The Free-Market Solution Fails a Major Truth Test : Peru: The leading candidate espoused economic reform; his mistake was in telling the voters how much it would hurt.

Alberto Fujimori’s victory in Sunday’s presidential election here was less of a surprise than was novelist Mario Vargas Llosa’s margin of defeat. Polls taken during the last week of the campaign showed a dead heat; Vargas Llosa was considered the winner of the only televised debate between the two candidates. Yet Fujimori, the son of Japanese immigrants and a virtual unknown three months ago, won the presidency by more than 20 percentage points--a landslide by any yardstick.

It has been said that Vargas Llosa made every imaginable mistake a political neophyte can make; that statement, though exaggerated, is largely true. But the reasons for his loss, the overriding lessons of his setback, lie elsewhere. They will be found in what Vargas Llosa, celebrated intellectual and honest, decent democratic new believer, had become: the standard-bearer of one of Latin America’s most elitist, class-conscious, racist and conservative oligarchies. In a nation with one of the worst income distributions in the world (10% of the population owns 55% of the wealth), where the immense majority of the population is Indian or (cholo), and where the divisions between the capital city and the rest of the country are dramatic, it would be a folly of the highest order to play the card of “great white hope.” Vargas Llosa, probably despite his better instincts, played that card, and lost--badly.

The election ended up being a social referendum, an ethnic, class and regional vote: 80% of the wealthiest one-quarter of the population voted for “Mario”; roughly the same proportion of the poorest one-quarter voted for “Fuji.” Lima went for the erstwhile unknown agronomist, but just barely. Vargas Llosa carried the affluent neighborhoods, but Fujimori scored strongly in the pueblos jovenes, or slums, on the outskirts of the capital, and won more than 80% of the vote in the poorest, most crisis-ridden provinces, like Ayacucho, cradle of the Shining Path guerrilla movement.

But if the internationally acclaimed writer came to be perceived as the candidate of the rich and famous--and even of the religiously intolerant--this was due above all to his radical economic platform calling for a free market, open economy, privatization and subsidy-cutting. This “shock treatment,” which he unabashedly promoted through the last weeks of the campaign, was simply rejected by the Peruvian electorate.

The problem, as Julio Cotler, one of Peru’s most insightful and distinguished social scientists, puts it, is that such programs can get a candidate elected if they are presented in a disguised fashion. But only in that fashion. Carlos Saul Menem ran for the presidency of Argentina on a traditional Peronist plank, then turned around and abandoned the caudillo’s legacy, without hesitation. Fernando Collor de Mello got elected in Brazil on a right/populist, anti-corruption, anti-government-bigwig stance, then threw millions out of work through his recessive anti-inflationary shock. But it is an entirely different affair for a candidate like Vargas Llosa to spell out clearly and unambiguously what he intended to do--cut 500,000 jobs in the public sector, raise prices, close state-owned firms, and so on--and still hope to receive a majority of the vote.

The Peruvian election may well end up being a watershed in the evolution of economic policy in Latin America. It could mark the forward-most advance of the free market, or so-called neo-liberal, wave that has already swamped countries like Mexico and Chile, and to a lesser extent Brazil, Argentina and Venezuela. It shows that up to a reasonable and inevitable extent, the economic adjustment that Latin America must carry out is politically viable.

But beyond a certain limit, when the economic policies become too radical, too ideological, and too extreme, they rapidly lose that political viability, at least in the context of representative democracy.

Finally, the defeat of Vargas Llosa and his proposed shock treatment for the Peruvian economy are a symptom of Latin American despair. The policies that Vargas Llosa stood for, which have been urged and/or imposed on many Latin American nations by the international financial community, require a substantial amount of funding from that very community. As more countries compete for the same funding, less is available. And there is more temptation to indulge in free-market brinkmanship and to try to outdo the others in the search for foreign resources. Whether this leads to free-trade agreements between Mexico and the United States, to authoritarian corporative economics in Brazil, or to extreme economic proposals in Peru, it is a dangerous temptation to succumb to. Ask Mario Vargas Llosa.