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The Independent Institute
Presentation

The State of Freedom: 2006


I am deeply moved to receive the Sir Antony Fisher International Memorial Award and to have been asked by the Atlas Economic Research Foundation and, in particular, by its President, Alex Chafuén, to address you this evening. I am humbled to be in the presence of so many luminaries of the classical liberal firmament, and especially moved to be able to briefly associate my name with that of Sir Antony Fischer, who had the rare quality of being able to dream awake and to detect that imprecise junction where the ideal meets the possible. We are, in a way, his children and grandchildren. He was, if you will allow me a communal license, one of the patriarchs of our tribe.

In the opening scene of the movie “Lord of War”, Nicholas Cage, who plays an arms dealer, says that there is currently one weapon for every twelve people in the world and wonders in anguish what can be done to persuade the other eleven. As I look at you, I estimate there are some 600 people in this room, that is, the lion’s share of the free-market think-tank family (I am joking, of course: the 600 figure includes the ladies and gentlemen who are very kindly catering our reception this evening and might or might not agree with our views.) This amounts to one classical liberal for every 10 million people—half the population of, say, the state of New York. H.L. Mencken wrote that ants, unlike humans, never go on strike. Since free-marketeers also work around the clock, and given that our ideas are no less sexy than AK-47s, there is no doubt in my mind that we will persuade the other 9 million nine hundred ninety-nine thousand nine hundred ninety-nine skeptics before Nicholas Cage converts his eleven peaceniks… So, let’s go!

It is only natural that those who believe in individual freedom and the rule of law should spend a good deal of their time expressing criticism. After all, that is part of the tradition. The critical spirit has been the driving force of those who fought for freedom against the prevailing institutions, whether it be Greek philosophers probing the nature of justice, Roman jurists adapting the law to the evolving social mores, medieval merchants and Thomist clerics curtailing the King’s prerogatives, the School of Salamanca discovering the subjective nature of value, English Whigs denouncing taxation and war, thinkers of the Scottish Enlightenment decrying mercantilism, American founders shaking off colonial oppression, Spanish liberals (of the right kind) resisting Napoleon’s invasion, Argentina’s “generation of 1837” renouncing the Iberian legacy, or dissidents and students smashing the Berlin Wall—to mention only the Western tradition. Understandably, and in keeping with that tradition, most of us in this room spend much of our time wrestling with what is wrong and what is ugly. That is why, as we look at the world in 2006, we find much that is still standing in the way of the liberty we strive for.

We fear, for instance, that the all-important need for security might dim people’s alertness toward the intrusion of government into their lives and the erosion of some civil and economic liberties. We shake our heads at the thought of Europe’s Welfare State absorbing half the wealth of those ancient societies that gave us many good things. We feel outraged that China’s rise as a capitalist powerhouse does not seem to be weakening the grip of the Communist Party yet. We lament the fact that many international public figures who were once well aware of the limits and inadequacies of foreign aid are suddenly championing it under the guise of the Millennium Project. We shake our heads with impatience when we hear our favorite rock stars singing the praise of redistribution rather than wealth-creation as the solution to Africa’s plight. We cringe at the kinds of parties that are winning elections across the Middle East. We are alarmed that protectionism is hiding inside the Trojan horse of “fair competition” and “level playing fields”. We are shocked that current oil prices are showering old and new tyrants with crude wealth, including Hugo Chávez in Venezuela. And we shiver, alas, at the suspicion that Fidel Castro might be on his way to proving the first part of Benjamin Franklin’s dictum wrong when he said that nothing is certain but death and taxes…

We are right to decry the many obstacles that still hinder the liberation of a large part of humanity from coercion. However, let us not forget that we have much to celebrate and to delight in. We would be loath on an occasion like this to let the opportunity go by to marvel at what has been accomplished throughout the world, in no small part thanks to your ideas and the romantic tenacity with which you espouse them.

Thanks to democracy understood not as unrestrained majoritism but as a limit on government power, and to bold reform that includes the introduction of low flat taxes, competitive privatization, the elimination of most trade barriers, and the enforcement of property rights safeguarded by legal institutions, ex-communist countries have taken some 40 million people out of poverty in the last seven years alone. Even Romania, until recently the “ugly duckling” of Europe, and the Slovak Republic, considered a dysfunctional state when it separated from the Czech Republic, have made spectacular leaps forward.

Thanks to visionary free-market reforms that started in 1987, Ireland went from being a country that “exported” about thirty thousand workers per year to receiving some forty thousand foreign workers annually, becoming the high tech and the pharmaceutical capital of Europe, and enjoying the highest per capita income in that continent after Luxemburg.

China, the ideological transvestite of our time, started a profound transformation in 1978 with the introduction of half-baked forms of private property that evolved into so-called township-village enterprises and, later, into shareholding cooperatives and privately owned or joint-venture companies. Although still very restricted and confined to coastal areas, this ideological sex-change means the Chinese state accounts today for no more than a third of the nation’s GDP and that 250 million people—the equivalent of four fifths of the population of the United States—have overcome poverty.

India’s reforms started in the 1980s but gathered pace after 1991. Among other things, the misleadingly named “New Industrial Policy” did away with investment licensing and barriers to numerous companies that had been prevented from participating in various markets because of “anti-monopoly” legislation. This move unleashed a torrent of entrepreneurship that, combined with foreign investment, has reduced poverty dramatically. In the 1970s, half the population was very poor; today, according to how you measure it, less than one third is considered to be in that condition. Although there is a long way to go, the socialist economy of the Nehru-Ghandi dynasty now belongs in a wax museum.

Chile is another country that had a turbulent 20th century. It was much poorer than Cuba when the Cuban revolution triumphed in 1959. But the transfer of decision-making power to ordinary citizens and the spread of ownership, especially through the privatization of the pension system, have turned that country into somewhat of a paradigm in the region. As a result of these reforms, the informal economy represents no more than one fifth of the total size of the economy –between half and a third of the proportion it represents in other Latin American countries. Chile boasts an annual investment rate equaling 22 percent of its GDP against rates of between 15 and 18 percent in the rest of the continent, and exports more than 45 percent of its production, a much larger share than its neighbors. With 18 percent of the population still in poverty, that country could shake off underdevelopment in one generation if it continues to transform itself. A few Latin American countries, most notably El Salvador, until recently a war-plagued nation, have been following its example for some years.

Botswana is, of course, a much-touted example of African success. Thanks to institutional reforms that have linked that country to the world economy, Botswana now ranks above Mexico, Thailand, South Africa, Pakistan, and Indonesia in the Globalization Index published by Foreign Policy magazine and enjoys a per capita income that is ten times higher than that of Zimbabwe. When Botswana obtained its independence a few decades ago, it’s capital basically consisted of cattle. While many African countries were busy practicing necrophilia with Marxism as a way to emphasize their departure from the recent colonial past, Botswana, a landlocked country, opted for trade, foreign investment, low taxation and the respect of some customary laws. A few years later, industries and services overtook agriculture as the mainstay of the economy. Today, that country, which I have had the privilege to visit, boasts a per capita income that is between four and five times the average per capita income of Sub-Saharan Africa and is greater than Brazil’s.

No matter where you look, the picture is always the same: wherever they find a small opening, poor people are able to create great things. You lift the levees one inch and a Niagara Falls (or should I say Victoria Falls?) of entrepreneurship floods cities and nations with ideas, goods, and services—in one word, with prosperity. We are currently involved at the Independent Institute in various research and educational projects in many backward communities and I myself marvel at their entrepreneurial drive. Whether it be a soft-drink company that started in one of the most destitute parts of the Andes thanks to an illiterate man who created a new chemical formula and was able to successfully compete with the giants of soda drinks, or the poor and mostly illiterate women of Abeokuta, a town in Nigeria, who have impacted West Africa with their clothing industry, enterprise is a characteristic of the human race. Just let it free and it will turn stone into bread.

Why is it that we can celebrate these and other successes today? Probably because of two decisive factors. One is the climate of ideas. The other is leadership in time of crisis. It is because certain ideas impregnated the environment in which influential people made important decisions that their actions contributed to the partial de-politicization of society through the reduction of state interference, the strengthening of moral authority in civil society, and the consolidation of legal institutions that offered security and certainty beyond traditional elite circles. Sometimes, those leaders were very conscious of what they were doing and assumed with fervor the ideas of which their actions were the offspring, but there were many occasions when things happened in a different way. Many leaders did away with certain barriers to free speech, to spontaneous social cooperation and to free exchange because the alternative had failed and it seemed the right time to try those proposals that people like you, organized in policy institutes and active in the media, had forcefully set forth. In recent decades, due to the perseverance of intellectual entrepreneurs like you and others not present here who were able to give the ideas of liberty a powerful projection on the world stage, those ideas turned into action.

The battle of ideas, as you well know, is never won. There have been periods in history when it looked as if freedom was irreversible. We talk of globalization today as if we had invented a new creature, but for millions of people globalization was already the assumed environment in the 19th century. And then the 20th century saw the emergence of collectivism in its atrocious and genocidal form. So we cannot guarantee that the trend toward individual liberty and the free flow of ideas, goods, services, and perhaps, one day, even people, will not be reversed. And that only means there is a lot of work ahead.

I was reminded the other day that the Commissioner of the U.S. Office of Patents said in 1899, just as the 19th century was drawing to a close, “Everything that can be invented has been invented”. Thank God no one listened to him. Similarly, we must not be put off by those who think the free-market movement has said it all. There is much, much more to say in a world of rising regional trading blocs, cultural and religious confrontations, massive illegal migration, closed political environments that seek to use the energy of free-market capitalism to strengthen political bureaucracies, etc..

It is important to remember, as we rejoice in the great strides the cause of liberty has made, how important ideas are. As someone who was briefly involved in tempestuous politics and as the member of a generation that has been privileged to see the ideas I believe in go from representing a mere drop in the ocean to becoming a force of nature, I can only state: ideas matter. No political or civil actor, not even the most pragmatic one, acts in an intellectual vacuum. Directly or indirectly, a prevailing set of ideas and beliefs, a certain way of understanding human interaction and the institutional framework within which it takes place, serves as the matrix in which most of these actors make decisions. Occasionally, some actors will go against the tide. And if they are successful, others will eventually follow through the power of imitation, that catalyst of progress.

The economist Israel Kirzner wrote that “the essence of entrepreneurship consists in seeing through the fog created by the uncertainty of the future.” Intellectual entrepreneurs, which is who many of you assembled in this Liberty Forum are, fit that description very well: because you see more clearly than many others the cornucopia that awaits countries that adopt limited government and let people produce and exchange value, and that let the spontaneous order breathe comfortably, you find creative ways of forwarding your ideas in order to change the mindset of many others who still cling to political and economic superstition. Thanks to that creative energy, you have beaten the odds more than a few times.

Aside from the climate of ideas, the other factor I would suggest considering as a determinant of institutional reform—in light of the events of the last few decades—is leadership in times of crisis. Most successful reformers had enlightened leadership in times of political, economic or social upheaval. Leadership, combined with the right climate of ideas, created the conditions for reform. That is true historically as well as in contemporary times. People like Roger Douglas in New Zealand’s Labor Party in the 1980s, Vaclav Klaus in Czechoslovaquia and Mart Laar in Estonia in the early 1990s, or, to some extent, the young reformers of the ARENA party in El Salvador in the last decade and a half, proved to be well ahead of their own societies. Through courage, risk-taking, and perseverance, they were able to transform their countries and build a constituency for reform that did not exist when they started their journey.

We should not be surprised at this. Leadership, especially the capacity to emerge from a crisis with a clear vision and a sense of direction, and to invite emulation by turning ideas into action, has been at the heart of the great achievements of our civilization. As you well know, development is a recent phenomenon in the course of human history and cannot be said to have seriously started before the 18th century. Leadership, whether it be intellectual, political or mercantile, has been the midwife of that process. After a long period of isolation, the 19th century emergence of the Japanese Meiji leadership during a time of conflict with the U.S. ignited modernization. In nineteenth century Britain, the relentless leadership of Richard Cobden and John Bright combined with the Irish potato famine forced the repeal of the Corn Laws. In contemporary times, the leadership that brewed in opposition circles under Communism in Central Europe was able to take charge after the collapse of totalitarianism. I am thinking of Charter 77 in Czechoslovakia and the Budapest intellectuals in Hungary—as well as the Solidarity movement, a less intellectual but equally important leadership (initially, at least) in Poland. Even in China, the crisis brought about by the disaster of the Cultural Revolution and the emergence of Deng Xiao Ping, a very intuitive despot, generated reform.

Of course, crisis is usually the best environment for leadership. Many of the examples just mentioned would not have been possible if a profound crisis had not shattered the prevailing consensus and created in people’s minds a sense of despair that opened the doors to leaders who provided “security” by showing the opposite way. In Latin America, the crisis of hyperinflation in the 1980s produced a struggle between statists who wanted to nationalize everything and protectionists who wanted to maintain private property under mercantilist rules. The result was preemptive reform led by the latter. It did not generate the desired results because the reforms were not deep enough and consistent enough, but that is a different story. Crisis and leadership are almost two sides of the same coin. And the right leadership emerges from the type of intellectual climate that people like you have provided and continue to provide. Leadership and crises cannot be measured econometrically, but if we want to make reform more credible in the eyes of the skeptical, let’s be clear about its causes.

There is much more to do. A quick look at the state of freedom around the world will tell us not only that wonderful things have happened and continue to happen, but also reveal the dark side of the story: millions of people still suffer under oppressive regimes, some of which are even using a degree of economic freedom to consolidate their power; half of humanity is still denied the benefits of development because of excessive government intervention and lack of reform in regions like Africa and Latin America, and the leading societies of the world have themselves become so complacent about their own wealth that they are either failing to stem the growth of government or in some cases even letting socialism creep in through the back door. It makes it very hard for us to argue in favor of a drastic reduction in the size of government in Latin America when our critics point to us that federal spending in the United States has increased by 50 percent in the last five years and that even many of the champions of small government argue for slowing the rate of growth of government rather than actually reducing it—and this in a nation whose state consumed no more than 6 to 8 percent of its GDP when it became the world’s number one economy in the 19th century. It does not help our case that Europe continues to maintain a Welfare State in the midst of an aging population, and that Germany, France, and Italy, which represent together 70 percent of the EU economy, stubbornly cling to rigid labor markets controls, a crippling taxation system, and a torrent of entitlements—the reasons why their economies have grown at a meager average of 1.5 percent in the last ten years!

What are the greatest challenges for us in the next few years? I would quickly suggest five areas: the need to bring development to Africa, central Asia, and Latin America; the need to modify the overwhelming perception that repression is the best way to fight the drug traffic; the need to fight back the protectionist and illiberal instinct that terrorism will try to provoke through its barbaric but well-calculated attacks on civilization; the need to protect private property against the assault of environmental fundamentalism with its doctrine of plural subjectivity and diffuse rights; and the need to expose so-called market socialism by which a Nomenklatura tries to control the process of economic change in order to consolidate its power. Other cases, like that of Russia, where the Czars have risen from the dead, fall into this fifth category.

Among these various challenges, which there is no time to describe in detail this evening, I put particular emphasis on the first one: the urgent need to bring reform to Africa, where ten out of fifty-seven countries are worse off today than in 1950 and where a country like Nigeria has seen its number of poor people rise from 19 million to over 90 million in three decades, and to Latin America, where just under half the population is poor and almost one quarter extremely poor.

Latin Americans were traumatized by 1990s-style reform, when poorly structured and corrupt crony-based privatization failed to produce results. It is time to get over this paralysis, especially now that authoritarian populism is back in some countries of the region. Commerce is still heavily hampered by regional trading blocs, a labyrinth of taxes encourages a two-tier economy, the judiciary is still subservient to political or economic power, and it is almost impossible to operate legally in any kind of activity without engaging in cronyism.

Latin Americans have at their disposal the necessary information about the causes of poverty. A recent study by the World Bank showed that in underdeveloped countries, including in Latin America, the cost of doing business is three times higher than in other nations, while property rights are less than half as secure. With the exception of Colombia, where some reform has taken place of late and there has been an increase of 16 percent in the number of new companies in the last couple of years, no Latin American country has done much to reduce costs and red tape in this new millennium. Even Chile has been losing ground to Korea, Malaysia, South Africa, and others.

In some cases, small and medium-sized Brazilian companies spend more than a third of their resources hiring squadrons of tax and accounting specialists to comply with continually changing and complex regulations. Brazilians are taxed five times more than the Chinese, and twice more than Indians. With wealth disparities that are the greatest in the world (the ratio of income of the federal district in Brazil compared to the poorest region is 7:1), only new reforms will preempt the rise of populist despots in those countries where the temptation to follow bad examples is boiling.

A recent study in Argentina indicated that the accumulation of laws in that country is such that 85 percent of them are not even enforceable because they contradict or overlap each other, and in many cases continue to be in the statute book even though they have already been tacitly repealed. The result of this legislative jungle is that citizens simply do not know what the law of the land is, finding it so complex and meddlesome that they often choose to disregard it. According to the study conducted by the Law School of the University of Buenos Aires, there are currently some 26,000 norms but no more than 4,000 are really applicable. This is the result of a legislative process (including decrees emanated from the executive branch) that has survived all regime changes since that country gained its independence from Spain.

Any serious reform process geared towards the liberation of the individual from the phenomenal accumulation of state power in Latin America will entail a thorough purgation of the legislation and of the bodies generated by it. This process will allow the official institutions to be much more closely in touch with reality—i.e. with the ways and means of ordinary people who have generated parallel institutions in their struggle to survive. Once the institutions are stripped of their authoritarian and socialistic dimensions, they will cease to expropriate the belongings of ordinary people, to suffocate their creative flair through barriers to entry and through the coercive redistribution of wealth, and to relegate them to a second-class status in which they have very limited access to the courts. The result should be a bridging of the gap that today separates the law from reality and the restoration of a social order presided by peaceful cooperation.

What is needed at this stage in Latin America is probably akin to what took place in 18th-century England when old Whig reformers decided to undo much of the statute book—and the agencies attached to those laws and norms legated by previous generations. By the third quarter of the 18th century, more than 18,000 norms had been repealed—some four fifths of the laws passed since Henry III. The process was dictated by the principle of individual liberty—most of the norms that undermined individual liberty and personal responsibility were done away with to the effect that the power of the state over the citizens was dramatically reduced. The result was a long period of prosperity that we now partly associate with the Industrial Revolution.

Around 2,400 B.C., a man known by the name of Urukagina led a people’s revolution against the oligarchic state in Lagash, one of the city-states of Sumer, in Mesopotamia, accusing special interests—court priests, administrators, the governor—of acting for their own benefit and either usurping the property of others or simply enslaving them. “The priest no longer invaded the garden of a humble man”, says the document that conveys his reforms and gave the human race the first recorded word for liberty: amagi (literally “a return to the mother”, referring to an idyllic past in which the gods wanted people to be free). He banned the authorities, both ecclesiastical and civil, from seizing property from commoners, did away with most of the tax collectors, curtailed the power of judges to rule in favor of oligarchs trying to exploit the weak, and got the government out of proceedings such as divorce. Although Lagash thrived, Urukagina’s reign succumbed to a rival king after a decade. It stands as perhaps the first case of reform along classical liberal lines (to use a much more recent paradigm) and a very early example of struggle against collectivism, plunder and conquest. Something of the spirit of Urukagina, the first free-market reformer in recorded history, needs to impregnate the popular and intellectual discussion so that decision-makers can begin the process of “undoing” much of what has been done over the last few centuries. That process will liberate African and Latin American societies from the constraints that today impede their development even as other regions of the world—less endowed by nature and with less impressive histories—are moving in the right direction.


Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His Independent Institute books include Global Crossings: Immigration, Civilization, and America, Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.

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