Bush's Lost Continent

By Tim Padgett and Andrew Downie/Sao Paulo

Washington's bursts of interest in Latin America rarely last long. Spanish-speaking George W. Bush came into office billing himself as the region's mejor amigo in the new "Century of the Americas." Yet when it came to Latin America's economic travails, Bush adhered to the principle of tough love: no more bailouts. South Americans, however, weren't prepared for the jibe they got from Treasury Secretary Paul O'Neill just before a visit to the continent. Even as a parade of U.S. CEOs stood accused of corruption, O'Neill remarked that Washington shouldn't help save the region's debt-choked economies because the money might wind up in Swiss bank accounts. His quip sent Brazil's faltering currency, the real, into free fall.

Once O'Neill saw South America's financial chaos up close during that quick tour of battered Brazil, Uruguay and Argentina, he wasn't so flip. Before he reached home, the Bush Administration surprised everyone by signing off on a $30 billion International Monetary Fund (IMF) rescue loan for Brazil, which began to restore stability. O'Neill gave tiny Uruguay $1.5 billion from the U.S. Treasury to stop a run on that country's banks. Now even profligate, bankrupt Argentina, which has sunk into bottomless recession through corruption and misguided policies, hopes to get in on the aid, though O'Neill has promised it nothing.

The abrupt policy change followed a familiar pattern for the Bush team: resist, resist, resist--especially if Bill Clinton championed it--then relent when reality intrudes. Brazil, with Latin America's No. 1 economy and the world's ninth largest, was simply too big to fail. The fallout would have rocked Wall Street, where major U.S. banks and businesses have huge exposure--more than $100 billion in loans and investments. While diehard ideologues cried betrayal, the business-first wing of the G.O.P. was delighted by the Administration's about-face. "The bank stocks are all up," said a Republican operative. "It helped add to the feeling that we might be out of the woods."

Politics was the bottom line, after all. Investors set off Brazil's crisis out of fear that the two leftist candidates leading in presidential election polls would reverse the country's laudable efforts to adopt free-market reforms. A Brazilian default could upset the tenuous U.S. recovery and cost U.S. Republicans in November's congressional elections. That vote also coincides with the start of new negotiations for a giant hemispheric free-trade pact. If Brazil's economy continues to melt down, those talks will implode, causing Bush political embarrassment.

The Administration's overdue attention to the region--the U.S.'s No. 1 export market--comes as the U.S. economic model that most Latin American nations adopted at Washington's behest a decade ago has been failing. Despite rosy promises that open markets and budget austerity would improve living standards for all, more of the region's 500 million people are stuck in poverty, and its economies look more like Global Crossing than the global players they aspired to be. The sense that Washington was losing influence in Latin America deepened last week when Marxist guerrillas fired mortar shells in Bogota, killing 20, during President Alvaro Uribe's inauguration.

The backlash can be felt in the rise of left-wing politicians vowing to temper market coldheartedness with old-fashioned protections for workers and the poor. Erstwhile radicals like Luiz Inacio Lula da Silva, 56, fiery head of Brazil's Workers Party, are running on rejection of "the Washington Consensus," as the capitalist reforms have come to be called.

In an interview with TIME, Lula made it clear that if he becomes President, Bush's hemispheric trade plan may have to wait beyond its current 2005 deadline. "Latin America," he says, "has to quit treating the U.S. as an empire." Though Lula reluctantly said he would live up to the rather stringent terms of the IMF's loan if he is elected on Oct. 6, neither he nor second-ranked Ciro Gomes, the candidate of the Workers Front coalition, is regarded with much enthusiasm in Washington. A former metalworker known for probity, Lula insists he won't nix the capitalist reforms but will make them fairer--starting with a crackdown on Brazil's epic tax evasion.

Corruption is key. South America did need the discipline and budget austerity of U.S.-backed reforms, which freed the region from crippling hyperinflation and ushered in hundreds of billions of dollars in foreign investment. But they couldn't whip the plague of corrupt elites, absentee judicial systems and addiction to foreign capital that made Latin American capitalism as ripe for abuse and collapse as an Enron office suite. Says Stanford University Latin America scholar Terry Karl: "The Washington Consensus just further concentrated economic and political power in a region that already had the worst inequality in the world."

Bush's Latin America team argues that this is why it refuses to bail out unreformed kleptocracies like Argentina. Buenos Aires, said O'Neill, still lacks a "crystal-clear idea of the rule of law."

The Washington Consensus might have worked better had Washington preached open democracy as earnestly as open markets. In giant Sao Paulo, Lula's home base, single mother Janecleide Batista, 24, lost her job as a telephone operator when her company was sold to a foreign firm. Now she lives in a squatters' shack on a small vacant lot with eight other families. To her, free-market reforms mean that Brazil's World Cup-champion soccer team "gets free new cars, while we sit here on the street and get nothing." The Bush bailouts may buy time, but they may not be enough to prop up faith in the capitalist road to prosperity. --With reporting by Sol Biderman/Sao Paulo and Matthew Cooper and Massimo Calabresi/Washington

With reporting by Sol Biderman/Sao Paulo and Matthew Cooper and Massimo Calabresi/Washington