Second of two articles

Cold Patagonian rain drenched the crowd gathered for a political rally in this poverty-stricken pocket of mud roads and wooden huts in southern Chile. A blue-gray Peugeot approached, and applause erupted as a union leader grabbed his makeshift bull horn and shouted: "Here he is! The next president of Chile! The president of the poor! Mr. Ricardo Lagos!"

On cue, Lagos, 61, stepped out of the car, exuding confidence. And why not? In a nation long considered an international model of the free market in the developing world, Lagos is the first Socialist Party leader to come this close to the presidency since Salvador Allende was overthrown by the military more than a quarter-century ago. Lagos is in a dead heat with his right-wing opponent in opinion polls looking toward Sunday's presidential vote.

As Lagos began his stump speech, it seemed for a moment, just a moment, like old times.

"We must end the two Chiles!" he shouted above the cheers that almost reached the neat streets and fine homes of a wealthy neighborhood just across a bridge in this town 40 miles south of Temuco. "No longer can we accept an unjust nation where the rich live comfortably while too many people live in poverty!"

But give him a minute, in the more reflective setting of an interview on the way to his next stop, and Lagos will tack on an important caveat.

"There is no doubting the free market anymore," said Lagos, who got his PhD in economics from Duke University and speaks fondly of Wall Street. "This is a globalized world where no one can turn back. And anyone who would suggest that in this day and age would be foolish."

Lagos, a former dissident who helped lead the popular outcry that ended Gen. Augusto Pinochet's 17-year dictatorship in 1990, is part of a "new left" sweeping across much of Latin America. Sounding like Britain's Prime Minister Tony Blair, a new breed of Latin politicians is preaching an economic "third way"--advocating a move away from the U.S. model of capitalism and toward a greater role for the state in a gentler, but still free market.

These politicians bear little resemblance to the camouflage-clad Ernesto "Che" Guevara disciples who once defined Latin American opposition movements with their Marxist or Maoist doctrines. The leaders of the new left disavow armed struggle championed by figures such as Guevara, an Argentine comrade of Cuban leader Fidel Castro who promised during the 1960s to ignite "many Vietnams" across Latin America in the quest of a socialist New World Order. Repression by right-wing governments and armed struggle by leftists cost hundreds of thousands of lives in Latin America in the second half of the century.

New Age Radicals

But today, with the notable exceptions of old-style guerrilla movements in Colombia and Castro's durable dictatorship in Cuba, the left has largely modernized its line. Even Venezuelan President Hugo Chavez, the most radical new left leader in Latin America and an unapologetic friend and admirer of Castro, has repeatedly said he supports the free market as a tool in his sweeping "democratic revolution," which he says would revive a leading role for the state in lifting up that nation's poor.

After a decade in which free-market reforms spread far and wide in Latin America, new left candidates have struck a chord by zeroing in on the failure to create enough new jobs to counter high unemployment rates caused by privatization and downsizing, or to bring equity to a region with the greatest gap between rich and poor in the world.

Sensing the turn in popular opinion, the right is also undergoing a political transformation across the region, moving to the center. There is no better example than Lagos's conservative opponent in Chile, Joaquin Lavin, who has dramatically narrowed the gap between them in recent weeks by promising the same focus on poverty championed by Lagos's Socialists.

Lavin, a 46-year-old economist and former journalist, has projected a centrist vision with a youthful, down-home delivery and by ditching conservative positions on political issues. Lavin has even voiced support for crusading Chilean Judge Juan Guzman, who has ordered the arrest of dozens of former military and intelligence officers for crimes committed during the dictatorship, and who is now investigating Pinochet while the retired general is under house arrest in London awaiting extradition for a trial in Spain.

"You've seen Lavin become more liberal and Lagos become more conservative," said Jane Winslow, vice president of Merrill Lynch & Co. in Santiago. "There are fewer and fewer divisions between the right and the left."

While the race in Chile remains a tossup, the new left has been gaining ground elsewhere. On Oct. 24, neighboring Argentina elected center-left opposition leader Fernando de la Rua to the presidency. A member of the international socialist movement, he has created a cabinet that puts free-market specialists in charge of the economy while naming Argentina's left-leaning matriarch, Graciela Fernandez Meijide, minister of social action.

In Uruguay, the Broad Front of Socialists, Communists and former Tupamaro guerrillas made historic gains in legislative races in October, winning a plurality in both houses of Congress. Their candidate for president, oncologist Tabare Vazquez, won the first round of elections in October, but lost in the Nov. 28 runoff to Jorge Batlle, a moderate liberal. Still, Vazquez received 44 percent of the vote in a nation that had never given the Broad Front more than 30 percent in a presidential election.

"The days of the revolution are gone," said Enrique Correa, a Santiago-based political analyst. "If you listen to [the new left], the discourse is anything but radical. It's suggesting an economic fine-tuning, combining the state and the free market to battle Latin America's biggest problems, like inequality. They are problems that the free market alone still hasn't fixed."

Although economic reforms have brought widespread benefits, such as the end of hyperinflation, the gap between rich and poor has widened or remained unchanged in every Latin American country that implemented free-market reforms in the 1990s, according to the Inter-American Development Bank. While candidates from the new left tend to play down anything that seems to infringe on the free market, there is more than a touch of Robin Hood in politicians like Lagos.

Their pitch is a new "social safety net," with promises to spend more on education, health care and job training. They say the money would come from getting tough on rich tax evaders, tackling corruption and increasing or levying new taxes on private industry. To ease the plight of hundreds of thousands of unemployed workers, for instance, Lagos is suggesting government unemployment insurance and re-training programs to be funded at least in part by the private sector.

"We are not poor nations in Latin America," Lagos said. "We are unjust nations."

Lagos and other new left politicians here also insist the state must step up regulations and enforcement in newly privatized sectors such as power and water utilities. Throughout Latin America, privatization contracts have become the target of public wrath. Endesa, the Spanish-owned power company in Chile, was widely criticized after it escaped with little more than a slap on the wrist for failure to manage a drought that has caused almost a year of energy shortages in Santiago, the bustling Chilean capital of 7 million.

"The state needs to reinsert itself into society," Lagos said. "The private sector cannot just be allowed to operate without supervision, and that is what we see happening now. Even in the United States you see the state playing a stronger role in regulating industry than in Latin America."

The new left is also promising an escape from government corruption that has seemingly exploded in the 1990s. For instance, Chavez in Venezuela is embraced as a political outsider by voters who have turned against traditional parties mainly because they see them as rotten.

Many of the names associated with free-market reforms have become synonymous with corruption. President Carlos Menem and his Peronist party in Argentina step down this month after 10 years during which the administration oversaw a massive privatization program that became notorious for kickbacks and cronyism. More than 10 of Menem's closest aides were forced to resign or have been indicted in corruption scandals.

This has made battling corruption and strengthening the judicial system just as important as fighting poverty and inequality. And the new left, viewed by voters as less beholden to economic interests, is seen as a more honest alternative.

"The people want an end to the impunity they have seen during these years [of economic reforms], which have taken a high social cost," said de la Rua, who takes office on Friday after a campaign that played up his austere style in contrast to the Ferrari-driving Menem.

Shift to Center

Conservatives suggest that these social-minded candidates threaten Latin America's struggle to become more competitive globally. Latin America has lost many new jobs to Asia or Eastern Europe, economists say, because the cost of doing business remains too high, especially in South America's more affluent Southern Cone of Argentina, Chile and Uruguay. Critics argue that greater regulations or higher private-sector taxes could drive up the costs of doing business even more.

Candidates like Lagos have taken those criticisms to heart, explaining in part his shift to the center. Like de la Rua in Argentina, he has been accused by stauncher leftists of being a sellout. After last year's arrest of Pinochet in England, for instance, Lagos joined those who insisted that the former dictator be brought home to face justice. Although many members of his party now agree with that position, at first he was criticized for taking too lenient a stance.

It has not been easy for Lagos. Just as Pinochet staged his coup in 1973, which ended with Allende dead, Lagos had been picked to be ambassador to Moscow. He fled into exile in the United States, briefly teaching at the University of North Carolina and later working for the United Nations.

He returned to Chile with a U.N. passport to become a major voice of the dissident movement in the 1980s. He was detained briefly, then in 1988 gained international recognition for his challenge to Pinochet during the campaign for a national plebiscite to decide if Pinochet would rule for another six years. On live television, Lagos waved his finger at the camera--and thus at Pinochet--and said Pinochet must be called to account for human rights violations. Soon after, Chilean voters overwhelmingly rejected Pinochet's rule, and the general stepped down in 1990.

By then, Chile had become the leader of a free-market movement in Latin America, systematically cutting tariffs and privatizing bloated state-run industries. Chile's new democratic government increased social spending but also followed conservative fiscal policies that encouraged investors and led to 15 years of sustained economic growth--broken only by a recession this year.

The outcome made Chile one of the few nations in Latin America to cut poverty substantially in the 1990s, slashing the poverty rate to 21.7 percent in 1998, down from 38.6 percent in 1990. As Chile became the free market's star pupil and the benefits of new-found efficiency became obvious, "there was no more denying that the free market worked," Lagos said. "But what we have failed to do is make it more fair for all."

For even as poverty dropped, Chile's income gap worsened. The poorest 20 percent held 3.7 percent of the national wealth in 1998, compared to 4.1 percent in 1990, while the richest 20 percent held 57.3 percent of the wealth in 1998, virtually unchanged from 1990. One reason this happened, analysts say, is that the poor did not receive the education necessary to land jobs that would elevate them into the middle class.

In the 1990s, the average number of years of schooling for Chilean children increased overall while remaining stagnant for children of the poor. At the same time, wages for high-tech jobs in telecommunications and computer fields were going up, while those for unskilled labor lagged.

On a recent campaign swing, Lagos's message hit home in poor communities. Ervin Rivas, 39, an electrical repairman and father of two in Villa Hermosa, said there have been major improvements in his life during the past 10 years, but his children still do not get the education they need.

"We have a television set, we have a VCR, we have a lot of things we never had before, and we're glad for that," he said under the falling rain.

"But I don't think we've come as far as we think. I look at the school my kids go to, and I see that not one teacher there has a university education. Then I look at the school [in the richer part of town] and I see teachers with college degrees and computers for the kids to work on.

"We need more than TVs in our lives," he said. "We need real change."

CAPTION: LATIN AMERICA'S INCOME GAP (This graphic was not available)