THE AGONY OF REFORM: IMPORTANT NOTES

• This episode deals with how the new global economy was born, with corresponding
agonizing reforms.
• In 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.
• Jeffrey Sachs, Professor, Harvard University: the market economy, the capitalist system,
became the only model for the vast majority of the world.
• In the 1980s, markets were deregulated. State-owned industries were privatized. It was
the start of a world revolution.
• Russia
o 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.
o 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.
o The prisoners' slave labor became a crucial component of the Soviet economy.
o The Iron Curtain / Cold War
• New Delhi, India
o India had used central planning to industrialize its peasant economy and conquer
poverty.
o Now India, like government-dominated economies all over the world, was
running into difficulty. Overprotected, over-administered, overplanned, the Permit
Raj was quite literally a brake on the Indian economy.
• Latin America
o 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
o By the early 1970s, Latin American economies were in trouble
• Santiago, Chile
o Chile elected the Marxist president Salvador Allende.
o 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
o Tremendous inflation (20 percent per-month built-in inflation)
o Chilean society became extremely polarized
o Ended in a military coup
o 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.
o 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.
 o Five hundred state-owned businesses were privatized. Government budgets were
cut. Import tariffs were swept away. The markets were given free rein.
o Here was the first case in which you had a movement toward communism which
was replaced by a movement toward free markets.
o But reforms were agonizing for all
• The Kremlin, Moscow
o 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.
o When Mikhail Gorbachev became leader of the Soviet Union, he was appalled by
the economic decay.
o Gorbachev's attempt to restructure the economy was called "perestroika."
o 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.
o 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. The 70-year communist monopoly was about to be
overturned. Russian citizens were given vouchers which they could use to buy
shares in privatized companies.
• Warsaw, Poland
o Margaret Thatcher carried the free-market message to Poland in 1988
o LESZEK BALCEROWICZ: Once Poland became free, one of the problems I
have to face was a fight about privatization
o Making overmanned state-owned industries efficient or profitable meant wide-
scale layoffs for Poland's blue-collar workers.
o Tens of thousands of small businesses sprung up, and the Polish economy began
to boom
• La Paz, Bolivia
o One of the poorest countries in Latin America and with a history of 189 military
coups, Bolivia was also one of the most unstable
o The cost of food and clothes kept increasing. Before it was all over, the total
inflation averaged 1 percent every 10 minutes
o The root of the problem was government finances. The government was spending
30 times more than it received in taxes
o In August 1985, Goni went public with a program called "shock therapy."
Government spending was slashed. Price controls were scrapped. Import tariffs
were cut. Government budgets were balanced. All across Latin America,
governments began to sit up and take notice.
• Beijing, China
o 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.
o Deng had been impressed by the success of the Southeast Asian economies, in
which overseas Chinese were so prominent
 o 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.
o Deng Xiaoping said: "Don't worry. We're not pursuing capitalism; we're pursuing
socialism with Chinese characteristics."
o 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.
o 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.
• The New Century
o 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.
o The world had indeed changed its mind. Capitalism was now the rule almost
everywhere. The stage was set for a single global market woven together by trade
technology and investment. Globalization had begun

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