Latin America's crony capitalism.

In the 1990s, as countries across Latin America announced their embrace of market reforms, economists expected them to boom. Most stagnated instead. Independent Institute Senior Fellow Alvaro Vargas Llosa looks for the roots of the continent's problems--and a way to escape them-in Liberty for Latin America: How to Undo Five Hundred Years of State Oppression. Assistant Editor Julian Sanchez spoke with Vargas Llosa in August.

Q: What are the origins of Latin America's development problems?

A. We came under the control of Spain and Portugal at a time when those two countries were heavily corporatist, heavily mercantilistic. Spain passed about a million different laws in those 300 years, and you can imagine what that did. If you pass a million laws in any country, in any cultural environment, you're going to stifle any initiative or entrepreneurship. And that's what happened, so people became very cynical about the law. Evading the law became an objective in life. There are almost 30,000 laws today in Argentina. Only 4,000 of them are enforceable or applicable.

Q. How does state economic power insulate itself from reform?

A: Mexico's press through most of the 20th century was controlled not directly through throwing the owners or the editors of media outlets in jail but through economic means. Either the government owned the land or the building in which the paper was based, or it controlled advertising. Sometimes it was even more Machiavellian than that: At a time of crisis, the government would make loans to some of these companies. So of course, many of them ended up heavily indebted to the government. That also happened in Peru, and many of the TV stations are still under heavy pressure because of that.

Q: Why does liberalization get such a bad rap?

A: This whole system we've been talking about reached a sort of crisis point at the end of the '80s, and an opportunity opened up for free market reform. It was a time when people were ready to accept almost anything.

Unfortunately, that opportunity was lost. It was a very corrupt type of reform; it was basically crony capitalism. It was all about handing government-owned enterprises to the cronies of the government under monopoly conditions. What the enemies of capitalism tend to associate capitalism with really took place in Latin America. So it made it very hard for those of us who defend the capitalist system to explain, "Well, listen, this is not real capitalism." People tended to think of those who said, "Oh, the Soviet Union was not real socialism."

But public spending in Argentina increased 100 percent during that period. How can that be called liberal in any sense?