In Latin America, Pointing a Finger at the US

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Mauricio Lima / AFP / Getty

Stock traders negotiate in the future dollar pit during the morning session at the Mercantile & Futures Exchange (BM&F) in Sao Paulo, Brazil.

In an interview with TIME last month, Brazilian President Luiz Inacio Lula da Silva sounded as calm as an afternoon on Copacabana. "The American crisis," he said, "is an American problem that they will have to resolve." A couple of weeks later, at the U.N. General Assembly in New York, a more concerned Lula warned, "We cannot let the burden of the boundless greed of a few be shouldered by all."

Over the past week, however, it became clear just how much the "American problem" may affect Brazil's stellar economic performance, as the Sao Paulo stock index — the Bovespa — lost about 20% of its value. A visibly irked Lula barked that the U.S. disaster "is one of the most serious problems we have ever seen." His parting shot: "Our financial system is not involved in the [U.S.] subprime" mortgage mess that sparked the catastrophe. "We did our homework and the U.S., who spent 30 years telling us what to do, did not."

Such is today's surreal situation that Washington is getting lectured on capitalism by Lula, the head of Brazil's leftist Workers' Party. All over a region once considered the poster child for economic dysfunction, the refrain is the same: Why can't the gringos run an economy as well as we do? Since the fall of the Berlin Wall, Latin America has been adopting the free-market economic reforms demanded by the U.S. The "Washington Consensus" — more open markets, draconian cuts in public spending, privatization of inefficient industries — has often been blamed for exacerbating the continent's epic inequality. But most Latin American countries now follow market policies. Some, especially Brazil, have used them not only to create prodigious wealth but also to redistribute it: 52% of Brazil's 190 million people now occupy the middle class, up from 42% when Lula was first elected in 2002. Using its windfall from high world commodities prices to tuck away a record $215 billion in foreign reserves, Brazil has also built what it thought were sturdy defenses against the global financial contagions that had regularly waylaid it in the past.

Then came the mother of all Wall Street collapses, fueled by a toxic cocktail of avarice and incompetence once common to the Latin American establishment, and the continent's trust in Washington's free-market model is once again in tatters. Lula and President Bush have spoken on the phone twice since last weekend to reassure each other about their countries' financial health. But the crisis is a shot in the arm for the socialist project of the new Latin left, led by Venezuelan President Hugo Chavez. "Countries like Mexico, Brazil and Chile have done everything expected of them macro-economically, but everyone underestimated the size of this crisis," says Peter Hakim, president of the Inter-American Dialogue in Washington, D.C. "Lula is very right to point the finger of blame at the U.S. If the Venezuelas of the region, which rejected market policies out of hand, come out better at the end of all this than the Brazils do, the credibility of the Washington Consensus will be sadly diminished."

The Washington Consensus had already taken a hit in 1995, during Mexico's last peso crash, and in 2002, when the International Monetary Fund, backed by the U.S., insisted on a strict currency policy that worsened Argentina's economic collapse and led to its massive foreign debt default. Since then, Argentina has thumbed its nose at the IMF and Washington, and has seen a dramatic recovery.

But as much as they may enjoy the shaming of the U.S. in the current crisis, leftist crusaders like Chavez may take an even bigger hit from the American debacle than more centrist governments like Brazil's will. The financial meltdown is dragging commodity prices along with it, which is bad news for leftist-run economies such as Venezuela's (oil) and Bolivia's (natural gas). It may also have a negative effect on Argentina's important agro-export sector. What's more, Bolivia and Argentina, as well as others such as Nicaragua and Cuba, have come to depend on Chavez's petro-largesse, which stands to be greatly reduced this year and next if crude prices keep plummeting as they are now. "People forget how much Argentina's recovery involved Venezuela's purchase of millions of dollars in Argentine bonds," says Eduardo Gamarra, a Latin America expert at Florida International University in Miami.

Brazil, whose $1.3 trillion economy is Latin America's largest and ranked 10th in the world, also relies substantially on commodity exports. But in contrast to his regional peers, Lula's business-friendly policies have made the nation a rarity in Latin America, more reliant on manufactured exports than on commodities. That, along with a well-capitalized banking system and a strong balance of payments picture "has buffered [Brazil] quite a bit against the coming downturn," says Paulo Leme, director of emerging markets research at the Goldman Sachs investment bank in New York. And while Mexico relies on the U.S. market for 80% of its exports, Brazil sends less than a fifth of its exports to the U.S.

Still, Brazil and Latin America again are in for yet another test of their economic maturity. And it will be especially hard if the region's new trading buddy, China — Chinese-Latin American commerce has grown from less than $3 billion in 1990 to more than $70 billion today — sees a downturn of its own in response to the global crisis. But if capitalist-oriented economies such as Brazil's survive it, "the market approach could actually be bolstered in an ironic way," says Hakim, "meaning that countries like Brazil will look like the examples who managed capitalism better than the U.S. did." In that case, Washington and Wall Street could find themselves berated by a new 'Brasilia Consensus.'