Commanding Heights Episode

2:

Date of Submission: Sept. 13, 2016

Submitted By:
GROUP III BEC 113
Nadean Kate Palmes
Angelica Pamogas
Jerica Siena

Submitted To:
Mr. David Victor Felix
 Commanding Heights: The Battle for World Economy

Episode 2: The Agony of Reform

Summary
After the Bolshevik Revolution, Russia became the worlds first Communist
country and became known as the USSR (the Union of Soviet Socialist Republics
Soviet is the Russian word for Council). For the next several decades, the
country seemed to enjoy highly impressive levels of economic growth and
development. Noteworthy was the fact that the USSR continued growing and
experiencing low unemployment rates even during the Great Depression. In the early
20th century, the numbers seemed to support the conclusion that Capitalism was
destined to fail and Communism was superior and would inevitably spread across
the world. However, even from the start, Communism never worked as well as most
people believed. The USSR systematically lied about the size and performance of its
economy, as just one example, by exaggerating the amount of steel it produced in a
given year. The dictatorial Soviet government also maintained very tight control over
its borders, of the movement of people within the country, and of the media. Because
of this, foreigners were only let into the USSR in small numbers and were only
allowed to visit the small parts of the country that were well-developed (Potemkin
Village). All visitors to the Soviet Union therefore left with skewed impressions of
how advanced the country, which they in turn reported to other people in their home
countries, spreading the falsehood. Outsiders never saw the other 90% of the USSR,
which was underdeveloped and marginally productive. The government also made it
nearly impossible for Soviet citizens to ever leave the country except perhaps to visit
other Communist countries, which prevented the people of the USSR from figuring
out that standards of living were far superior in Capitalist countries. Foreign news
and entertainment were blocked within the USSR, and all media were state-run,
which meant Soviet citizens were always told that their country was the best in every
way. As a result, they had no idea how bad their lives were and how much better
things could be without Communism.

Another key element to the Soviet Unions early economic success was the
widespread use of prison slave labor. At any given time, millions of people were in

Page 1 of 12
Soviet prison camps where they were forced to work under threat of grave physical
punishment or death. Even an inherently inefficient economic system like
Communism can be productive given enough manpower and brute force, and thats
exactly what happened. The Soviet government of course kept its dependence upon
prison labor secret from the rest of the world, which gave the false impression that
Communism was efficient. The Communist countries blocked almost all trade with
Capitalist countries and tried to be self-sufficient. However, given the inherent
shortcomings of the Communist system and the failure of Communism to take hold
in parts of the world geographically encompassing key resources, it became
necessary to trade more and more with the Capitalists, including the U.S. For many
Communist ideologues, this was humiliating.

After the death of Josef Stalin in 1953, the Soviet Union started mellowing out
in many ways: The level of government-sponsored brutality and the size of the prison
population both declined. The slow trends continued up to the end of the Cold War in
1991.

The relaxing of Communisms iron fist was ultimately to prove its undoing:
Without the assistance of mass amounts of slave labor and without threat of brutal
punishment, Soviet workers became highly unproductive (i.e. - large amounts of time
spent doing nothing at work, or small amounts of goods/services produced per hour
of labor). The lack of market signals simply did not provide the proper incentives to
Soviet workers and firms, which seriously undermined their ability to innovate and
produce. More and more, Communist firms had to resort to copying Western
products including military hardware in order to stay somewhat competitive. This
practice became increasingly pervasive as the Cold War dragged on and the
Communists fell behind.

The arms race with the U.S., other Western countries, and China also
severely drained the Eastern Blocs resources (by the 1980s, the USSR was
spending almost 1/3 of its GDP on defense, while the U.S. could sustain an
equivalent military using less than 10% of its GDP). The size of the USSRs economy
peaked in the 1970s before actually shrinking in the 1980s. The same thing
happened in the Communist countries of Eastern Europe. There were goods
shortages, including shortages of basic food, across the Communist world that

Page 2 of 12
impacted the daily lives of normal people. The problems became too big to hide from
the outside, and the rest of the world began seeing at last that Communism didnt
work. Simultaneously, the Eastern Bloc started allowing more freedom for their
citizens. At last able to see what things were like in Capitalist countries and to speak
their minds at home, average people in Communist countries began expressing their
frustration at the shortcomings of their own economic system and at their lack of civil
liberties. Reform-minded political groups formed against Communism.

By the 1980s, the USSRs leadership (Gorbachev) had gone soft and did
not violently crack down to stop the protesters and reformists as it would have done
in years past. Once people living in Communist countries realized this and saw that
they at last had a chance to win against their own governments, in various ways they
arose to disband the Communist regimes. The Cold War ended with Communism
being discredited as a viable social, political and economic system. After gaining its
independence, the Indian government decided to adopt a Soviet-style economy in
which all major firms would be state-owned and production would be centrally
planned. As happened in Communist countries, the Indian bureaucracy expanded to
a colossal size in order to manage and run the countrys economy. Rules governing
business and trade multiplied to unmanageable proportions.

Starting an independent business, even a simple neighborhood shop became

nearly impossible because of extreme government regulations. The government-run
firms were very inefficient at producing goods and services and at innovating, and as
a result, economic growth slowed to a crawl. The Indian government protected
national firms from foreign competition by banning the import of goods made outside
the country (protectionist trade measures). Indian consumers were thus forced to
deal with decrepit Indian businesses and to pay high prices for everything. A large
and complex black market arose in India as illegal private businesses sprang up to
bypass the government red tape and meet the actual economic demand from
consumers. Goods were also secretly and illegal imported. Corruption became
commonplace inside the Indian bureaucracy as people engaging in these illegal
business activities had to routinely bribe government officials at all levels to keep
their operations from being shut down.

Page 3 of 12
 After WWII, many Latin American countries used Dependency Theory to
guide their economic policies: They wanted to modernize by building up indigenous
key industries through a combination of government subsidies and trade barriers to
block competing imports until the key industries were strong enough. Though it made
some sense on paper, the strategy was a disaster in practice. Salvador Allende was
a very important 20th century Latin American political figure. A socialist, he became
the president of Chile in 1970 and passed many socialist reforms. A highly polarizing
figure who was both hated and loved by large segments of the population from the
beginning, his domestic opposition only grew as the reforms almost destroyed
Chiles economy.

In 1973, Allende was killed during an American-backed coup in which Chiles

military took over the government. General Agosto Pinochet became the countrys
new leader.

Pinochets economic advisers had studied at the University of Chicago and

were pro-free market. They undid Allendes policies, lowering taxes, eliminating trade
barriers, eliminating price controls, and cutting domestic social benefits. These
measures were part of the so-called Washington Consensus: A battery of free
market policies championed by the U.S. as the way to prosperity.

As a result, Chiles economy quickly rebounded and is now one of the

strongest in Latin America. However, while the countrys overall GDP grew, the level
of wealth disparity between the poor and rich also grew and some poor peoples
lives actually got worse. Also, while Pinochet stabilized and strengthened his
countrys economy and ended the political chaos, he was still a dictator who used his
security force to oppress and kill thousands of people. His legacy as leader is
therefore decidedly mixed.

No other South American countries wanted to copy Chile because they didnt
want to be seen as emulating anything related to a strongman like Pinochet.

During the 1970s, the USSRs economy peaked in size. The rest of the world
didnt realize this because high global oil prices continued to propel the Soviet
Unions GDP upward. However, once oil prices collapsed in the early 1980s, the

Page 4 of 12
stagnation in the Soviet economy was laid bare for all to see, and the country
entered into a terminal crisis.

Faced with major problems, the USSRs leadership made Gorbachev, a

widely known reformer, hoped that he could make the right changes to save the
country. Gorbachev never wanted the USSR to fall apart into several smaller
countries, nor did he want to end Communist rule over the USSR or see Russia fall
into social and political chaos. He wanted to restore the USSR and the Communist
system to strength. Problematically, he didnt know exactly how to do this, nor was
he able to predict how making the USSR a freer, less heavy handed country would
lead to the rapid implosion of Communism. One of his important reform campaigns
was Perestroika (restructuring). There was an important economic dimension to
Perestroika that eased state control over the economy and allowed low levels of
private enterprise for the first time since the 1920s.

Gorbachev admitted that it would take a generation to rebuild the market

mentality of Soviet people.

In Poland, Lech Walesa and the countrys biggest workers unionthe Solidarity
Union, turned against the Communist government due to major economic problems.
Walesa was imprisoned by authorities fearful of losing control of the country. During
an official state visit to Poland, Margaret Thatcher visited Walesa, who was under
house arrest. This act greatly encouraged and emboldened anti-communists in the
country.

During the 1980s, Bolivia was in free fall: Coups happened with
unbelievable frequency and the country was experiencing hyperinflation as bad as
Weimar Germany. The root of the problem was the government running massive
deficits and just printing more money to pay its expenses. Harvard economist Jeffrey
Sachs advised the Bolivian government starting in 1985 to make a series of major
policy reforms to solve the problems that together would constitute economic shock
therapy.

They would reverse the economic policies that grew out of Dependency
Theory. The Bolivian government agreed to make the tough choices and to put
Sachs advice into practice. There were immediate, harsh price spikes, but the

Page 5 of 12
economy quickly stabilized. Bolivia did this while under a democratic government,
restoring credibility to a set of policies that had previously been sullied through
association with Pinochet. Other Latin American countries began to copy it. Shortly
after the Solidarity political party won Polands first free elections, Sachs advised the
new government on how to dismantle Communism and to rebuild the free market
there. Poland tried shock therapy as well. Again, there were immediate price spikes
for all types of goods across the country. Within days, open-air markets
spontaneously materialized everywhere and prices began to drop. Next, the
Solidarity government went about privatizing the huge government-owned firms
(under Communism, the means of production had been owned by the state).
Shielded from competition and numb to market signals, these companies were
inefficient and wasteful. Once under private management, thousands of workers
were quickly laid off to save money. This led to many big strikes against the
government and widespread erosion of support for Solidarity among the working
classes.

Once again, the shift to Capitalism benefitted Poland overall, but some small
groups were made much worse off. Small business exploded in the country but
employment in heavy industries contracted. Under Mao Zedong, China had a more
purely Communist economy that was driven more by ideology than pragmatism. Mao
considered the USSR and most of Eastern Europe to be different from China
because they werent Communist enough, and he hated them for it. Chinas
economy remained backward and grew very slowly. After he died in 1976, Deng
Xiaopeng became the countrys leader and made the monumental decision to
reverse Maos failed economic policies and to promote a market-oriented economic
strategy (called Market Socialism) that was actually much less Communist than the
USSR. Deng had observed the stunning economic success of Asian Tiger
countries like Japan, Singapore and Hong Kong, and he saw that their economic
model was clearly superior to Maos.

In essence, Deng decided to slowly abandon most of the economic

elements of Communism while keeping the Communist party in political control of
the country.

Page 6 of 12
 Gorbachev met with Deng several times and considered adopting Chinas
dichotomous economic/political model, but the economic policies simply couldnt
work in the USSR: Though second place to the U.S. and other Western countries,
the Soviet Union was still a highly developed nation whose economy was based
around massive, state-owned industrial enterprises. Eighty percent of Soviets lived in
cities. A huge system of sorts had been built around Communism in the USSR, and
changing to Capitalism was impossible without a level of difficulty that Gorbachev
considered unbearable.

Shock Doctrine in the USSR would be even worse than it had been in
Eastern Europe.

China, on the other hand, was still an undeveloped country where most people were
very poor and lived and worked on small farms and there were few factories. The
Chinese therefore were closer to a tabula rasa economic condition, so making pro-
market economic reforms didnt entail mass disruptions since there didnt yet exist
anything to disrupt. Shock Doctrine was not needed in China and the country had the
critical luxury of time to change its economy. The Soviets didnt have that. The Soviet
Union collapsed on Christmas Day, 1991, and Gorbachevs position as leader of the
USSR vanished. The USSR disintegrated into several smaller countries, the biggest
of which was Russia.

Different Eastern Bloc countries handled the transition to democracy better

than others. Russias experience was particularly traumatic because, even after
democracy came, the Communist Party remained a powerful influence in the
legislature and bureaucracy. They opposed Boris Yeltsins pro-market reforms at
every step, which prolonged the countrys agony. By contrast, other countries like
Poland totally forsake Communism and enjoyed much easier transitions.

Under Yeltsin, Yegor Gaidar was Russias prime minister during the early
post-USSR period and, against strong Communist opposition, implemented many
elements of economic Shock Therapy. Predictably, this led to large price spikes for
all types of goods. Problems were made worse by the policies of the Russian central
bank. Gaidar was forced out of his office by Communists.

Page 7 of 12
 Indias experiment with central planning ended in failure: By 1990, the
country had zero annual GDP growth and was facing bankruptcy. The other Asian
countries that had gained independence around the same time as India but which
had instead embraced Capitalism were now dramatically richer and more advanced
than India. The collapse of the USSR dealt the final blow to central plannings
credibility.

The government was forced to enact radical reforms that opened Indias
economy. As a result, economic growth began again. Yeltsin, who was Russias first
democratically elected president first tried to privatize Russias Soviet-holdover
state-owned enterprises by giving all Russian citizens stock shares in them, and then
allowing them to trade shares in a new stock market, In what would later be viewed
as a highly corrupt move, Yeltsin then sold off many other core state industries worth
billions of dollars apiece to wealthy, well-connected insiders who went on to become
Russias infamous Oligarchs. In return, they agreed to give him large amounts of
campaign funds for his 1996 reelection, which he won. The privatization of the state
firms was also a calculated move that damaged Russias Communist party. While
Yeltsins actions are widely criticized, especially by Russians, the truth is that such
corrupt government dealings didnt start under Yeltsin or only once democracy came
to Russia: The government had been incredibly corrupt during Soviet times and
insider dealing at the highest levels had long been the norm. Moreover, had Yeltsin
not privatized the state-run firms and gotten the support of the oligarchs, he would
have probably lost the election and the Communists would have re-taken control
over Russia, which could have been horrible. The alternative therefore could have
been much worse. Like Carter, Yeltsin had the misfortune of being in charge of a
country during a very bad time in which the only way out was to make choices that
he knew would be highly unpopular, and in which the possible choices were never
good, just bad or less bad. Vladimir Putin became Russias president in 2000
and gained widespread popular support for fighting against the oligarchs. The end of
Communism marked the start of the Era of Globalization.

Page 8 of 12
Our Reaction and Learning:

Watching this Episode of Commanding Heights, "The Agony of

Reform", we learned about the failures of some economies and how their
leaders embraced the idea of "shock therapy", a rapid conversion to free-
market capitalism. The documentary detailed how reform played out in
several countries: Russia, Poland, India, Bolivia, and Chile, and how they
dealt with change, freedom, and the dangers of privatization, deregulation and
competition.

In the twentieth century, most of the world's nations tried to create

prosperity through government control of their economies by implementing
different policies such as the totalitarian central planning of the communist
world, to more democratic nations which tried to develop their economies by
nationalizing industries and protecting them from foreign competition.

When the government policies and control failed during the 1980s, it
triggered the era of economic reform around the world: Russia and the
eastern bloc nations, India embraced central planning, while Latin American
countries developed their own brand of government control of economic life,
based on a theory called Dependencia.

The documentary film also narrated the rise of fascism and

communism, the Great Depression which nearly extinguished capitalism, and
which rapidly lost popularity.

Below are other important key learning points and events we gained
after watching the documentary:

Russia became the worlds first Communist country and became

known as the USSR or Union of Soviet Socialist Republic. Soviet is
the Russian word which means Council.
Communism never worked for USSR as well as most people believed.
The USSR systematically lied about the size and performance of its
economy, as just one example, by exaggerating the amount of steel it
produced in a given year. Foreigners were only allowed to visit the

Page 9 of 12
 parts of the country that are well-developed. Media were state-run,
which meant Soviet citizens were always told that their country was the
best in every way.
Indias economy suffered after adopting a Soviet-style economy after
gaining its independence wherein all major firms would be state-owned
and production would be centrally planned. Corruption and black
market trades arose in India.
Latin American countries used Dependency Theory to guide their
economic policies: modernize by building up indigenous key industries
through a combination of government subsidies and trade barriers to
block competing imports until the key industries were strong enough.
Though it made some sense on paper, the strategy was a disaster in
practice.

Most importantly, the film narrated how the end of Communism marked
the start of the Era of Globalization.

Similar with the initial episode, Commanding Heights episode two was
interesting and fascinating to watch. We were impressed on how the videos
and scenes were clipped together to create a modern documentary film
composed of past historic events.

Although both episodes were interesting, we felt that the second

episode has more relevance with the Philippine context. An evidence of which
is when the real state of the nation was hidden to the Filipino people during
the Marcos regime. In our current economy, we can somehow relate on what
happened to Chile wherein while their countrys overall GDP grew, the level of
wealth disparity between the poor and rich also grew and some poor peoples
lives actually got worse. In todays economy here in the Philippines, those on
the lower class complain that they cannot feel that their lives are improving
although economic measure says that it is based on GDP rate. Needless to
say, rich people become richer while poor people are being left behind.

As for our country, Globalization is still a long process. With the

promises of the upcoming ASEAN Integration and with the help of our
government, let us hope for better a Philippine economy in the future. On the

Page 10 of 12
other hand, let us remember that each and every one of us should participate
in order to make this happen.

Page 11 of 12