The Collapse of a Once-Promising Democracy

In Peru, a nation once marked by its successful fight against poverty, voters now face a pair of unappealing alternatives.

Pedro Castillo
Gian MASKO / AFP / Getty

The first choice facing voters is a little-known union leader who leads a Marxist-Leninist party that wants to rewrite the constitution to eliminate congress.

The alternative is the daughter of a former dictator who has surrounded herself with kleptocrats and COVID-19 deniers.

Welcome to Round 2 of the Peruvian presidential election. How did one of the success stories of the developing world end up in such a crazy place?

Many democracies have suffered a collapse of the political middle, but few so starkly as Peru—or so unexpectedly. For years, Peru reported some of the highest growth rates in South America. It reduced the proportion of its people in poverty from 58 percent in 2004 to 23 percent by 2014. Exciting new mining discoveries promise more growth ahead.

Instead, even before COVID-19 struck, Peru faced a dissolution of familiar political structures. The country has rotated through five presidents or acting presidents since 2016. Then came the terrible shock of the pandemic. Peru has endured one of the highest excess-mortality rates on Earth from COVID-19, if not the very highest: 503 deaths per 100,000 persons, according to a global survey by The Economist. The economic carnage has been correspondingly awful, too.

The disaster discredited whatever remained of the former political ways. Parties of the left and center collapsed. The round of voting on April 11 was topped by a union leader so obscure that nobody even bothered to poll for him until November 2020—and who did not rise above 3 percent in the polls until early March 2021. Pedro Castillo was introduced to many Peruvians by a goofily endearing TikTok dance video. But the content of Castillo’s politics is troublingly resonant with the late Hugo Chávez’s attack on Venezuela’s once-democratic institutions. Castillo has called for the rewriting of Peru’s constitution to replace the elected congress with representatives of unions and other interest groups. He has spoken of nationalizing industries and restricting foreign investment and trade.

In shocked reaction, Peru’s non-left has rallied since April 11 to Keiko Fujimori, daughter of the president-dictator who crushed the Shining Path insurgency in the 1990s. Alberto Fujimori fell from power in 2000, and the question of what to do about him has bedeviled Peruvian politics ever since. He was convicted of human-rights abuses in 2009 and sentenced to 25 years in prison. Peru’s then president pardoned the elder Fujimori in 2017, but that act was overturned by the Peruvian supreme court in 2018. The release from prison of the now-82-year-old former dictator is a central issue of his daughter’s 2021 presidential campaign.

Among the political casualties of Peru’s upheaval was an old friend of mine, the economist Hernando de Soto, a globally famous social reformer. De Soto finished fourth in the first round of voting on April 11 with 11.6 percent of the ballots. De Soto’s vote appears to have come from the more liberal and globalized segments of Peruvian society—the segments most uncomfortable with their second-round choices on June 6.

The polarization in Peru is the latest indication of the global turn from the democratic, free-market, free-trade ideas that once seemed so ascendant. De Soto came to global prominence as one of the most original and brilliant contributors to that ascendancy. His two books—The Other Path (1986) and The Mystery of Capital (2000)—argued that state-led economic models had locked most of the world’s people out of the economic life of their societies. They lived in homes to which they lacked legal title. They farmed land without contracts for their crops. They worked in factories that evaded regulations and taxes.

These people were outside the law, but they were not criminals. They were victims of a system in which law was made by others, for others. If the law could be extended to them, de Soto argued, the world’s poor would better themselves and transform their countries.

One example of de Soto’s great insight: The cities of the Third World are ringed by settlements built by squatters on land that theoretically belongs to others: the government; defunct collective-farming associations; landowners who long ago left the country. Everybody accepts that these settlements are permanent urban facts. But they have no legal existence. The law sees only what used to be there, not what is there now.

And what is there now? For The Mystery of Capital, de Soto took satellite photos of the slums of cities like Cairo, Lima, and Port-au-Prince. His research team then imposed a grid on the photos and counted the number of slum dwellings within each square of the grid. They inquired locally about the value of these dwellings, and found that it might be as little as $500. Then they multiplied: the dwellings’ value times the number of dwellings in the square; then times the number of squares in the entire slum. He concluded:

So what is the value of all the buildings that are owned extralegally, especially by the poor, in Egypt? The reply is $241 billion. What percentage of Egyptians own real estate outside the law? The reply is 92 percent …

How much is $241 billion? It's fifty-five times bigger than all foreign direct investment in Egypt over the last 200 years, including the Suez Canal and the Aswan Dam, thirty times greater than the market value of all the companies recorded on the Cairo Stock Exchange, and roughly sixty-eight times the value of all foreign and bilateral aid received by Egypt, including World Bank loans. In other words, the group in Egypt with the largest accumulation of assets that could be converted into capital are the poor, but they’re not inside the legal system … and you can’t create a market economy out of them until they are governed by the rule of law.

(I should mention here that de Soto hired me to help him finish The Mystery of Capital.)

De Soto’s remedy: Give these de facto owners legal title to their dwellings. Give them the ability to buy and sell their dwellings, to rent to tenants, to borrow against their homes to start businesses or educate their children. Follow that step with other reforms to bring factories and farms and jitney buses within the law, too. Then … watch.

De Soto’s two books made him an international intellectual celebrity who conferred with presidents and prime ministers. He became a large figure inside Peru, too, perhaps the most visible face of market-opening reform. But the reforms he urged were not quite the reforms that arrived.

In November 2000, Peru returned to democracy after the seven-year dictatorship of Alberto Fujimori. Along with his many abuses, Fujimori bequeathed a legacy of economic reform: controlled public spending, moderate public debt. (Pre-pandemic, Peru’s debt totaled about 25 percent of GDP, less than half the burden borne by neighboring Bolivia, and about two-fifths of that carried by neighboring Ecuador. But Fujimori did not accomplish the de Soto agenda of bringing the poor into the legal economy. To this day, two-thirds of Peruvians work in the nonlegal—or “informal”—sector of the economy, one of the highest rates on Earth.

Peruvians might hear on TV or radio about the benefits of sound finances. But they experience low-quality schools and clinics, rutted roads, inadequate electricity, undrinkable water—the public goods that the government had skimped on to keep public spending low. The more tangible benefits urged by de Soto remain largely concepts for the international conference circuit.

When the pandemic struck, the Peruvian government locked down economic activity. It used its good credit to pay support to workers it could identify. But identifying informal workers was not easy—and neither was paying benefits to people who did not have bank accounts. Many informal workers faced the reality that they would not be paid if they did not work. If they worked during the pandemic, they risked getting sick. If they got sick, they might infect the other people in their multigenerational dwellings or on their informal jitney buses. State health services, always rickety, collapsed under the pressure.

The people who suffered most noticed that other people were suffering much, much less. And, of course, they resented it. The instability of Peruvian politics shifted from chronic to acute. Of the five presidents during the past five years, three served in the past 12 months. Presidents and congress battled each other. Pro-Fujimori factions maneuvered to reclaim power after 20 years of exclusion. Andrea Moncada, opinion editor of El Comercio, the country’s largest newspaper, told me, “We eroded democracy in a very 21st-century way, through our own institutions.”

The way was open for a radical new challenge to a discredited system. And that challenge materialized in the face of a dancing union leader who wore a peasant’s wide-brimmed hat as his trademark emblem.

What happens now? Nobody I asked even pretends to know. The polls are volatile. Castillo’s lead over Fujimori might be dwindling. Castillo’s message oscillates between more and less radical. Some believe that he’s duplicitous; others contend that Castillo has no real ideas beneath his hazy revolutionary slogans.

American influence in the country has dwindled. Since the defeat of the Shining Path, America’s top foreign-policy priority in Peru has been drug interdiction, and Peruvians of all political perspectives feel little zeal for that project. And Peruvians feel less need to fake it, since China has replaced the United States as Peru’s top trading partner. The Peruvian COVID-19 vaccination program relies on Chinese and not U.S. vaccines.

Paradoxically, Peru’s recent instability might cause a Castillo presidency to seem less threatening to undecided voters. Those voters might believe, as Moncada said to me, that a country that has removed so many presidents from office recently can always remove one more if he or she proves troublesome. But it’s always more prudent to assume that a politician who seems hostile to democracy before gaining power will prove even more dangerous to democracy afterward. But in this case, that grim assessment describes both choices that Peruvians face on June 6.