In Santiago, Second Coming Of A Socialist?

Ricardo Lagos, an ex-radical, may be the next President

Ricardo Lagos, Chile's Socialist presidential front-runner, knows his candidacy worries some Chileans. The last time Chile took a left turn--when it elected Salvador Allende Gossens in 1970--it led to a coup and 17 years of dictatorial rule under General Augusto Pinochet. Now, with Lagos favored to win in the Dec. 12 elections, some Chilean and foreign investors wonder how he'll manage Latin America's free-market model. But the 61-year-old Lagos, who has served in the Cabinet since Chile's return to democracy in 1990, brushes aside the doubters. "The way of producing change today is very different from what it was 30 years ago," he says calmly in his Santiago campaign headquarters.

Lagos seems set to prove his point. As a left-wing lawyer in the 1960s, he called for the nationalization of just about everything. Now he sounds like a devotee of the "third way" advocated by Britain's Tony Blair. Lagos vows to continue the private-sector initiatives and free-trade measures Chile adopted under Pinochet. But he has kept the support of Chile's center-left by proposing more spending on education, health care, and other social programs. The strategy is working: Lagos has built a 14-point lead over his closest opponent, conservative economist Joaquin Lavin of the Independent Democratic Union.

SOFT-SPOKEN. Whoever wins in December will have his hands full. Chile is in its worst recession since the early 1980s. Copper revenues--nearly 40% of export earnings--have been hit by a 30% price drop. Unemployment is at 10%, up from 6% last year. Decaying infrastructure--ports, rails, water--will cost $20 billion to rebuild. It's a comedown for a nation averaging growth of 7% in the 1990s. Says Geoffrey Dennis, Latin equity strategist at Salomon Smith Barney in New York: "The next President's challenge will be facing up to the loss of the economy's invincibility."

The soft-spoken Lagos, who earned a doctorate in economics at Duke University in 1962, bills himself as the prudent moderate that Chile now needs. Lagos supports long-planned sell-offs of utilities and state-run transport facilities. That would "free up resources for health and education," he says. Among Lagos' boldest plans is to reshape Codelco--the world's largest copper producer, with $3 billion in revenues last year. Lagos wants to take the company partly private and expand overseas. By law, the military gets 10% of Codelco's revenues. Lagos hopes to cut that--and thus the military's influence.

Lagos could tinker with financial regulation, too. In particular, he might revive Chile's capital controls, which required foreign equity investors to park part of the value of their portfolios at the central bank for a year. The encaje policy was dropped last October after seven years. While Lagos once favored an open system, Mexico's 1994 financial crisis forced him to flip on this issue. "You can't do much if you suffer massive capital flight, so it's better to be careful," he says.

RUNOFF. Lagos' main problems could be political. Unless he wins a majority in the first round of voting, a runoff could weaken his mandate. In office, Lagos would face a Congress stacked with lifetime members appointed by the former military regime. And he could be handed some hot potatoes: He may have to manage the fallout from Spain's request to extradite Pinochet from Britain on human-rights charges. At home, meanwhile, Chilean courts are challenging amnesty laws that protect retired military officers.

It must be odd to stand on the other side of the fence. Lagos first captured attention four decades ago by writing that private industry "should be abolished and handed over to the state." In 1988 he was a loud voice in a debate on whether to extend Pinochet's rule. Chileans voted against the general, who handed over the presidency to a democratically elected government in 1990.

Lagos served as Education Minister, then Public Works Minister under President Eduardo Frei Montalvo, until mid-1998, when he stepped down to run for the presidency. If he is elected, this aging socialist will look back over a long and winding road to the top.

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