stiffen the spine of people who were trying to insist on better economic policies. That's the period when the takeoff of the Chilean economy really began and major reforms were made.
NARRATOR: In Santiago, the junta called on the Chicago Boys to rescue the economy. Five hundred state-owned businesses were privatized. Government budgets were cut. Import tariffs were swept away. The markets were given free rein. SERGIO DE CASTRO: The basic thrust was to increase exports and abolish artificial price controls. MILTON FRIEDMAN: Here was the first case in which you had a movement toward communism which was replaced by a movement toward free markets. NARRATOR: There was much pain for the poorest. The cost of living went through the roof. The gap between rich and poor got wider, and stayed that way. ALEJANDRO FOXLEY, Finance Minister, Chile, 1990-1994: They were starting a very big process of transformation of the economy without any regard of what happened to people. And we ended up at one point in time with 30 percent unemployment rate. NARRATOR: According to the Chicago Boys, the gain was worth the pain. Chile became the fastest growing economy in Latin America. ALEJANDRO FOXLEY: They were able to start a process of deregulating the markets, opening up the economy, so that's their contribution. They were able to anticipate a global trend, and Chile has benefited from that. INTERVIEWER: But at a price? ALEJANDRO FOXLEY: At a very high price, believe me. At a very high human price. MILTON FRIEDMAN: The Chilean economy did very well, but more important, in the end, the Chilean military junta was replaced by a democratic society. Free markets did work their way in bringing about a free society. NARRATOR: This is the monument to the 2,400 who died or disappeared during the dictatorship. The brutality of Pinochet's regime left little enthusiasm for change in the rest of Latin America. CLIVE CROOK, Deputy Editor, The Economist: The fact that the Pinochet regime was politically unsavory allowed the left to make an association between market reforms on the one hand and repressive authoritarian governments on the other, and that was a terribly damaging connection. MILTON FRIEDMAN: The intellectual elite, as it were, were on the side of Allende, not on the side of Pinochet. They regarded me as a traitor for having been willing to talk in Chile.
ARNOLD HARBERGER: Friedman then became a figure of hate, and they organized demonstrations against him wherever he went, and this went on for a period of years. NARRATOR: The protests reached their climax when Friedman was awarded the Nobel Prize in 1976. MILTON FRIEDMAN: At the Nobel ceremonies in Stockholm, I was subject to abuse in the sense that there were large demonstrations against me. There was a concerted effort to tar and feather me. CLIVE CROOK: In the minds of many people, the reforms in Chile were tainted by the political caste of the regime that did set back the cause of liberal economics. It made other countries more resistant to the idea of market reforms than they otherwise would have been. Onscreen title: The Kremlin, Moscow
NARRATOR: The economic reforms in Chile may have had little immediate impact on the world, but the ideas behind them were gaining momentum. In the Soviet Union, where the aged leadership was dying off and the economy was moribund, people were starting to question the system. DANIEL YERGIN: By the 1970s and '80s, it was becoming clear to the better informed that the Soviet system really wasn't working, but they couldn't really talk about it publicly. They t alked about it in their kitchens; they talked about it in small groups. But it was not something that could be talked about in the public. NARRATOR: In Leningrad, the cradle of Lenin's revolution, an economics student was asking if the solution lay not in Marxism but in markets. ANATOLY CHUBAIS, Economic Reformer: I'm interested in what has happened in the economy. I start to feel that there is something wrong; there is some illness in the economy. But I try to discuss it with my professors, I get no feedback. You feel that either the world around you crazy or you yourself crazy. NARRATOR: Chubais helped to organize seminars far from the prying eyes of the secret police. One of his co-conspirators was a young economist from Moscow. YEGOR GAIDAR, Economic Reformer: We were all in our 30s, researchers or teachers who specialized in the Soviet economy. We could see how it worked and were well aware of its weak points. I read books by Friedman and Hayek with great interest. They were our inspiration. ANATOLY CHUBAIS, First Deputy Prime Minister, 1994-1996: On that stage, definitely we do understand that this thing quite risky. YEGOR GAIDAR: Some of our sessions took place behind closed doors; we didn't trust everyone at the seminar, so we kept some people out. Our
discussions were not revolutionary, but they were far beyond the limit of what was politically permissible. NARRATOR: After a day arguing the pros and cons of a market economy, they would sit around the campfire and tell jokes. ANATOLY CHUBAIS: There was the idea that Gaidar will become prime minister maybe, which sounds at that time absolutely crazy, and everybody laughing and another guy said that yeah, he will be prime minister or he will be prisoner. NARRATOR: But by 1985, it was not just economics students who were asking what was wrong. When Mikhail Gorbachev became leader of the Soviet Union, he was appalled by the economic decay. MIKHAIL GORBACHEV, General Secretary, Communist Party, 1985-1991: There was a government commission to examine the problem of women's pantyhose. Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can't resolve the problem of women's pantyhose. There's no toothpaste, no soap powder, not the basic necessities of life. It was preposterous and embarrassing to work in such a government. DANIEL YERGIN: Mikhail Gorbachev was what the Soviet Union had been waiting for -- a new, young, dynamic leader who was going to reform the system. But that system had been propped up for a decade and a half by high oil prices, and just after he came in, the price of oil collapsed, which meant that the economic problems facing the Soviet Union were even more enormous. NARRATOR: Gorbachev's attempt to restructure the economy was called "perestroika." MIKHAIL GORBACHEV: Perestroika was a reform that aimed at gradual political change to create an infrastructure for market economics. We had several generations with no experience of markets. You can't just announce the markets and see them appear overnight. I was actually saying it will take a generation for it to start working. DANIEL YERGIN: He started to allow a certain amount of private enterprise, but it was really a very uneven process. He ended up removing many of the tools of control of central planning, but didn't really replace them with anything else. NARRATOR: Gorbachev faced mounting pressure from the West. The U.S. president believed in the economic philosophy of Milton Friedman and Chicago. Ronald Reagan was not alone. He had a political soul mate in Margaret Thatcher. Britain's prime minister had already embarked on a radical free-market economic revolution at home. Thatcher and Reagan were determined to go on the ideological offensive. Their political rhetoric began to heat up. RONALD REAGAN, U.S. President, 1981-1989: What I am describing now is a plan and a hope for the long term, the march of freedom and
democracy which will leave Marxism-Leninism on the ash heap of history, as it has left other tyrannies which stifle the freedom and muzzle the selfexpression of the people. MARGARET THATCHER: Up to that time, the whole doctrine had been one of "Contain communism." That wasn't enough for Ronald Reagan and me, and we thought we should make it quite clear to communism that it could and would never win, and that we would go and fight the battle o f ideas between what the free world had to offer, compared with the dictatorship and tyranny and cruelty of communism. NARRATOR: Ever since Gorbachev's first visit to Britain, Margaret Thatcher never missed the opportunity to debate him on the evils and inefficiencies of communism and its system of central planning. OLEG GORDIEVSKY: Speaking to Gorbechev, she said: "Mikhail, you see how your economy is organized -- centralized, entirely led by the Kremlin. Look at me in Britain and the West. We have market economy, and it is running itself. I don't have to tell different industries what to do. I don't deal with it at all. My job compared with your job is much easier. And you would be able to enjoy your job as head of the Soviet Union much more if you had a market economy." NARRATOR: In 1987 President Reagan carried this war of words to the most symbolic section of the Iron Curtain: the Berlin Wall. RONALD REAGAN: General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization, come here to this gate. Mr. Gorbachev, open this gate. Mr. Gorbachev, tear down this wall. Onscreen title: Warsaw, Poland
NARRATOR: Margaret Thatcher carried the free-market message to Poland in 1988. Mrs. Thatcher had agreed to meet the Communist leadership provided she could also visit the port of Gdansk. Almost a decade earlier, in 1980, shipyard workers here in Gdansk had taken a stand against Communist rule. They had struck against the price rises and food shortages caused by a crumbling economy. Their leader was an electrician named Lech Walesa. LECH WALESA, President, Poland, 1990-1995: The country was so much in debt, with the West refusing to lend us any more, that the whole system was failing. It was more and more inefficient, and everybody, even the Communists, knew it. NARRATOR: Lech Walesa climbed the shipyard gate to announce a momentous victory. The workers had forced the government to recognize Solidarity, the free labor union. "I declare the creation of a free union of workers. We now have the right to strike."
FATHER HENRY JANKOWSKI, St. Brygida Church, Gdansk: I thought they didn't know what they were fighting for. I thought they were just fighting for a pay rise. Only then did I learn it was all about freedom. NARRATOR: Ten million Poles joined Solidarity. Under Walesa's leadership, Solidarity became the main opposition to communism. But in 1981, after a year and a half of strikes and unrest, the government declared martial law. Walesa was placed under house arrest. When Thatcher visited Poland in 1988 she demanded that the Communist government allow her to meet Lech Walesa. LECH WALESA: You didn't say no to Mrs. Thatcher. No one refused her, so her noticing us and demanding a meeting with me and the others, that was a crucial event. CHARLES POWELL: She came into the city of Gdansk onboard a small ship, and as she went past the shipyards, all the cranes on the dockside was lined with shipyard workers, all cheering and waving, and one began to sense here was an extraordinary experience in the making. FATHER HENRY JANKOWSKI: The shipyard workers were not only sitting on the gate, but they were also on the roofs surrounding the shipyard. She's a tough lady; she conquered the hearts of the people of Gdansk. NARRATOR: Solidarity workers escorted Mrs. Thatcher to a church. CHARLES POWELL: Great crowds sang the Solidarity anthem, a haunting anthem. FATHER HENRY JANKOWSKI: I could see she was very emotional about this visit. Her eyes registered everything that went on around her. CHARLES POWELL: It's one of the very few times that I saw tears in Mrs. Thatcher's eyes. She was so moved by this expression of longing for liberty. NARRATOR: At the house of Walesa's priest, Margaret Thatcher met with the leaders of Solidarity. A Solidarity cameraman recorded this historic meeting -- and Mrs. Thatcher arguing that economic freedom and personal freedom go hand in hand. MARGARET THATCHER: If you have a free society under a rule of law, it produces both dignity of the individual and prosperity. CHARLES POWELL: Although it sounds very bossy and interfering, I think they were genuinely grateful. "You, Solidarity," she said, "you must have your own ideas and plans worked out. It's no good just being popular." MARGARET THATCHER: How do you see the process from where you are now to where you want to be? Because whatever you want to do, it's not only what you want to do, but how the practical way you see it coming about, if you were to write down the 10 steps, from where you are now to where you want to be.
CHARLES POWELL: And at one point, she said to Walesa, "But how do you get your thinking over to the Polish government?" And he laughed and pointed to the ceiling and said, "There's no trouble; they've got this meeting bugged." FATHER HENRY JANKOWSKI: This meeting with Mrs. Thatcher made these future politicians recognize the opportunities within their grasp. MARGARET THATCHER: Thank you very much. LECH WALESA: Without this meeting, there would not have been no victory, that's for sure. There would have been delay, greater difficulties, or even our destruction. NARRATOR: Thatcher's free-market message seemed to offer an escape from a Polish economy that was debt-ridden and riddled with shortages. DANIEL YERGIN: As the communist economies got into deeper and deeper trouble, reformers and economists within the Soviet world began to look outside for solutions and for alternative paths. They looked at the miracle economies of Asia, they looked at what was happening in the United States and in Western Europe, and they looked even as far as Latin America. Onscreen title: La Paz, Bolivia
NARRATOR: One of the poorest countries in Latin America and with a history of 189 military coups, Bolivia was also one of the most unstable. JORGE QUIROGA, President, Bolivia: When I was going through college in Texas, the first question you'd be asked is "Who's the president of Bolivia this week?" Second question down the road was "You're from Bolivia -what's the inflation rate in Bolivia this week?," because we had galloping hyperinflation that destroyed our economic base. GONZALO "GONI" SANCHEZ DE LOZADA, President, Bolivia, 1993-1997: We found that Bolivia was the seventh highest inflation in the history of man. JUAN CARIAGA, Finance Minister, Bolivia, 1986-1988: Twenty-three thousand, five hundred percent. Prices increased by the hour. NARRATOR: The cost of food and clothes kept increasing. Before it was all over, the total inflation averaged 1 percent every 10 minutes. JORGE QUIROGA: Seven out of 10 Bolivians live in poverty. The poor people get hurt even more. They see their pockets being eaten away by inflation that is galloping around. GONZALO SANCHEZ DE LOZADA: It's like a tiger, hyperinflation: If you don't kill it and you only have one bullet, it'll eat you.
NARRATOR: The root of the problem was government finances. The government was spending 30 times more than it received in taxes. Across the continent, Latin America's uncompetitive economies had been piling up debt. In the 1970s, a massive hike in world oil prices left foreign banks awash with petrodollars. ARNOLD HARBERGER: So here were the international banks with billions of dollars and nowhere to earn interest on it. They discovered Latin America. GONZALO SANCHEZ DE LOZADA: We were offered unreasonable amounts of money. These banks who were very unwise in their lending policy came to the happy conclusion that countries don't go broke. It's true, but sometimes they don't pay. MOISES NAIM: Guess what? One day, these countries could no longer afford to repay the debts. NARRATOR: In 1982 a financial crisis in Mexico triggered a chain reaction that caused the 1980s to be known as Latin America's "lost decade". JOSEPH STANISLAW, Author, Commanding Heights: Bolivia was probably the most severe case of how things had gone wrong in Latin America. For decades they just printed money. They collected no taxes in the country. If you can't collect taxes, you've got to make the money up somehow, so they just printed it. GONZALO SANCHEZ DE LOZADA: Bolivia was a basket case. We were considered hopeless. We had help from nobody. We were totally alone. The World Bank had closed its office, the IMF had pulled out its representative, and the American government and other friendly nations wouldn't answer the telephones. Onscreen title: Harvard University, USA
NARRATOR: At 29, economist Jeff Sachs had just become one of Harvard's youngest full professors ever. JEFFREY SACHS: In 1985, some former students sent me a note asking whether I would be ready to come to a meeting with a group of visiting Bolivians. NARRATOR: The Bolivians had come to Harvard to take part in a seminar on the hyperinflation that was ravaging their country. JEFFREY SACHS: I was absolutely fascinated, made a few observations. Somebody in the back of the room piped up and said, "Well, if you think you know what to do, you come to La Paz." When I got to La Paz in July 1985, the inflation rate was about 60,000 percent. It was an extraordinary and terrifying thing to see, actually. It was a society at the edge of the precipice. NARRATOR: Bolivia's politicians were paralyzed. Only one man seemed to know what to do.
JEFFREY SACHS: I met a man at a cocktail party one of the evenings at work. I didn't know him at all. I introduced myself. He said, "What are you doing?" I said, "Oh, I'm writing an economic plan for the next government." GONZALO SANCHEZ DE LOZADA: And I said, "I'm very, very pleased that you're studying this, because we're going to beat these guys, and you can come and work for us." So they all laughed. JEFFREY SACHS: He said: "Oh, that's very interesting. What do you have in mind?" And I described a few elements, basically how to stop hyperinflation. And he said: "No, no, you have to go much beyond that. You don't understand. We need so much more. You're just going on the surface. This country needs a complete overhaul. We've got to get out of the mess that we're in." I wasn't sure whether he was provoking me, whether he was kidding, whether he was sober, whether he knew what he was doing. It turned out that this was Goni, Gonzalo Sanchez de Lozada -a genius. NARRATOR: Goni's party did win the election, and he became minister of planning. He told the president that Bolivia was running out of time. JUAN CARIAGA: We told him, "You have 90 days before Bolivia's hyperinflation becomes the highest inflation in world history." So he told us, "Okay, you have 20 days; you have to start working now." GONZALO SANCHEZ DE LOZADA: There was a big discussion whether you could stop a hyperinflation or an inflation period by taking gradualist steps. In this Jeff Sachs was influential. He said: "All this gradualist stuff just doesn't work. When it really gets out of control you've got to stop it, like a medicine. You've got to take some radical steps; otherwise your patient is going to die." NARRATOR: To avoid leaks, they worked at home. Every few days, Goni reported to the president. GONZALO SANCHEZ DE LOZADA: We said: "Look, boys, you've got one chance. And remember, as Machiavelli said, 'It's all the bad news at once, the good news little by little.'" So he said, "Get it all done." Shock therapy is get it over, get it done, stop hyperinflation, and then start rebuilding your economy so you achieve growth. NARRATOR: In August 1985, Goni went public with a program called "shock therapy." JUAN CARIAGA: It caught everybody by surprise. It had great credibility. It was a shock. NARRATOR: Shock therapy spelled the death of dependency theory. Government spending was slashed. Price controls were scrapped. Import tariffs were cut. Government budgets were balanced.
JUAN CARIAGA: We didn't use highly sophisticated economic theory to deal with hyperinflation. We just used very simple things, such as from now on the government will only spend what it gets. You get one peso, spend one peso; you get two pesos, spend two pesos. If we don't have it, we don't spend it. No borrowing from the Central Bank, and therefore the Central Bank did not have to print money. NARRATOR: Shock therapy meant that the price of essentials -- transport, food, fuel -- all shot up. Until then people had thought that only a military dictatorship like Chile's could impose such tough measures without tearing society apart. DANIEL YERGIN: Bolivia may be a small country, but it had a very big impact in terms of kick-starting reform throughout Latin America. In Brazil, a professor, who actually used to teach the dependency theory, launched a program of economic reform that looked a lot like shock therapy. DANIEL YERGIN: Argentina was suffering from 20,000 percent inflation and the new president of that country said, you know, we've seen this movie before. DOMINGO CAVALLO, Economy Minister, Argentina, 2001: Pro-market reforms could be implemented under a democracy, and we demonstrated that it was possible here in Argentina. NARRATOR: All across Latin America, governments began to sit up and take notice. GONZALO SANCHEZ DE LOZADA: I think the Bolivian experience did have influence. The fact that we did it in democracy, we did it without great social violence, had impact on economic thinkers and on politicians. JEFFREY SACHS: In late 1985, as we were struggling late into the night with a problem, he said, "You know, this is extraordinarily hard, but what's happening here, this is going to have to happen all through Latin America." I watched it unfold, one country after another. NARRATOR: It is a curious fact of history that what happened in Bolivia was to have a direct impact on the frozen economies of Eastern Europe. JEFFREY SACHS: I was approached by a Polish government official who had watched the Bolivian reforms, and then had seen the work I had done in Argentina and Brazil. He finally asked me would I go to Poland and help. Onscreen title: Warsaw, Poland
The Poles themselves feared that they were descending into starvation. The shops were utterly empty for miles. I would see a woman just standing on the street sobbing: "There's no milk in this city. I can't find any milk for my child. What am I going to do?" It was terrifying. NARRATOR: Sachs arrived on the very day that roundtable talks agreed there should be free elections in Poland.
LECH WALESA: The situation was more than dramatic. One can change a political system overnight, but an economic system needs years. DANIEL YERGIN: Whenever Soviet power was challenged in Eastern Europe, the response was very clear. It was tanks; it was the Red Army. That was the case in Berlin in 1953, Budapest in 1956, Prague 1968. But the answer was different in Warsaw in 1989. Solidarity won 99 out of 100 seats. The head of the Polish Communist Party called Moscow for directions. Mikhail Gorbachev's answer was stunning: "Do nothing; accept the outcome of a free election." And that was really the phone call that ended the Cold War. And of course, the great symbol of the end of the Soviet empire was the fall of the Berlin Wall. One country after another broke free of communism -- Poland, Hungary, Czechoslovakia, Romania. 1989 was truly a miracle year. NARRATOR: Poland was free now. Solidarity had to liberate the Polish economy. Late one night Sachs met the Solidarity economist Jacek Kuron in a Warsaw apartment. JEFFREY SACHS: I was trying to explain how you get out of this mess that the communist system had left behind. Every couple of minutes he would pound on the table, "Pah, pah, pah" -- "Yes, yes, yes, I understand." And we'd gone on -- "Pah, pah" -- and it was very, you know... it was really exciting. We went on for a few hours like this. I was exhausted. The room was filled with smoke, and he said: "Okay, clear. Write up the plan." We got up. I said: "Well, this will be a great honor. We'll send you something just as soon as we can." "No, tomorrow morning I need the plan." I laughed, and he said, "I'm absolutely serious; I need this written down now." We wrote up a plan that night and delivered it the next morning. They distributed it to the Solidarity members of the Parliament. NARRATOR: Like Sachs, Solidarity's new finance minister, Leszek Balcerowicz, believed transition had to be rapid and massive. LESZEK BALCEROWICZ, Finance Minister, Poland, 1989-1991: Just after breakthrough, there is a short period, a period of extraordinary politics. By definition, people are ready to accept more radical solutions because they are pretty euphoric of freshly regained freedom. One could use it only in one way, by moving forward very, very quickly. JOSEPH STANISLAW: Poland decided to do what Bolivia did, to introduce shock therapy, cut back on government expenditure and try and introduce a market system and see if it could work. NARRATOR: Prices almost doubled, and shortages didn't end. All Balcerowicz could do was chew his nails and wait for the law of supply and demand to kick in. But then, after a few days, farmers began to bring their produce to market. LESZEK BALCEROWICZ: I was going for a walk, and we were looking at the prices in the shops, the prices of eggs.
NARRATOR: His aides told him to concentrate on the price of eggs. If eggs appeared, if eggs got cheaper, the market would be working. Eggs did appear. And then the price of eggs began to fall. LESZEK BALCEROWICZ: And I remember that very important day when the prices of eggs are falling. This was one of the signals that the program, the stabilization program, is working. NARRATOR: But reforming state-owned heavy industries would prove a much bigger challenge. LESZEK BALCEROWICZ: Once Poland became free, one of the problems I have to face was a fight about privatization. DANIEL YERGIN: The big problem was the old industries inherited from the communist past, and there were wrenching problems of unemployment, of making them efficient, keeping them running. And that's where you saw a lot of the pain. NARRATOR: Making overmanned state-owned industries efficient or profitable meant wide-scale layoffs for Poland's blue-collar workers. JAN BIELECKI, Prime Minister, Poland, 1991: When I became the prime minister, the euphoria of transition was almost over. We had 20,000 strikes, sometimes organized by my former colleagues from Solidarity movement. NARRATOR: Solidarity began to lose support as workers felt the pain of reform. JEFFREY SACHS: I was asked to go to some factories, to meet with workers to try to explain what my vision of this might be. FACTORY WORKER: In the beginning we were made to believe that it wouldn't take long for things to get better. FACTORY WORKER: Sachs gave us a rosy vision for the future of our economy. ZYGMUNT WRZODAK, Union Leader, Ursus Tractor Factory: We soon found out that the program imposed on us from the outside most harmed precisely those Poles who had contributed so much to political freedom. NARRATOR: But elsewhere, the market was flourishing. Tens of thousands of small businesses sprung up, and the Polish economy began to boom. JAN BIELECKI: You suddenly had thousands of people trading the same products in front of the state-owned shop, but at a much lower price. This is phenomenal, because it shows enormously entrepreneurial drive of the Polish people. When you have your five minutes, take it. When the Polish
people finally got that opportunity, they took the chance. They used the chance. NARRATOR: At the Soviet embassy in Warsaw, a special observer from Moscow had been monitoring the economic reform. GRIGORY YAVLINSKY: The Soviet embassy in Warsaw had a feeling that this was a disaster for them. They didn't want to send my telegrams to Moscow. I was describing what was going on there, and they would completely disagree. I was very supportive, and they were very negative. I was sending the analysis to Gorbachev. "Balcerowicz is doing the right thing for Poland" -- that is what I was saying. NARRATOR: Gorbachev asked Yavlinsky to write up a plan for radical economic change. GRIGORY YAVLINSKY: I hoped to do in a year and a half as much as possible to make a transition from the Soviet economy to the market economy. I understood we should move as quickly as possible NARRATOR: The U.S. threw its moral support behind the free-market reforms. JAMES BAKER, U.S. Secretary of State, 1989-1993: We want to learn a little more about Mr. Yavlinsky's efforts. A country is trying to change 70 years of political and economic philosophy and change it in a way that moves it in exactly the opposite direction. NARRATOR: But Gorbachev shrank from shock therapy. The Yavlinsky plan languished on his desk. MIKHAIL GORBACHEV: Poland was definitely a pilot project, and the fact that reforms started there was very important. But please understand, no country can repeat the reforms of another country. DANIEL YERGIN: Gorbachev was looking at Poland. He's looking around the world trying to find some formulas that would help the Soviet Union make the transition. And what more logical place to look than in communist China, which is marching towards the market? Onscreen title: Beijing, China
NARRATOR: In 1989, the year the Berlin Wall fell, Gorbachev visited Beijing. As he arrived, protestors were gathering in Tiananmen Square. In China, too, the Communist hold on power looked unsure. But Gorbachev found the Chinese economy was being transformed under its leader, Deng Xiaoping. DANIEL YERGIN: Deng Xiaoping was an old-style Communist. He'd been very close to Mao Zedong, but he had fallen from power and had spent time when he was under house arrest, pacing around in the courtyard, thinking through what had gone, wrong; why was this communist dream turning into such an economic nightmare. And when he came back to
power, he said, "I have two choices: I can distribute poverty, or I can distribute wealth. NARRATOR: Deng had been impressed by the success of the Southeast Asian economies, in which overseas Chinese were so prominent. LEE KUAN YEW, Senior Minister of Singapore: They were lucky that after Mao died, Deng Xiaoping opened up China. He had to fight his own conservatives, the orthodox Communists who were terrified that this meant dismantling the socialist state that they were building. DANIEL YERGIN: Deng Xiaoping said: "Don't worry. We're not pursuing capitalism; we're pursuing socialism with Chinese characteristics." JOSEPH STANISLAW: The Chinese decided to keep the political system of communism, but to get rid of the economic system called communism and go towards market socialism. With that, they could keep political control, but also have the benefits of the marketplace. DANIEL YERGIN: By the mid-1980s, China embarked on its era of high economic-growth rates, moving towards a market system, moving towards engaging with the world economy. NARRATOR: Under Gorbachev, there had been intense argument on whether China's route to the market was right for Russia. JEFFREY SACHS: The KGB said, "Well, why don't we do what China's doing --keep political control, but open up on the margin, and we'll maintain our political power; we'll maintain the state enterprises, but we'll grow." That's what China did. NARRATOR: Tiananmen Square showed how far the Communist Party was willing to go to hold onto power. LEE KUAN YEW: Deng Xiaoping believed in restructuring before opening up. Glasnost and freedom and transparency and so on -- that had to wait. First restructure, and restructure under the old system by directives so that nobody can say no. Deng understood that if you released these forces, unless you do it in a controlled way, the system will collapse. He saved the country from an implosion like the Soviet Union. JEFFREY SACHS: Many people say, "Why didn't Gorbachev do the China approach?," without understanding that that, of course, is what Gorbachev tried to do for four years. They just don't get it. They don't understand that Russia was an 80 percent urbanized, heavy-industrialized economy, whereas China was a peasant economy with 80 percent of the population in rural areas. In Russia, the non-state sector was 1 precent; it was nothing. So yes, you could get a few restaurants going, but you couldn't get to the core of the problem without addressing the industrial core of the system. So they had no easy way out. They had no gradual track like China. LILIA SHEVTSOVA, Senior Associate, Carnegie Moscow Center: Gorbachev got stuck with economic reform. He began too late, and his reforms were
too cautious. He never touched the foundation of the planned economy. JEFFREY SACHS: This was a society that, while on the surface it looked stable, was more like one of those cartoon characters that's run off the cliff, is stationary for the moment, doesn't realize that it's about to reach a free fall. And it did go into that free fall. Onscreen title: Moscow, Soviet Union
NARRATOR: In August 1991, diehard Communists staged a coup. Boris Yeltsin became the voice of democratic resistance. The coup collapsed. Gorbachev survived the plot, but his prestige was destroyed, and the Soviet Union's days were numbered. DANIEL YERGIN: The end of December 1991, Mikhail Gorbachev went on Soviet television. He told his viewers that the Soviet Union would within a few days cease to exist legally. After seven decades, the Soviet Union was over, it was finished, fade to black. NARRATOR: The president of Russia was Boris Yeltsin. Unlike Gorbachev, Yeltsin wanted to move fast. He chose the young reformer Yegor Gaidar as the man to turn Russia into a market economy. DANIEL YERGIN: For Gaidar it was a shock. There was no money in the treasury; there was no gold; there was not even enough grain to get through the winter. It was unclear who was even in charge of the nuclear weapons. Gaidar later said that it was like flying in an airplane and going into the cockpit and finding no one at the controls. YEGOR GAIDAR: It was clear to me that the country was not functioning, the economy was not working, and that if nothing were done and if everyone feared that nothing would be done, it would end in catastrophe, even a famine. NARRATOR: Gorbachev's halfway reforms had left the economy in a tailspin. Every essential was in short supply. LILIA SHEVTSOVA: We have been queuing every day to get something -sugar, matches, salt. The stakes really were very high. Economic situation was absolute disaster. Inflation was about 20 percent a month. The shelves stood empty. The prices were skyrocketing. Everyday life was the search for survival. Gaidar had to move very fast. NARRATOR: Gaidar was now in charge of the entire Russian economy. And he was still only 35. He assembled a team of youthful free-market reformers, among them his fellow dissenter, 36-year-old Anatoly Chubais. Communist hard-liners nicknamed them the "little boys in pink shorts." Jeffrey Sachs now 36, was called on to advise on economic reform. JEFFREY SACHS: I of course had the Poland experience in mind. Russia turned out to be something quite different.
NARRATOR: The Parliament was dominated by Communists and other parties who opposed reform. JEFFREY SACHS: Gaidar was under remarkable political attack from the first moment. It wasn't seven days after the start of reform that the head of the Parliament called for the resignation of the government, for example. YEGOR GAIDAR: It is a pseudo market utopia. The only thing I want to ask is understanding the gravity of the situation. NARRATOR: Gaidar and his team wanted to use economic reform as a political weapon to smash the old communist system before it destroyed them. BORIS JORDAN: It was more a survival tactic -- how can we destroy the communist, centrally controlled economy? Let's destroy the army, let's destroy the KGB, and let's destroy centrally controlled planning, rather than how are we going to build an economy? NARRATOR: New Year's Eve, 1991. Next morning prices would be freed. Gaidar's reform would directly affect the man and woman in the street. It would also mean the end of everything the Communists had stood for. Next, Gaidar abolished the Soviet law that made private enterprise a criminal activity. Gaidar believed that an effectively free market would put an end to shortages. He didn't have long to wait. YEGOR GAIDAR: I was driving to my office on Old Square, past Detsky Mir, the children's shop, and I saw a huge crowd of people. I sent my aides to find out what was going on, and they saw hundreds of people with various kinds of goods. They were holding a copy of the decree on the freedom of trade while trying to buy or sell stuff. So that's when I understood that in 75 years it had not been possible to extinguish this entrepreneurial spirit. That was one of the pivotal points. Starting from then, there were no more shortages in Russia. I felt that we were right and that market forces worked, even in this tortured economy. NARRATOR: The market may have been reborn, but f or ordinary Russians reform meant higher prices. LILIA SHEVTSOVA: I hurried to a department store to look at the faces of Muscovites, whether they would revolt, looking, you know, at all these skyrocketing prices, because Gaidar felt that they would increase twofold. They increased twelvefold. NARRATOR: Prices kept rising. The hard-liners who controlled the Central Bank made it much worse. Their policies fueled inflation. In Norilsk, factory workers like Yuri Khamutov were cleaned out. YURI KHAMUTOV: Chubais talked about reform, but with him and with Gaidar, nothing improved. We lived worse and worse and worse. So much for Gaidar's reforms. Many came north to earn the money to buy a house,
a flat, a car, to save a pension. And then in one day you were left with nothing. It was so sudden, some people committed suicide. GRIGORY YAVLINSKY: Inflation came 500 percent, 600 percent, 700 percent. The monies simply went to the ashes, simply to nothing. The population was simply smashed by that hyperinflation, and that undermined all kind of belief in the economic changes.
