May 14, 2004
Alvaro Vargas Llosa

Presented to FreedomFest, Las Vegas Nevada, May 14, 2004

Alvaro Vargas Llosa

I’ve been asked to introduce myself, which is not something I’m used to so I don’t even know how to do it. I’m from Peru originally. I’m a veteran of a couple of revolutions that didn’t quite turn right so I’m really a refugee in this country. I had to flee Peru, my own country, a couple of years ago after taking part in a revolution to topple the previous president, Mr. Fujimori. Before that, I had taken part in a movement to stop Mr. Alan Garcia, who was trying to nationalize the banks, so neither of those, as I said, turned out quite the way we intended them to. But they taught us some important lessons, and we did manage to stop both of them so at least that part was OK.

I’m now with the Independent Institute in Northern California. I’m writing a book about Latin America, which will be published at the end of this year, called “Liberty for Latin America.” It will be published simultaneously in English, Spanish, and Portuguese, and I think in English it will be published by Farrar, Straus & Giroux, the New York–based publisher. And I’ve been working for the last two years precisely on that. I don’t know what else to tell you about myself. I am 99 percent monogamous. I reserve that one percent for salsa dancing, which I believe requires an open mind. (laughter) I strongly believe in God. I do read Ayn Rand from time to time as a precautionary measure. And apart from that, I’m just a normal guy just like you. Please, questions at the end. Are you OK with that?

Moderator

I just wanted to ask if you were that “Perfect Latin American Idiot.”

Alvaro Vargas Llosa

Oh, I am the co-author of that book but I included myself in that book, so, yes, I was. I hope I was and I’m trying to reform myself.

Let me sum up the last 500 years of Latin America in five words—or really five concepts. That’s a pretty challenging job, but I hope you’ll bear with me.

I would use five basic concepts to sum up really what the history of Latin America has been through pre-colonial, colonial, and republican times. I would use the word corporatism, state mercantilism—that’s two words, but let’s imagine it’s one word—privilege, bottom-up wealth redistribution, and political law.

I will define all five of them very quickly. Corporatism is really a system that looks at society not as a network of free, sovereign individuals, but basically as segments, as corporations, as groups of people in which individuals only achieve legitimacy through the collective entity.

State mercantilism is a system whereby the state decides who the winners and losers are in society. In other words, the closer you are to power—to political power—the better off you are in society, and the further away you are from power, the worse off you are in society.

Privilege, of course, is pretty much the same thing. It’s a system that, through the law, discriminates between some people and other people. That is, it’s basically a system that engineers winners and losers. And of course, the other word for privilege is discrimination. The state has engineered winners and losers, and by doing that it has also created discrimination.

Bottom-up wealth redistribution is basically the same thing with another name. It’s a system whereby most of the people create wealth for the benefit of those who are close to power, but it’s important to indicate that it is a bottom-up dynamic, because it means that the elites that were close to power put on a system that in a way could only survive if it enslaved the majority of people and put them to work for a privileged elite.

And of course, political law, which is the fifth concept, is the tool by which all of this was possible. The state used the law, which was not a principle that was above the state but which was really something that emanated from the state, from the political authorities, to create these divisions in society, and basically, these social classes.

The state was the creator of social classes in Latin America. It was not the market. It was not private enterprise. It was the state. And the way it did it was through a machine or a tool—a set of tools called political law. At least, that’s the way I choose to describe that.

Now, that’s exactly what went on in pre-Colombian times with the Inca empire, with the Aztecs. There were many differences between these different empires, but basically they all organized society around these five guiding principles.

That’s exactly what happened when the Spanish and the Portuguese empires took over what we know today as Latin America. They perpetuated these five principles, except of course, there was a reshuffle of elite interests, and the people who benefited from this were different people, were outsiders. But the principles guiding the organization of society were exactly the same.

And when the republic came to life in the early 19th century, exactly the same thing happened. There was revolution, a lot of people were killed, some wonderful ideas were floated around, but what we were left with were essentially states and societies that were guided by these five principles.

Now in the 20th century, this got much worse. And that’s what I’m going to talk about. I’m not talking about reform—about free market reform in the 1990s—but I wanted to give you a little bit of background on how we got to that stage.

In the 20th century, we had something called structuralism, or we call it economic nationalism. So after these 500, 600, perhaps even a thousand years of corporatism, state mercantilism, privilege, bottom-up wealth redistribution, and political law, we had something called structuralism.

What was the foundation of structuralism? Well, a group of intellectuals, who had a massive influence across the continent, said that the root of underdevelopment was basically the the unjust terms of trade between the periphery countries, that is Latin America and others, and the center countries, countries like the U.S. and main European countries.

And the argument was that the periphery countries were exporting cheap primary products. The central countries were exporting to the periphery countries expensive manufacturers, and that because the center countries, the developed countries, monopolized technology and capital, the periphery countries were at a structural—and that’s why it was called structuralism—structural disadvantage.

Why? Because with their primary products they couldn’t make enough foreign currency to get, to buy, to obtain technology, capital goods from the center countries. And this was even getting worse because population was going up in the periphery countries.

And of course, they were able to import some technology. Technology travels around even if you have closed societies. And of course, this was increasing the offer of primary products in the international markets.

But as the rich countries were getting richer, they were not buying more of these primary products from the periphery countries because their own technologists were substituting them. And therefore, they no longer needed some of that stuff.

So this entire superstition, this baloney, I mean, this ridiculous argument dominated 100 years of Latin America. Based on this argument, entire societies were built, and of course, this led to a crisis point.

The crisis point was reached. There was nothing pre-determined about it. It just happened at the end of the 1980s. In other countries like Chile, this happened earlier. But let’s say, for the sake of argument, that this crisis point was reached at the beginning of the ’90s.

What happened was that, of course, this system, this argument of structuralism, led to high tariffs, all sorts of quotas, exchange rate controls, nationalizations, subsidizing urban consumers, I mean a whole set of interventionist policies that were supposed to correct the unjust terms of trade, according to the structuralists, the economic nationalist argument.

Of course it didn’t work. So what did they do? They blamed the outside world and they said, What we need now is redistribution at the international level. Soo that’s where foreign aid comes into being. Because structuralism fails at home, we blame the outside world from which we have been shielding ourselves anyway. And we say to them, Now you have to redistribute your own wealth through foreign aid.

And masses, and masses, and masses of money are redistributed in that way, of course your money, taxpayer money, redistributed to us. And that doesn’t work either, so we reached a crisis point, and that happens at the end of the ’80s.

Now in the book that I talked about, I make the argument that the opportunity—and this is a valid point, I think, anywhere in the world, including your own country—the opportunity for reform arises when the vested interests that are linked to the status quo, that live off the status quo, come into conflict with other vested interests that also live off the status quo, because the state is no longer in a position to guarantee either side the parasitic rewards of that same status quo. The arrangement doesn’t work anymore.

So we have basically two sides. We have what we might call, for the sake of argument, the statists and the protectionists. They’re really the same thing, but they’re not the same thing in terms of the dynamic that creates the opportunity for reform.

The statists live directly off the state, directly from handouts from the state. The protectionists do so but in a more indirect way. There’s still some private enterprise. They own, or they think they own, their own assets, but really what’s happening is that the state is engineering an entire system to keep them alive. So they’re really statists but they don’t know they’re statists, or at least, they chose not to. Theypretend not to be statists.

So these two sides, the people who live directly off the state and the people who live indirectly off the state come into conflict with each other. There’s a big, massive confrontation.

I took part in one of those, in Peru, and this happened all over the place and it was violent. It was aggressive. People took to the streets, people went to jail, people were murdered. This was a bloody kind of conflict.

What was happening? What was happening is that both sides that lived off the state were so scared that the other side was going to take over that they wanted really to engineera sort of preemptive strike, so to say in modern terms.

What was happening was that the protectionists thought the statists were going to take over their own companies. And of course, that was true. The statists thought that, because the system was no longer viable, the logic really dictated that they would have to take over and go toward a totalitarian type of system where everything was directly owned by the state.

So the protectionists who really loved the state, but were also very scared that the statists wanted to take over their companies, and their enterprises and assets, moved and did a preemptive strike. And that’s where reform came into being.

It had nothing to do with those of us who were calling for reform from the outside circle, or world. It had to do with the confrontation and the conflict between the two, so it’s very important, bearing in mind last night’s speech by Mr. Mackey, that there be somebody out there on the fringes not making any concessions, because when the opportunity for reform arises those fringe voices will eventually become mainstream, and it will be up to the political class that tries reform, either to heed that message, those pieces of advice, or not. Well in Latin America, we chose not to.

The golden opportunity for reform arose. It really was a wonderful opportunity. It was a time when statists were killing each other. They were destroying each other. And the fringe voice suddenly became the reasonable voices of society. And if the leading political class had heeded those voices, we would be telling a very different story nowadays. But it wasn’t the case, unfortunately.

What happened was that there was massive reform but of the wrong kind. Reform was not really what it had to be.

I was telling you about corporatism, state mercantilism, privilege, bottom up wealth redistribution, political law—these five guiding principles of the entire Latin American history from pre-colonial times, through colonial times, through republican times.

So what was real reform all about? Well, it’s very simple. It really is not that difficult. If that was the cause of underdevelopment, of oppression, of misery, what you had to do was to dismount that system. It was not about doing, it was about undoing. It was not about improving or enforcing certain new laws, certain new ways of doing things. It was about repealing. It was about retreating on the part of the state.

It had been like that in other countries. The British, between the mid-18th century and the mid-19th century repealed 18,000 laws that had been passed since Henry III in the 13th century, and that’s how we achieve prosperity and greater freedom, not full total freedom, but greater freedom.

So it was all about retreating on the part of the state, repealing laws, getting out of the natural breeding of society. But that’s not what we did.

What we did is we—under the name of privatization and liberalization—reshuffled elite interests. So some of them died. Some of them were defeated. Others came into being and we are left today in the 21st century again with corporatism, state mercantilism, privilege, bottom-up wealth redistribution, and political law.

Let me give you a few examples just to show how this happened. I mean I wouldn’t for a moment say there wasn’ t reform. There was massive reform. There was fiscal and monetary reform. There was tax reform, there was trade reform, investment reform, financial reform, labor reform. Massive. Thousands of companies were privatized, and yet we are left with the same systems.

So what went wrong? And this is a lesson that should be heeded by other underdeveloped countries, but also by countries like the United States, because these are universal lessons that have to do with the wrong kind of reform when reform is not based on principle.

For instance, there was massive fiscal and monetary reform. Yes, the government ceased printing so much money. There was a lowering of government spending. Price controls were lifted, eliminated. And yes, inflation went down. We went from hyper-inflation, to double-digit inflation, and then to single-digit inflation along international standards.

So that was pretty good. I mean, whichever way that was done, there’s no question that the result was pretty good. It’s better to have 5 percent percent or 2 percent inflation than to have, like I had in my own country in Peru, two million percent inflation over five years. I would buy a chocolate in the morning. I would buy it again two hours later, and of course, the price had just gone crazy.

So, yes, that was an improvement. It would be silly to say that it wasn’ t an improvement. But what happened?

Governments did not realize that the source of this whole problem was the size of government. So, because they were getting so much money from the proceeds of privatization, they made new commitments. The state made new commitments to our society, and of course, the money from privatizations dried up.

You can only get proceeds from privatization once. Once you sell that company to civil society or whoever, you don’t get money from there anymore except through taxes, but what you do, if you do the wrong thing, is you make new commitments. And when that money dries out, then what do you do? You raise taxes again.

So Argentina, which was one of the model countries of privatization and liberalization, they were doing road shows all over the world, and Wall Street was applauding them, and the White House was heaping praise on them. And all sorts of glossy magazines had Mr. Menem on the cover and so on.

What was happening? Well, it’s very easy to explain. GDP went up by 40 percent in Argentina over that amazing reformist decade, but government spending went up by 100 percent. That says it all. Between 1996 and 2001, just five years, their public debt was doubled.

In Brazil, which engaged in a shyer type of reform—it wasn’t as bold as it was in Argentina—the the public debt was four times the export earnings of Brazil.

So governments were spending like crazy. They were not reducing or eliminating the size of government. Government spending was actually going up. The size of government was increasing even as the world was hailing them for reducing the size of government. So that was what monetary and fiscal reform amounted to.

In the monetary area we were printing a little bit less money to bring it more in line with production, so we wouldn’t have two million percent accumulated inflation. But we were still using the the discretionary power of the political authorities to engineer all sorts of results that were not determined by personal, individual choices in society, but by the political and oppressive state.

So what happened? We raised interest rates to attract foreign investment and foreign capital, and of course, what happened was that the cost of that was transferred to other types of producers, local producers, and especially, millions of Argentinean borrowers. So the little guy was worse off in the name of privatization, liberalization, and free markets.

Now, that was only fiscal and monetary reform. The same thing happened with tax reform. Income tax went down to 35 percent. It was 50 percent, in some cases 75 percent. It went down to 35 percent, so that was a move in the right direction. 70 percent of Latin American society was exempt and this time legally, not through the informal economy, but legally exempt from taxes. So that was supposedly a move in the right direction, and I wouldn’t deny that for a second

But because government spending was still between a fourth and and in most cases a third of GDP, which is, of course, three or four times higher than it was in this country, in Britain, and all the countries that reached prosperity in the 19th century, early 20th Century. taxes had to go up at some point.

So you lowered income tax but you raised sales taxes. In Peru it went up to 19 percent. Or you created new taxes like they did in Brazil.

So what did you do? You created—you used your intelligence and never for a moment deny that a bureaucrat is not an intelligent being. They are so clever at creating opportunities for the growth of government. They are so clever. I have direct, personal experience of that.

So they created all sorts of taxes, a tax on financial transactions, for instance, all sorts of sales taxes—not one, but three different types of sales taxes. Can you imagine that?

So of course, tax reform in the end meant growth of government, and therefore, what started as the lowering of taxes ended up being really the raising of taxes.

The same story in, say, trade reform. At the beginning what we did is we lowered tariffs by about—it was not bad—it was by about 50 percent, sometimes by 75 percent, so we had a 15 percent average tariff across the board from Mexico to the Patagonia in South America, so that wasn’t that bad.

But what happened? What happened of course was that we started creating all these trading blocks. We thought that what free markets are all about, what free trade is all about, is about Brazil getting together with neighboring Argentina and creating a sort of little free market, free trading block, regional blocks.

So what we did, in effect, was to put back tariffs up again. So Argentina, which started lowering its tariffs by about two thirds, which was not bad, ended up putting up tariffs in at least 71 out of 97 different groups of items. So most of the tariffs in Argentina actually went up during the ’90s.

And if you read The Economist, if you read all these glossy financial magazines—I read The Economist every week and I love it; it’s a great magazine—they all hailed Argentina for lowering taxes. What they were doing was putting up taxes except through the back door because they didn’t understand the concept of free trade. They thought they could convert this into a miniature free trade and just concentrated in a regional block in Central and South America.

Also the state was really discriminating between different sectors and areas of the economy. There was a certain group of tariffs for capital goods, other tariffs for agriculture, other tariffs for industry.

I mean, there was all sorts of discrimination. Mexico exempted assembly plants altogether from paying taxes. Argentina exempted health insurance, advertising, cable TV, for instance.

So the state was engineering again winners and losers just as in pre-colonial, colonial, and republican times. The state was really the god of that society. It decided who would live, who would die, who would succeed, who would fail in the name of free markets, liberalization, and privatization.

We can go on, and on, and on. Financial reform. Yes, some of these capital controls were lifted. Yes, some of the curbs on interest rates were eliminated. Yes, capital was freer. It moved around. It came in. It went out. But what happened?

The state needed funding so it created a sort of dependency on the part of certain entrepreneurs and business people, which amounted really to an oligopoly of banks and bank owners who, in return for their oligopoly, which really is a form of monopoly, just guaranteed the government a certain amount of funding.

So what did the government do? It gave guarantees to these banks, and of course, when the state gives guarantees to certain banks, those banks begin to lend in an irresponsible way. The market is not functioning there. What is happening is pure politics.

So Mexico went down the wrong path, and what happened was that taxpayers were burdened with a tax bill of $68 billion just to rescue most of the banks that belonged to this cadre of mercantilist government cronies and government friends. In my own country, Peru, $1 billion were spent to rescue certain banks because of this exchange of favors between certain privileged minorities and the state.

So what was all this financial reform worth? It was worth nothing. In the end, you had the state again creating winners and losers, creating privilege and discrimination in society.

Then you went on to labor reform and exactly the same thing happened. In some countries, it was easier to fire people. In some countries, collective bargaining went from a collective bargaining based on trades to a collective bargaining based on company. It was company-specific rather than trade-specific and therefore, I suppose, that was a move in the right direction.

But because they didn’t understand the principle that it had to be based on the individual, the individual being able to contract with whatever company he or she wanted to contract with, they created new forms of privilege.

So in a country like Argentina, which is really a symbolic country in all of this era, you had an absurd situation. Mussolini’s laws, which had been imported into Argentina by Peron in the 1940s, were still in place. So you still had collective bargaining by trade rather than by company, and of course, rather than by individuals.

So, for instance, metallurgical workers, whether they were building submarines or manufacturing nails, were subject to the same rules.

So what was the result of this? The only one that could be: double-digit unemployment. So of course, people were taking to the streets and saying free markets mean double-digit unemployment –20 percent, 25 percent unemployment in some parts of Latin America.

What about privatization? That was really the jewel of reform.

Well, yes, thousands of companies were privatized in Mexico. A few hundred in Chile a few years before. Almost 200 in my own country in Peru. A few dozen in Brazil, which was a slower reformer. Although they did have the greatest privatization of all, which was their telecommunications concern, Telebraz, which went for almost $19 billion.

That was not bad, but what you had was the creation of private monopolies. The government didn’ t understand that it is the government that creates monopolies, so what it did was to transfer the ownership to certain groups but of course it did so under conditions that had nothing to do with the free market.

What was the reasoning? The reasoning was, “I give you the monopoly of a certain market, of a certain area, and you give me a return, of course, funding, either through taxes, or most importantly, through the buying of government bonds,” which is what really happened here.

So of course, these monopolies, as they do anywhere in the world, were charging very high prices or rates for whatever service they were giving to society. There were protests in the streets. And then the government, as a response to that, of course, confusing causes with effects, created new government companies, new state enterprises called regulatory entities and agencies. And we’ve got thousands of those around Latin America.

And what happened? The same thing that happens everywhere. The regulatory bodies, of course, were in cahoots with the same companies they were supposed to regulate as happens everywhere in the world. It doesn’t happen only in Peru, or Chile, or Mexico. It happens here. It happens everywhere.

And what happens then? Well, more people take to the streets and say this is corruption and so scared the governments. What do they do? They put price controls on those goods and services.

And what happens? The monopolists cease to invest. And then what happens? Exactly what is happening this very week in Argentina, with the new president announcing the creation of a new state company, a company that’s going to take control of the energy market, because there’s now a shortage of natural gas. And Argentina has all the natural gas in the world, and so now they’re creating new state companies.

So a story that began as a privatization of state companies or state-owned enterprises, is ending with the state creating new government owned enterprises because of mistakes that were made along the way by the state itself, but for which we free marketers are taking the blame. So this is the really crazy story about free market reform in Latin America.

So I would say really that what happened is that we missed a golden opportunity to create free market societies. We missed a golden opportunity to retreat as states from society. We missed a golden opportunity to devolve power, to transfer power back to the individual, to transfer decision making from a single unit to millions of units—individual units in society.

And, as we all know—all of you who have ready Hayek and others, know –the only way information can flow in a society is through individual-based rights, not through decision making at the top. And that is exactly what reformists missed. They missed a great opportunity to transfer and devolve power.

And what they did really was to re-engineer new forms of privilege, new forms of corporatism, state mercantilism, privilege, bottom up wealth redistribution, and of course, political law. And on this last topic, it was even worse.

There was no reform whatsoever in the justice system. We have courts—except for Chile, Uruguay, and maybe Costa Rica, which function a little better than the others– we have courts that are completely subservient to the political system. They’re so inefficient.

In my book, I have a description of the backlog in cases. We millions, and millions, and millions of cases. And you know perfectly well that justice delayed is justice denied. So if we have a justice system that simply doesn’t work, or that is itself a tool of the state mechanism of creating privilege in society, of course, the individual has no possible response other than illegality, the black market.

And that, of course, is a wonderful story, but it is also a sad story because it has huge costs in society. We have now societies which have three sectors. We have the formal sector, the informal sector, and the public sector.

The informal sector is free because it evades the rules, but it has no capital because the cost of creating it is so huge. We have the formal sector that has some capital, but it’s not free because it obeys the rules. And we have the state sector that is both free and has capital, because it takes both away from the other side.

So the only one that is growing in this society is the state. Both the formal and informal sectors are simply not growing anymore. The formal sector is not able to—these big companies are not able to buy goods and services from small- and mid-sized companies. They were at a certain time in Germany, for instance, where much of prosperity was built on small and mid-sized companies.

And these small and mid-sized companies—what do they do? All they can do which is go to government offices, and just gather around, and wait for public employees to come out and try to sell them something.

If you go to a public or state office in Latin America, you will see, at six or seven o’clock in the evening, you will see a lot of people, thousands of people, gathered around just waiting desperately for those public employees to come out, because they are the only ones who can buy from them what they’ re willing to offer.

So I think this is a really important lesson to understand, because in the name of free markets, in the name of liberty, a lot of damage has been done to the cause of liberty. And we have now, throughout Latin America, all sorts of movements, very powerful inflation movements, that are coming back into power, or on their way back to power, blaming free markets for something that was entirely under the responsibility of statists, and monopolists, and people who were really intent on perpetuating this tradition of corporatism, state mercantilism, privilege, bottom-up redistribution, and political law. Thank you very much. (applause).

Audience Member

My husband and I we’ve lived in Honduras for the last eight years, and you brought up the point about foreign aid and the redistribution of taxpayers money from the first world to the third. And my question is, having lived there so long, maybe you could give me an explanation of why I haven’t really seen any value coming out of this millions of dollars in foreign aid poured into Honduras.

Alvaro Vargas Llosa

Well, that’s a very good question. In the last three decades, billions, and billions, and billions of dollars have been transferred from the rich world to, for instance, Latin America, and other countries. And many people have studied this.

Peter Bauer is probably the greatest economist to have studied this and come up with, I think, really the best answer.

If you do not have a system that is free, that is able to make the most of whatever capital is around in that society, whatever money you pump into that system is only going to have one effect, which is to strengthen, to fortify the structures of statism.

And that is exactly what has happened in all these countries. Money kept coming in and sometimes it went directly to state programs.

At other times, it didn’t go directly to state programs, it went to private programs but it did so in a way that was still under the influence of the state, because the state decided who would get that money.

And of course, if your program is entirely based on money that you’re being guaranteed, that you know is going to come from a certain source, what incentive do you have to create anything that’s going to be of value for people who are supposed to be the consumers of that, of those groups of services?

So if you remove incentives from that—if you remove choice, which is really what it’s all about—from that equation, what you’ re left with is with political authorities directing that money to wherever they want to direct it to, and which is usually areas that will be able to return the favor to them.

It is never a unilateral process. That’s something very important to understand. And it’s been like that forever. The king would distribute land to the conquerors in return for favors that the conquerors would give to the king. And this happened in the 16th, 17th, 18th century and we’re doing exactly the same today.

When for instance, social security was privatized in Chile and seven other countries, including my own, in Latin America, we went from a pay-as-you-go system to a system of capitalization where you, as a pensioner, would own your own assets and give them to a certain pension fund to invest in stock or whatever.

What did the government do? The government forced those pension funds to invest in government bonds.

So with Argentina, when the government defaulted on its debt in 2001, of course all pensioners, millions and millions of people, were just left out in the cold. Mexico passed a law whereby 64 percent of the assets had to be invested in government bonds. These were private pension funds. These were private companies, private enterprises, but forced, through the mechanism of the law, to invest in government bonds.

So the principle was:I make a favor for you, and then you give me back that in terms of funding.

Well, exactly the same happened with foreign aid. Either the state would direct that money to wherever it wanted in society in return for something. Of course, half of the money ended up in my pockets, or in Switzerland, but some of that money went to you, and that would return in some way under a favor that you would lend me. Apart from the fact that you would not make any use of that money in any productive way, because you were guaranteed that money, what incentive could you possibly have?

So we have now a situation where the black market economy in Latin America is creating a lot more wealth than the foreign aid is. But that’s wealth that’s not really that productive.

We have a situation in Peru, for instance, where only 2 percent of all businesses are formal, but they produce 70 percent of the GDP, of the wealth of the formal and legal wealth in that country. So that black market economy, although it is potentially much richer than what is coming in as foreign aid, is just simply unable to turn that into real wealth because of the prevalent system.

Audience Member

Did Chile beat the system? Can others?

Alvaro Vargas Llosa

Yes. There’s no question. Others have done it. The rich countries of today. That’ s a confusing reference though because they’re so statist. Government spending in these countries is a third, sometimes even a half, of the wealth, of GDP—of course, using that as a reference, it creates a lot of confusion.

We were told in Latin America, where we say we’ve got to reduce government spending, that in the U.S. a third of the wealth is spent by the state, or in Britain 40 percent, in Spain 55 percent, in Germany 50 percent—so that’s a confusing way to look at it. But these countries became prosperous at a time when government spending was no more than 9 percent or 8 percent—talking about the end of the 19th century, early 20th Century. And that was too much anyway.

But of course, the further you moved toward the situation where the society is really free, and the more you move away from statism, the more prosperous you are, although I would never build an argument just on that. Principle has to come into it. Because when it doesn’t—and that’s what worried me about this wonderful speech last night is—when principle doesn’t come into it, you end up with a situation like Latin America.

You have to have principle guiding reform because otherwise, if it’s a strictly utilitarian situation where it’ s all about better health care, better social security, in the end you’re going to create opportunities for statists and political authorities to re-engineer statism in some other way. So a principle has come in..

But it’s been done in other countries. It can be done. It just requires for us to totally discredit the state as a source of anything but poverty, misery, and oppression.

And when we do that, people will be liberated from that idea rather than from that institution, simply from that idea. And when they are, it will just take a natural course. Yes.

Audience Member

I understand that in Costa Rica there’s are four or five libertarians who have been elected to the senate. Could you talk a little bit more about the (inaudible)?

Alvaro Vargas Llosa

Yes. This is true. There are libertarian parties springing up all over Latin America. The Costa Rican party is probably the one that’s most successful. Not only that, they have a group of people who are trying to secede from Costa Rica –in Limon, which is a province in the Atlantic Coast—and they’re trying to create a truly libertarian society. Of course, they haven’t achieved their goal yet, but they’re making headway. And they have a voice that’s heard. And they now have members in parliament.

That’s of course a difficult choice to make. Should libertarians take part in the political system and therefore credit the political system in order to dismantle the political system from inside, or is that a way of really reinforcing the political system? That’s a choice you have to make.

I have an open mind about it, but I admire very much what they’re doing. They have an agenda and they’ re pursuing it with conviction and they’re making progress. TheyÕre a long way from achieving the results they would like.

Audience Member

Could you say something about Chile and Pinochet?

Alvaro Vargas Llosa

That’s a slightly different story. Reform there took place in the ’70s and ’80s. That’s a long time before the rest of Latin America.

Reform there had better results than in the rest of Latin America so I deliberately left that out, because that’s a different story plus it’s a better-known story, that’s become an international case.

But what happened was that I think that really what we can agree on is that the more freedom you have, the better—even if it’s not all freedom. If you give a society a little bit of freedom, that society will probably fare better than the others simply because it has a little bit more freedom.

Of course as libertarians, we want total freedom. We don’t settle for that. We know that those are trade-offs that we don’t necessarily settle for, and that there are big costs attached to that, because in the Pinochet era, that was an authoritarian state. People died. People were killed. People were unable to speak their minds. People were simply under a threat that inhibited them from exercising the liberty in the way they would have done.

But because that system created spaces of freedom for economic activity, then that’s exactly what happened. Economic activity took off, and the country was doing better than the rest of Latin America. And because that system was able to prevail for three decades, Chile is better off today than the rest of Latin America is.

When the transition to democracy took place, what happened was that, I guess through a combination of common sense on the part of the Democrats and of certain kind of guarantees that Pinochet had left in place, much of the system was preserved.

And in some areas, they have even made progress. For instance, a socialist president who is now in power, Ricardo Lagos, has brought down tariffs to around 6 percent. They were much higher than that.

My idea is that they have to simply be eliminated all together. Estonia did so to great success. Of course, it now has gone into the European Union, so it now has to bring them back up again –exactly as Argentina did when they eliminated some tariffs in the 1990s. Then they went into this trading block called the South American Common Market, Mercosur and they had to bring back up those tariffs so.

But I would say that Chile is doing better than the rest because reform took place earlier and went a little deeper. They privatized social security. They privatized, somewhat, the health care system.

And that is bound to happen in any society even under a dictator, even under an authoritarian government. If you leave some pockets to freedom, of course you’re going to have prosperity and you’re going to have results.

But in the end, I would not settle for that because the cost of that was human minds, was human dignity, and of course, many, many individuals were left out of the story.

I am pushing for Chile to go back to reform. They’re resting on their laurels now. They haven’t done any reform for the last two or three years. They’re simply living on the proceeds from the reforms of the ’70s and ’80s, and I really think they have to keep going forward. But it would be stupid to deny that they’re doing better than the rest of the continent.

Audience Member

During the 1960s the United States government tried to help Latin America by enforcing the coffee production quotas, helping the Latin American coffee producers organize and effectively police their cartel. Is there any danger that a similar arrangement might come to the fore in our modern day, and is the enforcement of the drug trade a variation of this?

Alvaro Vargas Llosa

Well, for instance, we have a system now called the Andean Preference System, or something like that. Basically, it consists of giving Andean countries free access to the American market in garments, and textiles, and that kind of thing. That’s basically through a quota that’s kind of—pretty big, pretty large, so it’s mostly a free system.

But my argument is that half freedom is not freedom. What you do is -you engineer a concentration of resources in that particular market. So you have a lot of Peruvians, for instance, Colombians and Bolivians now trying to invest in that particular area, because they know that that market now is pretty much open for them.

But what’s going to happen is, at some point, the United States is going to say, Well, you’re not doing enough to fight drugs, so I’m now going to close that market for you. That’s exactly what they’re doing now, by the way. They’re threatening the Andean countries, who are not doing enough to fight drugs, with closing that market or just lowering the quotas. And of course, that’s not a way to do business. That’s simply blackmail.

As to the drug situation, it is a total mess. It has failed. It is immoral. It is simply time for the United States to realize—and for other countries in Europe too—to realize that they’re on their way to total and absolute failure. And they’re creating a lot of harm, a lot of havoc.

It’s tantamount to bombing. They’re bombing entire fields in Latin America, in Colombia especially. They were doing so in Peru. No longer, but through other mechanisms really they’re having the same effect. And they’re simply destroying the livelihood of peasants who just want to make a living. That’s all they want to do. They don’t care about domestic American politics. They simply want to make a living. They want to get on in life as others do.

If there is a market for what they grow, and what they have been growing for ancestral reasons for centuries, and centuries, and centuries—well, that’s really not their problem.

So I would urge the American authorities not to transfer their own internal problems and failures to Latin America, because they’re creating a lot of hatred and resentment towards America.

But even more importantly, what they’re doing is they’re discrediting the whole idea of free markets. There is, outside of the United States—I know that all of you are extremely critical of your own government, or most of you are. So that’s not a problem within the borders of the United States.

But it’s a grave problem outside of the United States because most people in this world associate the United States with free markets. Whatever happens, whatever policy, whatever effective policy the U.S. government is putting in place, that’s the immediate association in people’s minds.

So of course, if that translates into people destroying the peasant’s livelihood in the name of something that’s totally ridiculous, which is deciding what you put into your own body, then you are discrediting the entire idea of free societies and free markets.

And we, who support free markets, and admire the Founding Fathers of the United States, and quote them all the time, are left in the cold. We just don’t know how to defend free markets if the people who stand for free markets act in a way that discredits systematically everything that their own country was founded on—was supposed to be founded on—and the values that they supposedly embody.

Audience Member

But isn’t that what the United States has been doing for many years? When I lived in Chile during the 1960s, we would send our surplus wheat down to Chile, and that would destroy production.No one would produce wheat, and there was no work to produce wheat in Chile, so it put a lot of people out of work.

I mean, this was always the policy. And then they were supporting military governments. They had all these military aid programs. They had the IRS down there showing them how to collect taxes from everyone, and it did nothing but create messes in Latin America.

Alvaro Vargas Llosa

It is true that a lot of mess has been created, except that, as a Chilean consumer, I don’t mind you as a taxpayer paying your own government lots of money for your government subsidizing you so that you send surpluses. I buy really cheap wheat in Chile. You know, you’re just doing a really dumb thing for yourself in my benefit. I don’t mind that as a Chilean consumer.

But on the whole, the situation is that, of course, protectionism in the U.S., and in Europe, and in agriculture,—it’s very, very high It’s almost $300 billion dollars. It’s huge, huge protectionism. Of course, it doesn’t help us at all. We just want to get into your market. We want to sell you our own agricultural stuff. And you guys are protecting your agriculture, and it doesn’t help us. It doesn’t help the cause of development.

But again, I always go back to principle. It doesn’t help the idea of free markets. If people who stand for free markets in the U.S. and in Europe don’t let our products go in and compete with yours, how the hell can defenders of free markets in Latin America stand for anything that you stand for? It’s very hard to do.

In Europe, for instance, agricultural protection raises the price of food by about 25 percent. So I need to get across to those European consumers and mobilize them because they are millions. They’re a much greater force than the protectionists. And I need to get them to confront the protectionists, destroy those mechanisms for protection, and then my own supply will be able to get into those markets.
Audience Member

What is the future in Latin America?

Alvaro Vargas Llosa

That’ s a very good question. I have a little theory about this. As I said, there is an opportunity for reform, which is really a revolution, but I tend not to use that word because it’s a very loaded word. It has all sorts of connotations.

But an opportunity for real profound reform always arises in a society which is in the state that most Latin American societies are in. Just as it did in the beginning of the ’90s when all these vested interests started confronting themselves, because they were desperate.

The state just said, Well, unless I nationalize every single company in the country, unless I take over in a totalitarian way every corner of society, I’m not going to be able to survive, and the protectionists are going to survive at my expense. And then the protectionists said, Well, the state isn’t going to survive at my expense so let’s have a preemptive strike and let’s do reform.

Well, that situation is going to happen again because we haven’t solved the problem. We have simply reengineered the entire corporatist, mercantilist system. So an opportunity for reform is going to arise again.

My feeling, and this is really just pure speculation but based on a little bit of experience, is that we will get an opportunity in the next decade. I think we have to keep making the points, but we probably have to allow the statists like Kirschner, like Lula in Brazil, all these people a little bit of time until the end of this decade. And I am pretty sure we will get another opportunity the next decade.

And it is important for us to heed and understand the lessons of the ’90s. And that’s what my book is about, if I am allowed this commercial. That’s exactly the idea. We must not repeat these same mistakes.

We have repeated them now three times. There was free market reform in the mid-19th century in Latin America and the same mistakes were made. There was free market reform at the beginning of the 20th century, especially the Ô20s, and the same mistakes were made. We had reform again in the Ô90s and the same mistakes were made.

We’ve got to get away from this idea that state power is really the solution to free markets. And once we do that, there’s nothing that stands in the way of prosperity in Latin America. Other societies that were worse off at the time when they made that decision have been able to do so.

Audience Member

What went so horribly wrong in Venezuela?

Alvaro Vargas Llosa

That’ s a very good question. My answer to that is they have too much oil. And that’s a curse. If you have so much oil in the country, it’s a curse.

They went back to democracy in 1958, and they’ve had four decades of democracy and they thought that that was enough. It was simply a question of electing a government.

And what those democratic governments did was live off that oil. So that oil produced, over four decades, about $300 billion, which for a Latin American country the size of Venezuela, it’s a huge amount of money. It really is a lot of wealth.

And of course, when you have a state, and cronies that live off the state, who have this guarantee of permanent income worth $300 billion, you’re not going to engage in any reform. What you’re going to do is you’re simply create all sorts of mechanisms for corruption, and for redistribution, and for basically draining the energy of society towards the state, so that the state can own really the energies of that society.

So that’s exactly what happened. The Venezuelans realized that at the end of the ’90s so they took to the streets. There was revolution. And they thought this guy called Chavez was the way to do it. They thought this was the guy who’s defying the status quo. This is the guy who’s taking to the streets, mobilizing opinion against the status quo. He is the way to get rid of all these politicians, basically two big political democratic parties.

So they did so. But as has happened so often in Latin America, of course, the guy who got into power just perpetuated exactly the same tradition. Why is Chavez now able to defend himself against this huge mobilization of civilization power in the streets? Because he has tons of oil.

The price of oil has gone up so much in the last two or three years and that, of course, gives him revenue, and revenue, and more revenue. And he’s able to use that wealth to protect himself against the efforts by civilian society to get rid of him.

So oil has been the curse of Venezuela. I’ve been there many times, and I’ve said that many times there. It’s really terrible that such a great source of natural wealth could really, and so perversely, turn into the cause, or one of the causes, of a society’s own demise.

We had a situation in the ’90s where many countries that depended very heavily on primary exports, basically extracted exports, ceased to do so. percentEighty-five percent of Mexico’s exports are now manufacture. The proportion of primary products, as a percentage of total exports in Latin America, is now only 40 percent. It used to be 80 percent, 90 percent. Then it went back to 60 percent. It’s now only 40 percent. It’s still high but it’s not that high.

And yet we still have the same system in place. So getting rid of those extracts as a primary source of income does not necessarily guarantee that we move towards free markets.

By the same token, relying on those exports does not necessarily mean we do not move towards free markets. I think it really has to do with the type of reform that you engage in. It has to do with the kinds of principles that guide reform.

But because of the nature of society, which has really perpetuated this legacy of mercantilism, perhaps the primary exports have worked towards reinforcing the system. But I wouldn’t place the blame exactly on that. I mean, having natural resources cannot be a curse if you have the right system in place.

California has a wonderful history with many mistakes and now we have an extremely statist system there, but that is a society that was able to make good use of its natural resources in a way that Latin America has not necessarily been able to.

Audience Member

I work closely with the immigrant population in Phoenix, and I was wondering if you can address what type of reform these people can go back to their own country and institute some sort of real change.

A lot of my friends are very disillusioned with what’s happened. Can you tell me when they can possibly recognize the opportunity that you’ re talking about and what sort of movement they should be gearing toward?

Alvaro Vargas Llosa

To be entirely honest, there is simply not enough time, at this point, for reform to be put in place and produce results for those immigrants to go back. My policy would be simply embrace them. Just let them be. Let them come in. Let them contribute to this society. Let their friends and the next generation or generations come in, according to how long it takes.

Audience Member

What would you recommend for those generations to do?

Alvaro Vargas Llosa

I recommend what all of you in this room know better than I do. I recommend free markets. I recommend the state retreating entirely from all these areas where it has created so much havoc. I would simply recommend a massive, colossal transfer of power from the state to the individual, from that single unit called the state, to that massive decentralized unit which is really millions of units called the individual.

You do that through taxes, tariffs, all the different forms, which the states has of creating oppression. You just remove that state bar away from that. We don’t need to tell the people what to do. We don’t need to direct any resources to any corner of society.

We simply let them do. They will do wonders beyond our imagination, but we simply have to retreat and undo what we have done. If we don’t do that, we’ re simply going to go revolve around exactly the same type of system that we already have.

But immigrants: just embrace them. Let them be. Don’t subsidize them. If they want subsidies, if they come here looking for subsidies, just don’t subsidize them. Let them be. Let them work.

I love San Francisco—it’s a wonderful city, one of the most beautiful cities in the world. I take my children there. You know what? The beggars there are not immigrants. They’re not Mexicans. They’re all blond. They’re all working age. They’re all male. It’s amazing. They’re all 40, 35-year-old blond males. They’re not Mexicans. They’re blond males because the system incentivates that.

And the Mexicans, what are they doing? They’re working out in the fields or wherever they can. So just embrace them. Let them be. Don’t be scared of them.

Audience Member

Well, I agree with you 100 percent.

Alvaro Vargas Llosa

Thank you very much. (applause) You’re very kind.