(above) Peruvian presidential candidate Ollanta Humala celebrates his performance in the general election on April 10, 2011. Photo: Marco Garro / DPA-Corbis

Peru Pivots Forward

Is this economic powerhouse of the Andes about to prove that the 'Lula effect' will win the battle for Latin America?

by Mac Margolis

To get a good look at the forces shaping Latin America's future, just keep an eye on the hotly contested presidential election that's currently unfolding in Peru. Riveted Peruvians--along with millions of others across the hemisphere--watched the first round with trepidation. When the country went to the polls on April 10, the top finisher in the packed field was Ollanta Humala, a cashiered Army colonel known for his hard-left rhetoric and the failed coup d'état he helped lead a decade ago, Now everyone is bracing for his runoff against the second-place candidate, Keiko Fujimori, daughter of the disgraced former president who's currently serving 25 years for corruption and human-rights abuses. The two full-throated populists will go head-to-head on June 5, and the home stretch is already looking tight and fierce.

Is one of the region's most promising countries heading off the rails? The initial reaction to the political tremors in the Andes certainly suggested so. The first-round election results hit the financial markets like a stink bomb. There was a sharp sell-off of the Peruvian currency, sending the country's stock exchange tumbling. "A step backwards," lamented the influential Brazilian daily O Estado de São Paulo. Mario Vargas Llosa, the country's only Nobel Prize winner, quipped, however distastefully, that the two top finishers represented a "choice between terminal cancer and AIDS."

But those gloomy reactions actually mask a more hopeful reality. A surging economy and a decade of law and order have transformed this nation, where memories of rule by fiat, economic chaos, and political violence are still raw. Many Peruvians remain poor, with the World Bank reporting that one in three still lives below the poverty line. But that ratio has plummeted in recent years, as has inequality. The emergence of a strong middle class has created a new generation of consumers on the make. And like their peers across Latin America, rising Peruvians are loath to gamble their newfound gains on a political adventure. The battle for Peru may well turn out to be a race to the middle.

Call it the "Lula effect." Now that Brazil's former president Luiz Inácio Lula da Silva has catapulted to global-rock-star status, it's easy to forget that the onetime steelworker once spooked most of his countrymen--not to mention foreign investors. His encomiums to a command economy and broadsides against "savage capitalism" flopped at the polls. But after three straight failures to win Brazil's top job, Lula pruned the beard, shed the woolly rhetoric, and penned a "Letter to the Brazilian People," promising to respect contracts, pay debts, and basically abide by the rules of the free market. He sweetened the pill of austerity with aggressive antipoverty programs, winning favor in the favelas and boardrooms alike.

Lula's transformation turned Brazil into one of the world's most admired successes, a model of responsible leftism that has left its mark. His country stands in stark contrast to Venezuela under the self-styled revolutionary Hugo Chávez. His cockeyed idea of "21st-century socialism" has left the economy in tatters and relegated Venezuela's people to mere spectators as prosperity has flowered elsewhere on the continent.

Now a new crop of born-again moderates is gaining ground across Latin America. Uruguayan President José "Pepe" Mujica, a former Tupamaro guerrilla, now spends much of his time battling public-sector unions and the stultifying bureaucracy. As a Marxist cadre for the Farabundo Martí National Liberation Front, El Salvador's Mauricio Funes did his share of gringo bashing. Now, as president, he's celebrating a "new relationship" with Washington. And let's not forget Lula's handpicked successor in Brazil, Dilma Rousseff, who once ran with an armed rebel band but is now following her predecessor's market-friendly line to the letter. Repentance, circumspection, and sober--even orthodox--economics are the new normal for Latin America's erstwhile revolutionaries. Political pretenders have had little choice but to play along.

Exactly how much is the Lula effect guiding Peru's future? It's early to say, but a close look at Humala's campaign is revealing. He narrowly missed becoming president in 2006, hurt by accusations that he campaigned as a Chávez puppet. Since then, he has toned down the fiery speeches and shelved talk of rewriting the Constitution to jump-start a Venezuela-style "revolution." He now takes his campaign advice from a pair of consultants from Lula's Workers' Party. All that's missing in the makeover, the skeptics joke, is a "Letter to the Peruvians."

Whoever emerges victorious in June will take over from Alan García. Once a left-wing nationalist who nearly ruined the economy in the late 1980s, he returned as a moderate in 2006--narrowly beating Humala--and has ruled as a conservative ever since. García balanced the budget, freed up markets, wooed investors, and pushed trade pacts, completing Peru's transition from lost cause to Latin tiger. Yet despite those triumphs, in the end he was so unpopular he failed even to field a candidate to succeed him.

Just why Peruvians are so hostile to their most successful leaders has eluded a generation of political analysts. Official tolerance of senior-level corruption, persistent poverty, and a gnawing resentment over the way globalization has blessed the modern cities but left rural areas behind--all are part of a toxic mix that has turned Peruvians against the system as a whole. Of 18 countries surveyed by the polling firm Latinobarómetro, few hold their politicians and governing institutions in deeper contempt. Only 14 percent of Peruvians say they trust Congress, while just one in four has faith in the executive branch. Then there's the most glaring statistic: 52 percent say they could support an authoritarian government, well above the regional average of 36 percent. Taken together, it helps explain why a similar share of Peruvians--54 percent--plumped for Humala and Fujimori, the two most extreme candidates, with authoritarian accents.

Skeptics have questioned Humala's eleventh-hour bid to become the Lula of the Andes. "Lula's transformation took place over a decade," says Riordan Roett, a Latin America scholar at Johns Hopkins. "Humala's is basically taking place now. It's opportunistic." All the same, the odds for a radical jag, either to the right or left, look remote. Unlike in Venezuela, where Chávez has stacked the courts and the legislature, Peru's democracy is flawed but functioning. The new president will have to answer to a Congress where neither Humala nor Fujimori commands a majority.

Both candidates are eagerly reaching out to the centrists and conservatives they thrashed during the campaign. Fujimori, in a nod to moderates, now vows she will never pardon her father. Humala is scrambling to sign on establishment figures and has retracted a campaign promise to nationalize the private pension system. "The mandate in Peru is not to tear down the system, just to tweak it," says Michael Shifter, of the Inter-American Dialogue think tank. And even if there is no Lula in Lima, the fact that Peru's politicians are taking their cues from Brazil--and not from Venezuela--speaks volumes about a new direction for Latin America.