ECONOMIC AUSTERITY AND______ THE PERUVIAN CRISIS: THE SOCIAL COST OF AUTOCRACY by Carol Graham EI conomic reform and the reduction in poverty that it will generate are the only viable strategies for ending instability and political violence in Peru, the third largest nation in South America. Yet integral to the political feasibility of a successful economic reform program is the development of a safety net to address the social costs of adjustment and the economic deterioration that preceded it. Another key component ofsuccessful reform which entails Peru's integration into the international financial community is the restoration offull political democracy. One reason is the nature ofpresent day international politics. Another is that President Alberto Fujimori's economic program cannot endure without the establishment of domestic political legitimacy under democratic auspices. Unfortunately, the authoritarian nature ofthe Fujimori government, coupled with its complete failure to implement a social safety net, have jeopardized the viability of the Peruvian economic reform program. In response to domestic and international pressure, President Fujimori has promised to restore the democratic institutions he closed down in April 1992. Atthe same time, he is correctly attemptingto implementan orthodox adjustment program, which entails painful austerity measures and proCarol Graham is a guest scholar in the Foreign Policy Studies Program at the Brookings Institution. She is also Adjunct Professor ofGovernment at Georgetown University. She wishes to acknowledge the Inter-American Development Bank and the John D. and Catherine T. MacArthur Foundation for support for the research upon which this article is based. 45 46 SAIS REVIEW longed recession. Both these processes are taking place amid widespread political violence which approximates civil war. Our experience with simultaneouspolitical and economic liberalization is limited to "experiments" in Latin America and Eastern Europe; it is not yet fully clear what constitutes success nor how it can be achieved.1 Yet ifthe process of liberalization fails in Peru, its precarious social order will disintegrate further. Various insurgent groups, particularly the Maoist Sendero Luminoso movement, will substantially increase their de facto control. The economic and political obstacles to success are formidable. Per capita income levels lie below those of 1970, when Peru was already one of the region's poorest countries. Up to 70 percent of Peruvians now live in poverty. Less than 10 percent of the population capable of working is adequately employed in the capital of Lima, home to more than one third of the national population.2 Political democracy, which had been in place since 1980 and endured three rounds of national elections, came to a halt on April 5, 1992, when in an "autogolpe," or self-coup, President Fujimori suspended the nation's constitution, closed down the Congress and the Judiciary branch, and launched a process of "national reconstruction" under military auspices. Fujimori subsequently succumbed to international pressure and agreed to hold elections for a constituent assembly and Congress in November 1992, and municipal elections in early 1993. But the prospects for completion of the electoral process are limited at best, given the President's questionable commitmentto it, combined with the economic crisis andpolitical violence.3 Finally, Sendero Luminoso, the main guerrilla movement that confronts Peru, is one ofthe world's remaining Marxist insurgencies. It is also one ofthe most brutal guerrilla movements in modern history, despite the recent capture of its founder and leader, Abimael Guzman. The Sendero philosophy is a blend of "gang of four" Maoism and anarchism, with a glorification ofthe Inca empire; the group is most often compared in terms of philosophy and violent tactics to the Cambodian Khmer Rouge.4 1.Few ofthe market transitions that are complete enough to learn from were completed under fully democratic auspices. These cases include Chile, Mexico, South Korea, Spain, and Turkey. For a detailed study of various such cases, see Stephan Haggard and Steven B. Webb, Voting for Reform: The Political Economy of Adjustment in New Democracies (forthcoming, The World Bank). 2.Adequately employed implies earning sufficient salary from one forty hour per week job to purchase a basic needs basket of food and other essentials. [Cuanto, March 1991] 3.Before the November 1992 elections, the government modified the electoral laws to favor the New Majority/Change 90 Front, which backed...