Commanding Heights: The Agony of Reform

The Agony of Reform

Directors:Greg Barker | William Cran
Writer:Greg Barker
Release Date:2002 (USA)
Commanding Heights: The Battle for the World Economy is a book by Daniel Yergin and Joseph Stanislaw, first published as The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World in 1998. In 2002, it was turned into a documentary of the same title, and later released on DVD.

The terrible events of September 11 showed how a whole world might be driven deeper into recession.
(thunder)
(metal clanking rhythmically) Argentina's economic meltdown has raised new fears about the perils of the interconnected global economy.
Bill Clinton: 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 positive or negative? 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 and mass unemployment.
So governments everywhere sought to curb market forces and rein in their 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.
Sachs: Part of what's 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.
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.

This free-market revolution has really led to the new global economy.
It excites some and terrifies others.
That revolution was wrenching.
Tonight on Commanding Heights, "The Agony of Reform.
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Additional funding was provided by: and by contributions to your PBS station from: 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.
Norilsk symbolized every stage of Soviet economic history, from the original prison camp and the 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 political prisoners were working in its mines and factories.
Narrator: Millions rode the slow train to the prison camps.
Vasily Romashkin's crime against the state was to check out the wrong book from the public library.
(speaking Russian) Translator: They sent me to Norilsk after the trial.

The trial lasted about ten minutes.
My wife and I said our good-byes.
Narrator: The prisoners' slave labor became a crucial component of the Soviet economy.
Romashkin (translated): 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.
Shultz: Russia looked very formidable.
The essence of Soviet power was its ballistic missiles.
They could wipe out any country in the world in a 30-minute time, so that's a lot of power.
Thatcher: Communism was gaining the world over, gaining by its main methods- military threat from military might.
Powell: 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, the apparent success of Communist China seemed to show the way.
But the truth about the Soviet economy lay concealed behind the "Iron Curtain." 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 adviser to Prime Minister Margaret Thatcher.
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.
Powell: 0leg Gordievsky was perhaps the most valuable agent because he understood the Soviet system from inside.
Narrator: In Moscow, the net was closing in on 0leg Gordievsky.
At that time, I decided to use my secret, long-standing 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.
Gordievsky: In the morning, I started to move toward the site in the woods.
And there I waited.
I waited arrival of car, driven by two British people.
The British picked me up, put me in the boot and drove to the border.
It was a very small car, a very small boot.
0n the border we started to stop: one stop, second stop, third stop.
Narrator: They were approaching the moment of maximum danger.
(dog barking) Gordievsky: The KGB and Soviet customs checks of the cars.
(dog barking) I heard the voices, I heard even the KGB dogs barking.
(dog barking) And to my great luck, it went without any accident.

Narrator: 0ne of the British agents, a woman, threw the guard dogs off the scent by feeding them potato chips.
Narrator: Three days later, Gordievsky was in London and the debriefings began.
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 armaments- 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.
Gordievsky: And the analyst, he said, "No, I can't put such a huge figure because nobody would believe it." Later, economists realized that the Soviet Union had been spending at least 50% on the military.
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.
(march music playing) Narrator: Thanks to Gordievsky's intelligence, Western leaders realized that Soviet military might rested on a crumbling economy.
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.
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 Yavlinksy wrote a report on why workers in state mines were so unproductive.
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.
(man speaking Russian) Translator: 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.
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.
Man: 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.

Man: 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.
Man: Every license, every permit, was procured by corrupt means.
Interviewer: A bribe? 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.
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.
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.
50 years later, Toyota makes five million cars a year.
Hindustan sells 18,000 Ambassadors and still to the same design.
Man: If you have a controlled economy, cut off from the rest of the world by infinite protection, nobody has any incentive to innovate, nobody has any incentive to increase productivity, to bring new ideas.
Narrator: 0verprotected...
over-administered...
over-planned.
The "Permit Raj" was quite literally a brake on the Indian economy.
(tires screech) In Latin America, radically different leaders shared India's suspicion of the world economy.

In the 1940s and '50s, it was Argentina's 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.
(giving speech in Spanish) Though rich in raw materials, Latin America seemed doomed to perpetual poverty.
The "dependency theory" of economic development seemed to offer a way out.
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 imports 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.
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.
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.

Man: 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 strafed 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.
(shouting in unison) Narrator: Chile's military junta was led by General Augusto Pinochet.
Many middle-class Chileans saw him as a savior.
Man: 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.
Harberger: After a year, year and a half of military government, you still had 20% per month built-in inflation that wouldn't go away until something structurally changed.
Narrator: 0ne of those who plotted the coup went to talk to Pinochet face-to-face.
(man speaking Spanish) Translator: I told him, "You've been called Chile's savior, but you will go down in history as the man that buried Chile." (speaking Spanish) Translator: He was very shocked by this, and he said, "0kay, you've got 48 hours to come up with a national plan to fix the economy." (Kelly speaking Spanish) The only people who had a serious blueprint of how to get out of this were this group known as 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.
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 mistrust 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.
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 kind of a 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.
(speaking Spanish) Translator: 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.
So I called Milton Friedman and invite him to come to Chile.
Narrator: So Milton Friedman, the most famous free-market economist in the world, came to lecture in Chile.
Friedman: I went down to Chile and spent five days giving a series of lectures on 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.
The emphasis of that talk was that free markets would undermine political centralization and political control.

Harberger: He said 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.
Vial: Friedman say, "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." 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: The junta called on the Chicago boys to rescue the economy.
500 state-owned businesses were privatized, government budgets were cut, import tariffs were swept away.
The markets were given free rein.
(brokers shouting) (De Castro speaking Spanish) Translator: The basic thrust was to increase exports and abolish artificial price controls.
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.
Man: 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% unemployment rate.
Narrator: According to the Chicago boys, the gain was worth the pain.
Chile became the fastest-growing economy in Latin America.
Foxley: They were able to start the process of deregulating the markets, opening up the economy, so that's a contribution.
They were able to anticipate a global trend, and Chile has benefited from that.
Interviewer: But at a price.
At a very high price.
At a very, very- believe me- at a very high human price.
(band playing marching music) 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 people who died or disappeared during the dictatorship.
The brutality of Pinochet's regime left little enthusiasm for economic change in the rest of Latin America.
Man: 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.
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.
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.
(crowd chanting) Narrator: The protests reached their climax when Friedman was awarded the Nobel Prize in 1976.
(crowd chanting) Friedman: At the Nobel ceremonies in Stockholm, I was subject to abuse in the sense that there were large demonstrations against me.
(whistle blowing) There was a concerted effort to tar and feather me.
Friedman, go home! Friedman, go home! 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.
(funeral dirge playing in distance) 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.

Yergin: By the 1980s, 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 talked 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.
Man: 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: Chubias helped to organize seminars far from the prying eyes of the secret police.
0ne of his co-conspirators was a young economist from Moscow.
Translator: 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.
Chubias: 0n that stage, definitely we do understand that this thing is quite risky.
Gaidar: Some of our sessions took place behind closed doors.
We didn't trust everyone at the seminar, so we kept some people out.
0ur 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.
Chubias: 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.
(Gorbachev speaking Russian) Translator: 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 solve 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.
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.
" Gorbachev (translated): 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.
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.
Woman: Mr.President! Mr.President, Mr.President! Narrator: 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.
(applause) Reagan: Thank you very much.
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 self-expression of the people.
Thatcher: Up to that time, the whole doctrine had been one of contained 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 of ideas between what the free world had to offer compared with the dictatorship and tyranny and cruelty of communism.
(cameras whir and click) 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.
Gordievsky: Speaking to Gorbachev, 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." (cheering) Narrator: In 1987, President Reagan carried this war of words to the most symbolic stretch of the Iron Curtain: the Berlin Wall.

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.
(cheering) Mr.Gorbachev, tear down this wall.
(cheering continues) (reporter speaking Polish) 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.
(Walesa speaking Polish) Translator: 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.
(speaking Polish) (crowd cheering) (Walesa speaks briefly) (man speaking Polish) Translator: I thought they didn't know what they were fighting for.
I thought they were just fighting for a pay rise.
0nly 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.
(Walesa speaking Polish) Translator: 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.
Powell: She came into the city of Gdansk onboard a small ship, and as she went past the shipyards, all the cranes and the dockside was lined with shipyard workers, all cheering and waving.
And one began to sense here was an extraordinary experience in the making.
(Jankowski speaking Polish) Translator: 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.
(crowd chanting "Solidarity" in Polish) Narrator: Solidarity workers escorted Mrs.Thatcher to a church.
(organ playing, woman leading congregation in song) Powell: Great crowds sang the Solidarity anthem, a haunting anthem.
(congregation singing anthem) (Jankowski speaking Polish) Translator: I could see she was very emotional about this visit.
Her eyes registered everything that went on around her.
Powell: It's one of the very few times that I saw tears in Mrs.Thatcher's eyes, as she was so moved by this expression of longing for liberty.
(congregation singing anthem) 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.
Thatcher: If you have a free society under rule of law, it produces both dignity of the individual and prosperity.

Powell: Although it sounds very bossy and interfering, I think they were genuinely grateful.
Good grief! (laughter) "You, Solidarity," she said, "you must have your own ideas and plans worked out.
It 's no good just being popular." 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 ten steps from where you are now to where you want to be.
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."
Translator: This meeting with Mrs.Thatcher made these future politicians recognize the opportunities within their grasp.
Thank you very much, thank you.
(Walesa speaking Polish) Translator: Without this meeting, there would have been no victory.
That's for sure.
There would have been delay, greater difficulties or even our destruction.
(crowds chanting) Narrator: Thatcher's free-market message seemed to offer an escape from a Polish economy that was debt-ridden and riddled with shortages.
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.
(marching band playing) Narrator: 0ne of the poorest countries in Latin America and with a history of 189 military coups, Bolivia was also one of the most unstable.
Man: When I was going to college in Texas, 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.
"Ah, Bolivia.
What's the inflation rate in Bolivia this week?" Because we had galloping hyperinflation that destroyed our economic base.
We found that Bolivia was the seventh highest inflation in the history of man.
23,500%.
Prices increased by the hour.

Narrator: The cost of food and clothes kept increasing.
Before it was all over, the total inflation averaged one percent every ten minutes.
Quiroga: Seven out of ten Bolivians live in poverty.
The poor people get hurt even more.
They see their pockets being eaten away by inflation that is galloping around.
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 petro-dollars.
So here were the international banks with billions of dollars and nowhere to earn interest on it.
They discovered Latin America.
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.
Guess what? 0ne day these countries could no longer afford to repay their debts.
(brokers shouting orders in Spanish) 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." 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.
If you can't collect taxes, you've got to make the money somehow, so they just printed it.

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 telephone.
(telephone ringing) Narrator: At 29, economist Jeff Sachs had just become one of Harvard's youngest full professors ever.
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.
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%.
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.
0nly one man seemed to know what to do.
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, "I'm writing an economic plan for the next government." 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.
(laughter) Sachs: He said, "0h, that's very interesting, What do you have in mind?" And I described a few elements, basically how to stop a 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.
Man: We told him you have 90 days before Bolivia's hyperinflation becomes the highest inflation in world history.
So he told us, "0kay, you have 20 days.
You have to start working now." 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 in 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.
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." 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.
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.
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 former professor who actually used to teach the dependency theory, launched a program of economic reform that looked a lot like shock therapy.
Argentina was suffering from 20,000% inflation, and the new president of that country said, you know, we've seen this movie before.
Man: 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.

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.
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.
(foghorn blows) Sachs: I was approached by a Polish government official who had watched the Bolivian reforms and then had seen the work that I had done in Argentina and Brazil.
He finally asked me, well, would I go to Poland and help.
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.
Translator: The situation was more than dramatic.
(speaking Polish) 0ne can change a political system overnight, but an economic system needs years.
(cameras whirring and clicking) 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 a hundred 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.
(cheering and chanting) And of course the great symbol of the end of the Soviet empire was the fall of the Berlin Wall.
0ne country after another broke free of communism: Poland, Hungary, Czechoslovakia, Romania.
(crowd roaring in celebration) 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.
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'd pound on the table, (imitates pounding): "Yes, yes, yes, rozumie."
I understand.
And we'd go on, and, "Rozumie, rozumie!" and it was very...
you know, it was, it was really exciting.
We went on for a few hours like this.
I was exhausted, the room was filled with smoke.
He said, "0kay, 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, Lescek Balcerowicz, believed transition had to be rapid and massive.
Balcerowicz: 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.
0ne could use it only in one way: by moving forward very, very quickly.
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.
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.
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.
(foghorn blasts) Narrator: But reforming state-owned heavy industries would prove a much bigger challenge.

Balcerowicz: 0nce Poland became free, one of the problems I have to face was a fight about privatization.
Yergin: The big problem was the old industries inherited from the communist past.
And there...
there were wrenching problems of unemployment, of making them efficient, keeping them running, and that's where you saw a lot of...
a lot of the pain.
Narrator: Making over-manned, state-owned industries efficient or profitable meant wide-scale layoffs for Poland's blue-collar workers.
Man: 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.
(speaking Polish) Narrator: Solidarity began to lose support as workers felt the pain of reform.
(speaking Polish) Sachs: I was asked to go to some factories, to meet with workers...
...to try to explain what my vision of this might be.
(man speaking Polish) Translator: In the beginning we were made to believe that it wouldn't take long for things to get better.
Sachs gave us a rosy vision for the future of our economy.
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 sprang up and the Polish economy began to boom.

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.
The Soviet embassy in Warsaw had a feeling that this is a disaster for them.
They didn't want to send my telegrams to Moscow.
I was describing what's 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's what I was saying.
Narrator: Gorbachev asked Yavlinsky to write up a plan for radical economic change.
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.
Baker: We want to learn a little bit 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.
(speaking Russian) Translator: 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.
Gorbachev was looking at Poland, he's looking at...
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? Narrator: In 1989, the year the Berlin Wall fell, Gorbachev visited Beijing.
As he arrived, protesters 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.
(applause) 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.
Man: 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.
Deng Xiaoping said, "Don't worry, "we're not pursuing capitalism.
We're pursuing socialism with Chinese characteristics." 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 their political control, but also have the benefits of the marketplace.

Yergin: By the mid-1980s, China embarked on its era of very high economic growth rates, moving towards a market system, moving towards engaging with the world economy.
(cameras whirring and clicking) Narrator: Under Gorbachev, there had been intense argument whether China's route to the market was right for Russia.
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 on to power.
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.
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% urbanized, heavy industrialized economy, whereas China was a peasant economy with 80% of the population in rural areas.
In Russia, the nonstate sector was 1%, 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.
Woman: 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.
Sachs: This was a society, 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 it's about to reach a free fall.
And it did go into that free fall.
(gunfire) Narrator: In August 1991, diehard communists staged a coup.
(man yelling in Russian) Boris Yeltsin became the voice of democratic resistance.
(crowd chanting) (speaking Russian) Narrator: The coup collapsed.
Gorbachev survived the plot, but his prestige was destroyed and the Soviet Union's days were numbered.
(Gorbachev speaking Russian) 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.

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.
(speaking Russian) Translator: It was clear to me that the country was not functioning, the economy was not working, and that if nothing was done- and 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.
(crowd yelling) (people yelling) You've been queuing everyday to get something- sugar, matches, salt.
The stakes really were very high.
Economic situation was absolutely...
was absolute disaster.
Inflation was about 20% a month.
The shelves stood empty.
The prices were skyrocketing.
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 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.
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 that opposed reform.
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.
(no audio) (speaking Russian) Narrator: Gaidar and his team wanted to use economic reforms as a political weapon to smash the old communist system before it destroyed them.
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 lets destroy centrally controlled planning.
Rather than, how are we going to build an economy? (fireworks popping, crowd cheering) 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.
(crowd cheering) 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.
Translator: I was driving to my office on 0ld 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 up the decree on the freedom of trade whilst 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 for ordinary Russians, reform meant higher prices.
Shevtsova: I hurried to a department store to look- to look at the faces of Muscovites, whether they would revolt looking, you know, at all these skyrocketing prices, because Gaidar thought 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.
(speaking Russian) Translator: Chubais talked about reform, but under him and 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 for a pension.
And then in one day you were left with nothing.
It was so sudden, some people committed suicide.
Inflation came 500%, 600%, 700%.
The money simply went to the ashes, simply to nothing.
The population was simply smashed by that hyperinflation.
And that's undermined all belief to the economic changes.
Narrator:: The collapse of the Soviet Union reverberated around the world.
For India, it was the end of a role model- the ideal of central planning shattered.
This was telling proof that a command type of economy was not as secure as we had thought.
Therefore, the collapse of the Soviet Union was a major factor which influenced thinking on economic reforms in our country as in other countries.

Narrator: Planned by bureaucrats and cut off from world trade, India's economy had grown stagnant, inefficient and indebted.
In 1991, India stared bankruptcy in the face.
We were borrowing heavily.
We had to mortgage our gold deposits.
0ur growth rate had come to virtually zero.
All this added to a very enormous crisis.
Narrator: In the midst of the crisis, the economist Manmoham Singh received an urgent call from the new prime minister.
He found himself appointed finance minister.
Singh: Well, I said to him that we are on the verge of a collapse.
0ur foreign exchange reserves when I took over were no more than a billion dollars- that is roughly equal to two weeks imports.
(reporters asking questions) The argument was quite simple.
We were in the midst of an unprecedented crisis.
It was time to think big.
Narrator: To the horror of his own political party, the prime minister gave the green light for free-market reform.
Chidambaram: Well, the rank and file of the party were simply bewildered.
They did resist the kind of changes that we brought about.
But we presented them the hard facts that unless all this was done the economy would simply collapse.
Narrator: India's "Permit Raj" was ended.
State control was reduced, government subsidies were cut, tariffs and trade barriers reduced and regulatory licenses eliminated.
We got government off the backs of the people of India, particularly off the backs of India's entrepreneurs.
We introduced more competition to release the innovative spirits which were always there in India.

The economy turned around much sooner and much more deeply than I had anticipated.
Indian industry boomed.
We created a record number of jobs, we were able to control inflation and the economy was growing at the rate of seven percent per annum so our critics were completely silenced.
Narrator: In Russia, the commanding heights of the economy were still in the hands of the state.
In a great idealistic move, the young reformers set out to democratize state industries by simply giving them away.
In charge of this program of privatization was Anatoly Chubais.
(speaking Russian) The 70-year communist monopoly was about to be overturned.
Russians citizens were given vouchers which they could use to acquire shares in privatized companies.
Translator: We need millions of property owners, not just a few millionaires.
All Russian citizens, workers, pensioners and small children will be given privatization vouchers worth 10,000 rubles.
Narrator: There was a problem.
Not one company was ready to be privatized.
Jordan: They had distributed 144 million vouchers to the people but had no practical idea on how to get companies through the privatization process and actually into public hands, away from the state.
Narrator: The young reformers asked Boris Jordan- one of the first foreign bankers to set up shop in Moscow- to find a company to privatize.
But they had to move fast.
(man speaking Russian) Jordan: They knew that if they didn't at least launch the program by December 9, 1992, when the Congress of Peoples Deputies was getting together, the Communists were going to kill privatization.
(speaking Russian) Narrator: The young reformers were in a race against time.
Jordan: It was very tight.

If there wasn't going to be privatization there was going to be no market economy.
Narrator: They narrowed the search down to a business on the edge of Moscow.
It was not exactly what Lenin would have called the commanding heights, but the Bolshevik Biscuit Factory did bake Russia's favorite cookie.
Jordan: We had to, I wouldn't say bribe, but incentivize them.
We gave managers of their factories and the employees of the factories about 50% of the stock in the company.
The balance of the equity would be sold in the public markets through these vouchers.
We opened up the first official auction of a Russian company to the public on December 8, 1992.
(men shouting) Narrator: 0n the day of the auction, fury at the economic reforms boiled over in parliament.
(people shouting) Communist hard-liners forced a vote of no-confidence in Gaidar.
I remember it very well.
We'd already opened the auction, and I was sitting in the auction center.
(auctioning in Russian) I was watching the television, and I watched Gaidar get removed.
Narrator: Communist opposition had forced Yeltsin to sacrifice Gaidar.
His replacement, Victor Chernomyrdin, was a product of the old Soviet central planning system.
Sachs: There's no doubt that after Gaidar was thrown out of the prime ministership at the end of 1992 that the level of corruption rose tremendously.
Narrator: State companies were sold off, and the trade in vouchers led to a fledgling stock exchange.
A market economy was taking hold, but it was getting off to a shaky start.

In Moscow, this was the time of "gangster capitalism." Speculation and crime were rampant in what some called "the Wild East." A lot of societies have corruption, but Russia had, uh, an elite that had grown up in such an amoral environment under the Soviet system that they really did believe that property is theft.
"0kay, now we're in a private property system, we'll steal it," and Russia had a lot to steal.
You had the oil, the gas, the nickel, the chromium, the diamonds, the gold.
This extraordinary combination of huge natural resource reserves- and they were in state hands.
Narrator: The biggest companies, the major industries, were still controlled by their all-powerful managers, former Soviet apparatchiks.
Known as the "Red directors," they were utterly opposed to the young reformers and privatization.
The only way to privatize the commanding heights of the Russian economy was to wrest control away from the Red directors.
Yavlinsky: In Eastern Europe, the real democratic revolution happened.
It was a real replacement of the political elite.
In Russia, the same people changed the jackets and changed the portraits in the rooms, and instead of saying "communism" and "Lenin" and "five-years plan," started to say "market," "democracy," "freedom." (men conversing quietly in Russian) Chubias: I do remember one of the first meeting with directors, which was very tough, which was very tough.
(conversations continue) They hate the language we speak, they hate the face we have, they hate everything which was connected with us.

These guys was the real owners of the country.
I was fighting for the real commanding heights in terms of who run the economy.
Who run the economy: market or the Soviet directors? (siren wails) Narrator: The vast factory complex at Norilsk was to become a major battleground between the Red directors and a new kind of Russian.
Vladimir Potanin was a buccaneering businessman who quit his job in the foreign ministry and within a few years built a small trading company into one of Russia's leading banks.
I decided to become a businessman at the moment when I understood that it is possible.
Because, uh, I grew in a country where it was not possible and there existed even a special article in a penal code of the Soviet Union which banished entrepreneuring activity.
Narrator: Potanin's next venture would lead some to see him as an inspired entrepreneur, others as a robber baron.
In 1995, he decided to make a play for Norilsk Nickel, but to take over Norilsk meant going up against one of the most powerful of the old Red directors, Anatoly Filatov.
Jordan: Filatov of Norilsk- the hardest guy, one of the most powerful men in Russia.
Potanin, who was at that time a relatively unknown person in this country, went up against this guy.
Norilsk Nickel was the test case.
Narrator: Potanin needed allies.
These were the richest of the new entrepreneurs.

They came to be known and hated as "the oligarchs." Potanin: By 1995, we had a new business elite who in my opinion were efficient owners and qualified managers, but they had no property in their hands.
That's why it was the struggle between old Red directors and new managers who gained their money let's say themselves.
Narrator: To break the power of the Red directors, the oligarchs needed political support.
It was politically very difficult to withdraw this power from the Red directors.
Even the government and even Chubais were not strong enough to win easily this struggle.
Narrator: It looked as if the Communists were going to win the upcoming 1996 presidential elections.
(crowd chanting) Yeltsin and the reformers had to find a way to stop them.
Shevtsova: In the beginning of 1996, Yeltsin enjoyed only five percent of popularity.
He definitely needed financial assistance, financial resources from the rich people, the oligarchs.
Narrator: The government and the oligarchs needed each other and they needed to move fast.
The government feared a communist comeback.
The oligarchs feared the loss of their fortunes.
The oligarchs hammered out a secret deal that would enable them to acquire key industries at a knockdown price.
Jordan: Potanin proposed a privatization program which today is still viewed as exceptionally controversial, the loan-for-shares program.
That program entailed Russian business giving the government loans in return for taking the shares of strategic assets as collateral.

In fact, what ended up happening is most of these companies ended up getting sold back to the guy that actually provided the loan.
Narrator: The oligarchs' money would help Yeltsin fight the presidential election.
In exchange, they wanted the commanding heights.
The dilemma was not, should we choose this way of privatization or another way which is more transparent, more open, more public? The idea was, should we choose this way or nothing? (speaking Russian) Translator: The point of the loans-for-shares deal was to create a critical mass of powerful and influential businessmen whose primary interest would be to prevent the communists from coming back.
(man singing in Russian) (crowd cheering) Narrator: With their media companies and wealth, the oligarchs backed Yeltsin's reelection campaign.
(crowd murmuring) (crowd cheering) Singing and dancing endlessly across Russia, Yeltsin surged ahead in the polls and to victory.
Potanin entered Yeltsin's cabinet- the oligarchs' direct voice in the Kremlin.
(men speaking Russian) Potanin had won Norilsk Nickel, and with it, a third of the world's nickel.
For a company with annual sales of $2? billion, Potanin paid just $170 million.
Potanin: I felt a great feeling of victory.
Several years before, it was even difficult to think about struggling with Red directors.
The struggle was won by us, by those who came who are younger, who are more active and more prepared for competition.
Many years later came feeling of great responsibility, because when you win, you become responsible for everything what is going on.
But it came a little bit later.

Narrator: To many, the loans-for-shares deal was more than a scandal.
It was the theft of the century.
But it was a price Yeltsin was willing to pay to keep the communists out.
Yavlinsky: The task was not to distribute the property between ten personal friends.
There were no need for that.
The task was to give the property to millions of people.
We can say that it was artificially...
yes, it was cheap, relatively cheap.
It was not transparent- yes.
But, uh...
I think that it was difficult to avoid.
Maybe it was the only way.
Yavlinsky: The goals are justifying the means.
That's how the Bolsheviks made the revolution in Russia and that's why it is disaster.
Always when you are using the formula that the goals are justifying the means, you are destroying the goals.
Narrator: In Yeltsin's Russia, crony capitalism thrived.
For many, reform came to mean corruption, inflation and inequality.
Then in 1998, Russia defaulted on its debts and the stock market crashed.
The Yeltsin era ended with his abrupt resignation on New Years Day, 2000.
(fireworks popping) By the start of the new millennium, the decade of radical change was over.

A world that not so long ago had looked to socialism, central planning and protectionism, now looked to the market.
(squeals) Yergin: It's breathtaking what's happened in the last 20 years or less.
It 's as though the whole world has changed its mind.
Everywhere- in India, China, Asia, in Latin America, in Europe, in North America and above all, in the Communist world, governments have retreated from the commanding heights of the economy.
Narrator: Having thrown off communism, the countries of Eastern Europe continued to embrace free markets.
Poland has flourished.
What's driving Poland are two million small businesses, almost all started after economic reform.
0f all the cases of shock therapy around the world, that in Poland worked just about the best.
It really got the economy going.
Narrator: Businesses like Zofia Bielzycks's gym now employ over half of the country's workforce and produce close to 75% of its total output.
(woman speaking Polish) Translator: After 1990, lots of companies and foreign firms appeared in Poland.
The forecasts were very good, and I think they have come true.
But we Poles need time for everything to fall into place.
Narrator: In Latin America, the result of reform has been mixed.
Chile continues to set the pace.
A democracy, it follows free-market policies, and is one of the world's seven fastest-growing economies.
The first democratic president after Pinochet maintained the reforms and also tried to improve on them.
Lagos: It is not something of the right-wing or the left-wing parties.
It 's simply sound economic policies.
Now, to learn that took some time.

Narrator: Bolivia is still poor, but it has been growing.
Lozada: Many people would say, "Well, we're still poor." I would say to them, Bolivia before we stabilized the economy was a poor country with hyperinflation.
Bolivia after we stabilized the economy is a poor country with stability.
Crook: I think there is some disillusionment in Latin America that they have had problems despite the reforms.
Getting to a steady high rate of growth is a difficult thing.
And it certainly requires more than sorting out your inflation problem.
And now we see a sort of financial collapse in Argentina.
For several years, Argentina looked like the poster boy for economic reform.
But it turned out that the reforms were quite incomplete.
The country ran up huge international debts, and in 2002 it had an economic meltdown.
(crowd chanting in Spanish) At the end of the day, the strains were too much, and now we see a great deal of political turmoil raising all kinds of questions for the future.
(gunshot) (gunshots) Narrator: In India, Narayan Murthy no longer needs 50 trips to Delhi for permission to import one computer.
Instead he has built one of the world's biggest software companies.
India's economy has loosened up and it is growing.
Well, it did work, I think certainly it did work.
And what is interesting is that all the parties that criticized the party that introduced reforms are now taking forward those reforms.
So I think '91 to 2000 has shown that the economic liberalization which started out of compulsion has ended up being a process that is being driven by conviction.

Chidambaram: All this has brought about a sea change.
In fact, nobody in India today would question the correctness of the decision to open up India's economy.
Even the communists grudgingly concede that this is the right path now.
Narrator: In Russia, ironically, the 1998 stock market crash and the default on debts may have been a turning point...
a second chance for Russia's still new market economy.
Under President Putin, the institutions of a market economy strengthened and the oligarchs were reigned in.
Yergin: Russia has changed a lot since the loans-for-shares deal of the mid-'90s.
It 's had strong economic growth over the last several years.
Companies have modernized, and a lot of the reform legislation that should have been done five or six or seven years ago has finally been enacted.
I remain cautiously optimistic.
But even if Russia gets out of this mess, even if democracy survives, even if all market reforms take root- and all of that is possible- the 1990s was so costly unnecessarily that I'll never be able to look at it and feel that, "Gee, it all ended up well in the end." The problems are still there- the problems of inadequate health care all the way to corruption.
But it's a society that's changing.
President Putin sees Russia's future as being part of the world economy.
Shevtsova: I'm looking at my son who is 19 years old and I'm looking at other people and I am amazed.
They are ready to live in this global environment.
These are the people absolutely free of any old stereotypes.
They don't remember communism.

My son is coming home and asking me, "Mom, can you tell me what Marxism is?" We spent only ten years after collapse of communism and my son doesn't know what communism and Marxism is.
Narrator: The world had indeed changed its mind.
Capitalism was now the rule almost everywhere.
The stage was set for a single global marketplace woven together by trade, technology and investment.
The era of globalization had begun.
Next time on Commanding Heights...
Man: Today in the technological world in which we live it's possible to do in Bangalore what is being done in Silicon Valley.
The promise and the perils of a global economy.
Man: All these people who had decided there was no risk anywhere panicked and decided there's got to be massive risk everywhere.
"The New Rules of the Game, " next time on Commanding Heights.
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