The Commanding Heights (Part 2): The Agony of Reform (Chapters 1-7)

Chapter 1: Prologue [3:49]

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, 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, 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.

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.

Chapter 2: The Ghosts of Norilsk [4:27]

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 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. 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 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, the apparent success of communist China seemed to show the way.

But the truth about the Soviet economy lay concealed behind the "Iron Curtain."

Chapter 3: Behind the Iron Façade [8:18]

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.

Chapter 4: India's Permit Raj [3:04]

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.

Chapter 5: Latin American Dependencia [2:03]

 (tango music)
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.

Chapter 6: Counterrevolution in Chile [3:30]

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 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.

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 per-month 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.

Chapter 7: Chicago Boys and Pinochet [8:16]

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.