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Peru: What Happened on the Way to the Free Market

The Free Market

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07/01/1990Murray N. Rothbard

The Free Market 8, no. 7 (July 1990)


He had been widely touted by the American media as the savior of Peru from hyperinflation and from the dangers posed by the current socialistic Garcia regime as well as the fanatical Maoist-type guerrillas who call themselves "The Shining Path." Mario Vargas Llosa, tall, aristocratic, eminent avant-garde novelist and ex-leftist, was running for president of Peru.

Vargas Llosa, trumpeted the media, was a non-politician bound for inevitable victory on his free-market program. In the April presidential balloting, however, which Vargas was expected to sweep in a landslide forecast by the public opinion polls, the bubble burst. An unknown presidential candidate, Alberto Fujimori, operating with virtually no money out of a storefront in Lima, rose from a negligible amount in previous polls into a virtual tie with Vargas Llosa for first place. Fujimori may now win the runoff. What exactly happened on the road to the Peruvian free-market paradise?

Vargas Llosa had been converted to the free market by the remarkable economist, Hernando de Soto, whose best-selling work, The Other Path, not only called for a free market, but advocated a genuine "people's" free market based on private entrepreneurs, in contrast to Peru's (and other Latin American countries') unfortunate experiences with state capitalism that fosters privileged contractors and monopolists.

In the early part of last year's presidential campaign, de Soto was one of Vargas's key campaign advisors. But de Soto soon broke with Vargas, denouncing him for selling out to the very state capitalism that de Soto had spent so many years denouncing.

Vargas's shift was the beginning of his troubles. His state-capitalist policies aggravated the fact that Vargas Llosa is one of the wealthy, white minority of European descent—the CriolIos—(approximately 2.8 million out of a largely Indian and mixed-Indian Peruvian population of 20 million) who are the landlords and state capitalists of Peru and who are therefore cordially detested by the rest of the population. While Vargas Llosa surrounded himself with wealthy Criollos, he was visibly uneasy on the stump in Indian districts.

Vargas sealed his doom when he embraced the "free-market," "anti-inflationist" policies of the new Brazilian president, Fernando Collar de Mello. His "free-market shock treatment" for the Brazilian economy has been widely heralded as a salutary if radical "strong-man" technique of ending that country's accelerating inflation.

De Mello's policy may well be a "shock treatment," but it goes far beyond any shock administered by a free market. For while there are some decontrol and privatization planks in the de Mello program, most of the shock is blatantly statist: including a massive increase in taxes, and, in particular, a Draconian deflationary program that freezes for many months everyone's bank account, thereby suddenly contracting the Brazilian money supply by 80%.

Austrian economists have often been accused of being grim "deflationists" for wanting to allow insolvent fractional-reserve banks (including S&Ls) to go bankrupt without a bailout. But this contraction is nothing compared to de Mello's arbitrary deflation of 80%. Far from being free market, the Brazilian policy amounts to first engaging in a massive printing of money, then spending this newly-created money, driving up prices drastically, and then proclaiming a cure by confiscating the largest part of that money. In short, the Brazilian government has delivered to the country's economy a massive and lethal one-two punch.

On his promising to Peru the same treatment as de Mello had just given Brazil, it is no wonder that the Peruvian voters turned from Vargas in droves. In the meanwhile, Fujimori came up fast on the outside. A member of the small but highly respected Japanese-Peruvian community of 55,000, Fujimori found himself embraced by the country's Indians as a fellow ethnic oppressed by the hated ruling Criollo elite. The first Japanese were imported into Peru at the end of the 19th century to work as slaves on the coastal sugar plantations.

The Japanese, however, rebelled within weeks, and moved to Lima, where they are now located. Fujimori's parents emigrated to Lima in the mid-1930s, where his father, along with other Japanese, created hundreds of successful small businesses.

After Pearl Harbor, the U.S. government pressured Peru to go to war with Japan, to confiscate Japanese-owned businesses, including the elder Fujimori's tire repair shop, and to ship almost 1,500 Japanese to internment in the U.S. Hence, the Peruvian Indians' embrace of Fujimori as a fellow non-white rising up against the Criollos. The fact that Fujimori's immigrant mother does not speak Spanish works in his favor with the Inca masses, who don't speak Spanish either; Spanish is the language of Vargas Llosa and the Criollo conquerors.

Fujimori, by running a nonmoneyed, grass-roots campaign, tapped this favorable sentiment. Moreover, his campaign slogan: "Work, Honesty, Technology," though a bit vague, resonated with the three key precepts of Inca law: don't be lazy, don't steal, don't lie. Fujimori also promised the Peruvians something far more concrete: that he would encourage massive private Japanese investment. As I write, the race is a tossup. If Vargas loses, it will be because he deserves it.


Murray N. Rothbard

Murray N. Rothbard made major contributions to economics, history, political philosophy, and legal theory. He combined Austrian economics with a fervent commitment to individual liberty.

Cite This Article

Rothbard, Murray N. "Peru: What Happened on the Way to the Free Market." The Free Market 8, no. 7 (July 1990): 1 and 3.