The Commanding Heights (Part 2): The Agony of Reform (Chapters 7-14)

Chapter 8: Heresy in the USSR [8:08]
Onscreen title: The Kremlin, Moscow

NARRATOR: The economic reforms in Chile may have had little immediate impact on the world, but the ideas behind them were gaining momentum. In the Soviet Union, where the aged leadership was dying off and the economy was moribund, people were starting to question the system.

DANIEL YERGIN: By the 1970s and '80s, it was becoming clear to the better informed that the Soviet system really wasn't working, but they couldn't really talk about it publicly. They 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.

ANATOLY CHUBAIS, Economic Reformer: I'm interested in what has happened in the economy. I start to feel that there is something wrong; there is some illness in the economy. But I try to discuss it with my professors, I get no feedback. You feel that either the world around you crazy or you yourself crazy.

NARRATOR: Chubais helped to organize seminars far from the prying eyes of the secret police. One of his co-conspirators was a young economist from Moscow.

YEGOR GAIDAR, Economic Reformer: We were all in our 30s, researchers or teachers who specialized in the Soviet economy. We could see how it worked and were well aware of its weak points. I read books by Friedman and Hayek with great interest. They were our inspiration.

ANATOLY CHUBAIS, First Deputy Prime Minister, 1994-1996: On that stage, definitely we do understand that this thing quite risky.

YEGOR GAIDAR: Some of our sessions took place behind closed doors; we didn't trust everyone at the seminar, so we kept some people out. Our discussions were not revolutionary, but they were far beyond the limit of what was politically permissible.

NARRATOR: After a day arguing the pros and cons of a market economy, they would sit around the campfire and tell jokes.

ANATOLY CHUBAIS: There was the idea that Gaidar will become prime minister maybe, which sounds at that time absolutely crazy, and everybody laughing and another guy said that yeah, he will be prime minister or he will be prisoner.

NARRATOR: But by 1985, it was not just economics students who were asking what was wrong. When Mikhail Gorbachev became leader of the Soviet Union, he was appalled by the economic decay.

MIKHAIL GORBACHEV, General Secretary, Communist Party, 1985-1991: There was a government commission to examine the problem of women's pantyhose. Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can't resolve the problem of women's pantyhose. There's no toothpaste, no soap powder, not the basic necessities of life. It was preposterous and embarrassing to work in such a government.

DANIEL YERGIN: Mikhail Gorbachev was what the Soviet Union had been waiting for -- a new, young, dynamic leader who was going to reform the system. But that system had been propped up for a decade and a half by high oil prices, and just after he came in, the price of oil collapsed, which meant that the economic problems facing the Soviet Union were even more enormous.

NARRATOR: Gorbachev's attempt to restructure the economy was called "perestroika."

MIKHAIL GORBACHEV: Perestroika was a reform that aimed at gradual political change to create an infrastructure for market economics. We had several generations with no experience of markets. You can't just announce the markets and see them appear overnight. I was actually saying it will take a generation for it to start working.

DANIEL YERGIN: He started to allow a certain amount of private enterprise, but it was really a very uneven process. He ended up removing many of the tools of control of central planning, but didn't really replace them with anything else.

NARRATOR: Gorbachev faced mounting pressure from the West. The U.S. president believed in the economic philosophy of Milton Friedman and Chicago.

Ronald Reagan was not alone. He had a political soul mate in Margaret Thatcher. Britain's prime minister had already embarked on a radical free-market economic revolution at home. Thatcher and Reagan were determined to go on the ideological offensive. Their political rhetoric began to heat up.

RONALD REAGAN, U.S. President, 1981-1989: What I am describing now is a plan and a hope for the long term, the march of freedom and democracy which will leave Marxism-Leninism on the ash heap of history, as it has left other tyrannies which stifle the freedom and muzzle the self-expression of the people.

MARGARET THATCHER: Up to that time, the whole doctrine had been one of "Contain communism." That wasn't enough for Ronald Reagan and me, and we thought we should make it quite clear to communism that it could and would never win, and that we would go and fight the battle of ideas between what the free world had to offer, compared with the dictatorship and tyranny and cruelty of communism.

NARRATOR: Ever since Gorbachev's first visit to Britain, Margaret Thatcher never missed the opportunity to debate him on the evils and inefficiencies of communism and its system of central planning.

OLEG GORDIEVSKY: Speaking to Gorbechev, she said: "Mikhail, you see how your economy is organized -- centralized, entirely led by the Kremlin. Look at me in Britain and the West. We have market economy, and it is running itself. I don't have to tell different industries what to do. I don't deal with it at all. My job compared with your job is much easier. And you would be able to enjoy your job as head of the Soviet Union much more if you had a market economy."

NARRATOR: In 1987 President Reagan carried this war of words to the most symbolic section of the Iron Curtain: the Berlin Wall.

RONALD REAGAN: General Secretary Gorbachev, if you seek peace, if you seek prosperity for the Soviet Union and Eastern Europe, if you seek liberalization, come here to this gate. Mr. Gorbachev, open this gate. Mr. Gorbachev, tear down this wall.

Chapter 9: Poland's Solidarity [7:32]

Onscreen title: Warsaw, Poland

NARRATOR: Margaret Thatcher carried the free-market message to Poland in 1988. Mrs. Thatcher had agreed to meet the Communist leadership provided she could also visit the port of Gdansk.

Almost a decade earlier, in 1980, shipyard workers here in Gdansk had taken a stand against Communist rule. They had struck against the price rises and food shortages caused by a crumbling economy. Their leader was an electrician named Lech Walesa.

LECH WALESA, President, Poland, 1990-1995: The country was so much in debt, with the West refusing to lend us any more, that the whole system was failing. It was more and more inefficient, and everybody, even the Communists, knew it.

NARRATOR: Lech Walesa climbed the shipyard gate to announce a momentous victory. The workers had forced the government to recognize Solidarity, the free labor union. "I declare the creation of a free union of workers. We now have the right to strike."

FATHER HENRY JANKOWSKI, St. Brygida Church, Gdansk: I thought they didn't know what they were fighting for. I thought they were just fighting for a pay rise. Only then did I learn it was all about freedom.

NARRATOR: Ten million Poles joined Solidarity. Under Walesa's leadership, Solidarity became the main opposition to communism. But in 1981, after a year and a half of strikes and unrest, the government declared martial law. Walesa was placed under house arrest.

When Thatcher visited Poland in 1988 she demanded that the Communist government allow her to meet Lech Walesa.

LECH WALESA: You didn't say no to Mrs. Thatcher. No one refused her, so her noticing us and demanding a meeting with me and the others, that was a crucial event.

CHARLES POWELL: She came into the city of Gdansk onboard a small ship, and as she went past the shipyards, all the cranes on the dockside was lined with shipyard workers, all cheering and waving, and one began to sense here was an extraordinary experience in the making.

FATHER HENRY JANKOWSKI: The shipyard workers were not only sitting on the gate, but they were also on the roofs surrounding the shipyard. She's a tough lady; she conquered the hearts of the people of Gdansk.

NARRATOR: Solidarity workers escorted Mrs. Thatcher to a church.

CHARLES POWELL: Great crowds sang the Solidarity anthem, a haunting anthem.

FATHER HENRY JANKOWSKI: I could see she was very emotional about this visit. Her eyes registered everything that went on around her.

CHARLES POWELL: It's one of the very few times that I saw tears in Mrs. Thatcher's eyes. She was so moved by this expression of longing for liberty.

NARRATOR: At the house of Walesa's priest, Margaret Thatcher met with the leaders of Solidarity. A Solidarity cameraman recorded this historic meeting -- and Mrs. Thatcher arguing that economic freedom and personal freedom go hand in hand.

MARGARET THATCHER: If you have a free society under a rule of law, it produces both dignity of the individual and prosperity.

CHARLES POWELL: Although it sounds very bossy and interfering, I think they were genuinely grateful. "You, Solidarity," she said, "you must have your own ideas and plans worked out. It's no good just being popular."

MARGARET THATCHER: How do you see the process from where you are now to where you want to be? Because whatever you want to do, it's not only what you want to do, but how the practical way you see it coming about, if you were to write down the 10 steps, from where you are now to where you want to be.

CHARLES POWELL: And at one point, she said to Walesa, "But how do you get your thinking over to the Polish government?" And he laughed and pointed to the ceiling and said, "There's no trouble; they've got this meeting bugged."

FATHER HENRY JANKOWSKI: This meeting with Mrs. Thatcher made these future politicians recognize the opportunities within their grasp.

MARGARET THATCHER: Thank you very much.

LECH WALESA: Without this meeting, there would not have been no victory, that's for sure. There would have been delay, greater difficulties, or even our destruction.

NARRATOR: Thatcher's free-market message seemed to offer an escape from a Polish economy that was debt-ridden and riddled with shortages.

DANIEL YERGIN: As the communist economies got into deeper and deeper trouble, reformers and economists within the Soviet world began to look outside for solutions and for alternative paths. They looked at the miracle economies of Asia, they looked at what was happening in the United States and in Western Europe, and they looked even as far as Latin America.

Chapter 10: Bolivia at the Brink [7:07]

Onscreen title: La Paz, Bolivia

NARRATOR: One of the poorest countries in Latin America and with a history of 189 military coups, Bolivia was also one of the most unstable.

JORGE QUIROGA, President, Bolivia: When I was going through college in Texas, the first question you'd be asked is "Who's the president of Bolivia this week?" Second question down the road was "You're from Bolivia -- what's the inflation rate in Bolivia this week?," because we had galloping hyperinflation that destroyed our economic base.

GONZALO "GONI" SANCHEZ DE LOZADA, President, Bolivia, 1993-1997: We found that Bolivia was the seventh highest inflation in the history of man.

JUAN CARIAGA, Finance Minister, Bolivia, 1986-1988: Twenty-three thousand, five hundred percent. Prices increased by the hour.

NARRATOR: The cost of food and clothes kept increasing. Before it was all over, the total inflation averaged 1 percent every 10 minutes.

JORGE QUIROGA: Seven out of 10 Bolivians live in poverty. The poor people get hurt even more. They see their pockets being eaten away by inflation that is galloping around.

GONZALO SANCHEZ DE LOZADA: It's like a tiger, hyperinflation: If you don't kill it and you only have one bullet, it'll eat you.

NARRATOR: The root of the problem was government finances. The government was spending 30 times more than it received in taxes.

Across the continent, Latin America's uncompetitive economies had been piling up debt. In the 1970s, a massive hike in world oil prices left foreign banks awash with petrodollars.

ARNOLD HARBERGER: So here were the international banks with billions of dollars and nowhere to earn interest on it. They discovered Latin America.

GONZALO SANCHEZ DE LOZADA: We were offered unreasonable amounts of money. These banks who were very unwise in their lending policy came to the happy conclusion that countries don't go broke. It's true, but sometimes they don't pay.

MOISES NAIM: Guess what? One day, these countries could no longer afford to repay the debts.

NARRATOR: In 1982 a financial crisis in Mexico triggered a chain reaction that caused the 1980s to be known as Latin America's "lost decade".

JOSEPH STANISLAW, Author, Commanding Heights: Bolivia was probably the most severe case of how things had gone wrong in Latin America. For decades they just printed money. They collected no taxes in the country. If you can't collect taxes, you've got to make the money up somehow, so they just printed it.

GONZALO SANCHEZ DE LOZADA: Bolivia was a basket case. We were considered hopeless. We had help from nobody. We were totally alone. The World Bank had closed its office, the IMF had pulled out its representative, and the American government and other friendly nations wouldn't answer the telephones.

Onscreen title: Harvard University, USA

NARRATOR: At 29, economist Jeff Sachs had just become one of Harvard's youngest full professors ever.

JEFFREY SACHS: In 1985, some former students sent me a note asking whether I would be ready to come to a meeting with a group of visiting Bolivians.

NARRATOR: The Bolivians had come to Harvard to take part in a seminar on the hyperinflation that was ravaging their country.

JEFFREY SACHS: I was absolutely fascinated, made a few observations. Somebody in the back of the room piped up and said, "Well, if you think you know what to do, you come to La Paz."

When I got to La Paz in July 1985, the inflation rate was about 60,000 percent. It was an extraordinary and terrifying thing to see, actually. It was a society at the edge of the precipice.

NARRATOR: Bolivia's politicians were paralyzed. Only one man seemed to know what to do.

JEFFREY SACHS: I met a man at a cocktail party one of the evenings at work. I didn't know him at all. I introduced myself. He said, "What are you doing?" I said, "Oh, I'm writing an economic plan for the next government."

GONZALO SANCHEZ DE LOZADA: And I said, "I'm very, very pleased that you're studying this, because we're going to beat these guys, and you can come and work for us." So they all laughed.

JEFFREY SACHS: He said: "Oh, that's very interesting. What do you have in mind?" And I described a few elements, basically how to stop hyperinflation. And he said: "No, no, you have to go much beyond that. You don't understand. We need so much more. You're just going on the surface. This country needs a complete overhaul. We've got to get out of the mess that we're in." I wasn't sure whether he was provoking me, whether he was kidding, whether he was sober, whether he knew what he was doing. It turned out that this was Goni, Gonzalo Sanchez de Lozada -- a genius.

Chapter 11: Shock Therapy Applied [4:48]

NARRATOR: Goni's party did win the election, and he became minister of planning. He told the president that Bolivia was running out of time.

JUAN CARIAGA: We told him, "You have 90 days before Bolivia's hyperinflation becomes the highest inflation in world history." So he told us, "Okay, you have 20 days; you have to start working now."

GONZALO SANCHEZ DE LOZADA: There was a big discussion whether you could stop a hyperinflation or an inflation period by taking gradualist steps. In this Jeff Sachs was influential. He said: "All this gradualist stuff just doesn't work. When it really gets out of control you've got to stop it, like a medicine. You've got to take some radical steps; otherwise your patient is going to die."

NARRATOR: To avoid leaks, they worked at home. Every few days, Goni reported to the president.

GONZALO SANCHEZ DE LOZADA: We said: "Look, boys, you've got one chance. And remember, as Machiavelli said, 'It's all the bad news at once, the good news little by little.'" So he said, "Get it all done." Shock therapy is get it over, get it done, stop hyperinflation, and then start rebuilding your economy so you achieve growth.

NARRATOR: In August 1985, Goni went public with a program called "shock therapy."

JUAN CARIAGA: It caught everybody by surprise. It had great credibility. It was a shock.

NARRATOR: Shock therapy spelled the death of dependency theory. Government spending was slashed. Price controls were scrapped. Import tariffs were cut. Government budgets were balanced.

JUAN CARIAGA: We didn't use highly sophisticated economic theory to deal with hyperinflation. We just used very simple things, such as from now on the government will only spend what it gets. You get one peso, spend one peso; you get two pesos, spend two pesos. If we don't have it, we don't spend it. No borrowing from the Central Bank, and therefore the Central Bank did not have to print money.

NARRATOR: Shock therapy meant that the price of essentials -- transport, food, fuel -- all shot up. Until then people had thought that only a military dictatorship like Chile's could impose such tough measures without tearing society apart.

DANIEL YERGIN: Bolivia may be a small country, but it had a very big impact in terms of kick-starting reform throughout Latin America. In Brazil, a professor, who actually used to teach the dependency theory, launched a program of economic reform that looked a lot like shock therapy.

DANIEL YERGIN: Argentina was suffering from 20,000 percent inflation and the new president of that country said, you know, we've seen this movie before.

DOMINGO CAVALLO, Economy Minister, Argentina, 2001: Pro-market reforms could be implemented under a democracy, and we demonstrated that it was possible here in Argentina.

NARRATOR: All across Latin America, governments began to sit up and take notice.

GONZALO SANCHEZ DE LOZADA: I think the Bolivian experience did have influence. The fact that we did it in democracy, we did it without great social violence, had impact on economic thinkers and on politicians.

JEFFREY SACHS: In late 1985, as we were struggling late into the night with a problem, he said, "You know, this is extraordinarily hard, but what's happening here, this is going to have to happen all through Latin America." I watched it unfold, one country after another.

NARRATOR: It is a curious fact of history that what happened in Bolivia was to have a direct impact on the frozen economies of Eastern Europe.

Chapter 12: The Miracle Year [6:57]

JEFFREY SACHS: I was approached by a Polish government official who had watched the Bolivian reforms, and then had seen the work I had done in Argentina and Brazil. He finally asked me would I go to Poland and help.

Onscreen title: Warsaw, Poland
The Poles themselves feared that they were descending into starvation. The shops were utterly empty for miles. I would see a woman just standing on the street sobbing: "There's no milk in this city. I can't find any milk for my child. What am I going to do?" It was terrifying.

NARRATOR: Sachs arrived on the very day that roundtable talks agreed there should be free elections in Poland.

LECH WALESA: The situation was more than dramatic. One can change a political system overnight, but an economic system needs years.

DANIEL YERGIN: Whenever Soviet power was challenged in Eastern Europe, the response was very clear. It was tanks; it was the Red Army. That was the case in Berlin in 1953, Budapest in 1956, Prague 1968. But the answer was different in Warsaw in 1989. Solidarity won 99 out of 100 seats. The head of the Polish Communist Party called Moscow for directions. Mikhail Gorbachev's answer was stunning: "Do nothing; accept the outcome of a free election." And that was really the phone call that ended the Cold War. And of course, the great symbol of the end of the Soviet empire was the fall of the Berlin Wall. One country after another broke free of communism -- Poland, Hungary, Czechoslovakia, Romania. 1989 was truly a miracle year.

NARRATOR: Poland was free now. Solidarity had to liberate the Polish economy. Late one night Sachs met the Solidarity economist Jacek Kuron in a Warsaw apartment.

JEFFREY SACHS: I was trying to explain how you get out of this mess that the communist system had left behind. Every couple of minutes he would pound on the table, "Pah, pah, pah" -- "Yes, yes, yes, I understand." And we'd gone on -- "Pah, pah" -- and it was very, you know... it was really exciting. We went on for a few hours like this. I was exhausted. The room was filled with smoke, and he said: "Okay, clear. Write up the plan." We got up. I said: "Well, this will be a great honor. We'll send you something just as soon as we can." "No, tomorrow morning I need the plan." I laughed, and he said, "I'm absolutely serious; I need this written down now."

We wrote up a plan that night and delivered it the next morning. They distributed it to the Solidarity members of the Parliament.

NARRATOR: Like Sachs, Solidarity's new finance minister, Leszek Balcerowicz, believed transition had to be rapid and massive.

LESZEK BALCEROWICZ, Finance Minister, Poland, 1989-1991: Just after breakthrough, there is a short period, a period of extraordinary politics. By definition, people are ready to accept more radical solutions because they are pretty euphoric of freshly regained freedom. One could use it only in one way, by moving forward very, very quickly.

JOSEPH STANISLAW: Poland decided to do what Bolivia did, to introduce shock therapy, cut back on government expenditure and try and introduce a market system and see if it could work.

NARRATOR: Prices almost doubled, and shortages didn't end. All Balcerowicz could do was chew his nails and wait for the law of supply and demand to kick in. But then, after a few days, farmers began to bring their produce to market.

LESZEK BALCEROWICZ: I was going for a walk, and we were looking at the prices in the shops, the prices of eggs.

NARRATOR: His aides told him to concentrate on the price of eggs. If eggs appeared, if eggs got cheaper, the market would be working. Eggs did appear. And then the price of eggs began to fall.

LESZEK BALCEROWICZ: And I remember that very important day when the prices of eggs are falling. This was one of the signals that the program, the stabilization program, is working.

Chapter 13: Poland in Transition [2:39]

NARRATOR: But reforming state-owned heavy industries would prove a much bigger challenge.

LESZEK BALCEROWICZ: Once Poland became free, one of the problems I have to face was a fight about privatization.

DANIEL YERGIN: The big problem was the old industries inherited from the communist past, and there were wrenching problems of unemployment, of making them efficient, keeping them running. And that's where you saw a lot of the pain.

NARRATOR: Making overmanned state-owned industries efficient or profitable meant wide-scale layoffs for Poland's blue-collar workers.

JAN BIELECKI, Prime Minister, Poland, 1991: When I became the prime minister, the euphoria of transition was almost over. We had 20,000 strikes, sometimes organized by my former colleagues from Solidarity movement.

NARRATOR: Solidarity began to lose support as workers felt the pain of reform.

JEFFREY SACHS: I was asked to go to some factories, to meet with workers to try to explain what my vision of this might be.

FACTORY WORKER: In the beginning we were made to believe that it wouldn't take long for things to get better.

FACTORY WORKER: Sachs gave us a rosy vision for the future of our economy.

ZYGMUNT WRZODAK, Union Leader, Ursus Tractor Factory: We soon found out that the program imposed on us from the outside most harmed precisely those Poles who had contributed so much to political freedom.

NARRATOR: But elsewhere, the market was flourishing. Tens of thousands of small businesses sprung up, and the Polish economy began to boom.

JAN BIELECKI: You suddenly had thousands of people trading the same products in front of the state-owned shop, but at a much lower price. This is phenomenal, because it shows enormously entrepreneurial drive of the Polish people. When you have your five minutes, take it. When the Polish people finally got that opportunity, they took the chance. They used the chance.

Chapter 14: Gorbachev Tries China [7:17]

NARRATOR: At the Soviet embassy in Warsaw, a special observer from Moscow had been monitoring the economic reform.

GRIGORY YAVLINSKY: The Soviet embassy in Warsaw had a feeling that this was a disaster for them. They didn't want to send my telegrams to Moscow. I was describing what was going on there, and they would completely disagree. I was very supportive, and they were very negative. I was sending the analysis to Gorbachev. "Balcerowicz is doing the right thing for Poland" -- that is what I was saying.

NARRATOR: Gorbachev asked Yavlinsky to write up a plan for radical economic change.

GRIGORY YAVLINSKY: I hoped to do in a year and a half as much as possible to make a transition from the Soviet economy to the market economy. I understood we should move as quickly as possible

NARRATOR: The U.S. threw its moral support behind the free-market reforms.

JAMES BAKER, U.S. Secretary of State, 1989-1993: We want to learn a little more about Mr. Yavlinsky's efforts. A country is trying to change 70 years of political and economic philosophy and change it in a way that moves it in exactly the opposite direction.

NARRATOR: But Gorbachev shrank from shock therapy. The Yavlinsky plan languished on his desk.

MIKHAIL GORBACHEV: Poland was definitely a pilot project, and the fact that reforms started there was very important. But please understand, no country can repeat the reforms of another country.

DANIEL YERGIN: Gorbachev was looking at Poland. He's looking around the world trying to find some formulas that would help the Soviet Union make the transition. And what more logical place to look than in communist China, which is marching towards the market?

Onscreen title: Beijing, China

NARRATOR: In 1989, the year the Berlin Wall fell, Gorbachev visited Beijing. As he arrived, protestors were gathering in Tiananmen Square. In China, too, the Communist hold on power looked unsure. But Gorbachev found the Chinese economy was being transformed under its leader, Deng Xiaoping.

DANIEL YERGIN: Deng Xiaoping was an old-style Communist. He'd been very close to Mao Zedong, but he had fallen from power and had spent time when he was under house arrest, pacing around in the courtyard, thinking through what had gone, wrong; why was this communist dream turning into such an economic nightmare. And when he came back to power, he said, "I have two choices: I can distribute poverty, or I can distribute wealth.

NARRATOR: Deng had been impressed by the success of the Southeast Asian economies, in which overseas Chinese were so prominent.

LEE KUAN YEW, Senior Minister of Singapore: They were lucky that after Mao died, Deng Xiaoping opened up China. He had to fight his own conservatives, the orthodox Communists who were terrified that this meant dismantling the socialist state that they were building.

DANIEL YERGIN: Deng Xiaoping said: "Don't worry. We're not pursuing capitalism; we're pursuing socialism with Chinese characteristics."

JOSEPH STANISLAW: The Chinese decided to keep the political system of communism, but to get rid of the economic system called communism and go towards market socialism. With that, they could keep political control, but also have the benefits of the marketplace.

DANIEL YERGIN: By the mid-1980s, China embarked on its era of high economic-growth rates, moving towards a market system, moving towards engaging with the world economy.

NARRATOR: Under Gorbachev, there had been intense argument on whether China's route to the market was right for Russia.

JEFFREY SACHS: The KGB said, "Well, why don't we do what China's doing --keep political control, but open up on the margin, and we'll maintain our political power; we'll maintain the state enterprises, but we'll grow." That's what China did.

NARRATOR: Tiananmen Square showed how far the Communist Party was willing to go to hold onto power.

LEE KUAN YEW: Deng Xiaoping believed in restructuring before opening up. Glasnost and freedom and transparency and so on -- that had to wait. First restructure, and restructure under the old system by directives so that nobody can say no. Deng understood that if you released these forces, unless you do it in a controlled way, the system will collapse. He saved the country from an implosion like the Soviet Union.

JEFFREY SACHS: Many people say, "Why didn't Gorbachev do the China approach?," without understanding that that, of course, is what Gorbachev tried to do for four years. They just don't get it. They don't understand that Russia was an 80 percent urbanized, heavy-industrialized economy, whereas China was a peasant economy with 80 percent of the population in rural areas. In Russia, the non-state sector was 1 percent; it was nothing. So yes, you could get a few restaurants going, but you couldn't get to the core of the problem without addressing the industrial core of the system. So they had no easy way out. They had no gradual track like China.

LILIA SHEVTSOVA, Senior Associate, Carnegie Moscow Center: Gorbachev got stuck with economic reform. He began too late, and his reforms were too cautious. He never touched the foundation of the planned economy.

JEFFREY SACHS: This was a society that, while on the surface it looked stable, was more like one of those cartoon characters that's run off the cliff, is stationary for the moment, doesn't realize that it's about to reach a free fall. And it did go into that free fall.