Observers of the Latin American scene over the past several months have begun to notice a subtle but important shift. We are witnessing the beginnings of a split into two Latin Americas--one running on an irregular axis from Mexico City through Central America to Chile, and the other from Havana, passing through Caracas, Brasilia, and possibly Quito and Buenos Aires. The first will be broadly associated with the United States, both in economic and geostrategic terms; the second will define itself by opposition to the Washington consensus in economics and finance, to hemispheric free trade, and to the broader strategic agendas of the Bush administration. The implications for future policy are far too crucial to ignore.

The Mexico-Central America-Chile Axis

Let us begin with the first axis. Its centerpiece is the U.S.-Mexican relationship. In spite of continuing tensions provoked by the drug wars and immigration, never have both countries enjoyed such intimate and mutually productive relations. Both have gained immeasurably from their creation (together with Canada) of the North American Free Trade Agreement (NAFTA) in 1993. Mexico provides the United States with much-needed labor, particularly in agriculture; the United States is the source of literally billions of dollars each year in remittances to Mexican families, many of them living in the poorest regions of that country. Even in the area of culture, the influences have been flowing in both directions, particularly in food preferences. Paradoxically, the free trade agreement with the United States has served a perennial Mexican objective of diversifying dependence better than erecting trade barriers and content requirements; since 1993 the country has experienced an unprecedented wave of European and Asian investment anxious to use Mexico as an export platform to the United States.

The five Central American republics, having taken notice of Mexico's success, are anxious to follow suit. In some ways they already have. Important Central American communities are flourishing not only in Miami, Los Angeles, and Houston, but also in smaller cities and towns near our agricultural heartland. Remittances now form the first or second source of hard currency for many of these republics, so much so indeed that the U.S. dollar is regularly used in business transactions (and is the official medium of exchange in El Salvador and Panama). One of these countries--Costa Rica--has a political culture that more nearly resembles that of the United States than most South American nations. Another--El Salvador--has a business community that is virtually world-class. Economic and political progress has been slower in Guatemala and Nicaragua, but the days of tin-pot military dictators (or tin-pot revolutionaries) lie clearly in the past. More to the point, these countries without exception seek close association with the United States and its NAFTA partners. Opponents of globalization are extraordinarily thin on the ground.

The terminus of this axis lies in Santiago, Chile. There preparations are being made to link South America's most dynamic and best-managed economy to the United States through a free trade accord. While Chile's gross national product is small, it has been steadily growing over the past two decades and now matches (or even exceeds that) of Argentina, its much larger neighbor across the Andes. Chile's political democracy is arguably the strongest in the region, with low tolerance for corruption and a decided preference for the rule of law. Americans there often marvel that the business environment--as almost nowhere else in Latin America--strongly resembles that of the United States.

It is certainly true that when the notion of a hemispheric-wide free trade accord was originally proposed by President George H. W. Bush in 1990, it was expected that the first countries to follow Mexico into the club would be heavy-hitters like Argentina, Venezuela, or Peru. On the other hand, there is much to be said for "cherry picking" candidates for entry. By working with those that are genuinely committed to the project or have demonstrated particular suitability for membership, the United States and its NAFTA partners send a message--impossible to misconstrue--that that positive policies have positive consequences (and the reverse as well). At the same time, while we will fall far short of the goal of reaching a hemispheric free trade area by 2005, at least we sustain momentum while other countries decide how to relate to this emerging commonwealth.

The Anti-Globalist Axis

The election of a leftist, Luiz Inácio Lula da Silva, to the presidency of Brazil has the potential to give a massive boost to the other side of the divide, at least for the moment. It now includes Cuba's Fidel Castro and Venezuela's Hugo Chávez, but may soon incorporate two new members--Adolfo Rodríguez S‡a in Argentina and ex-colonel Lucio Gutiérrez in Ecuador (if those men are elected in contests in this month and next March, respectively). Bringing up the rear will be Cuba's sempiternal dictator, who is a close friend of both Lula and Chávez. What unites all of these men is a generalized protest against the current world order and the role of the United States in it. Just how far any of them can carry their protest is difficult to predict. All of these countries--even oil-rich Venezuela--may be carrying too heavy a debt burden to easily strike out in radical new directions, unless of course they choose to repudiate their external obligations (something even communist Cuba--though in default since 1986--has not formally done).

It may indeed be, as many now assure us, that Brazil's new president will turn out to be far more moderate and pragmatic in practice than he has often sounded in the past. If so, then this Outlook will prove a gratuitous exercise. But let us suppose, for a moment, that he does not. What are the likely consequences for the region and for the United States?

The first effect will be a perceptible shift in capital flows to the region. With four or five countries taking themselves out of the running, so to speak, others like Mexico and Chile should find it even easier than usual to place their bonds on the world market.

The second will be a decline in employment and job creation, combined with a growth in political unrest. What we have seen in Venezuela--the virtual rebirth of an angry civil society--is likely to be observed whenever the political leadership frightens off capital and other sources of job creation.

The third will be an increase in government spending and with it a sharp inflationary spiral.

The fourth will be an increasing polarization of society, with the massive flight of financial and human capital. The pressures of immigration, both legal and illegal, on Miami and other warm-weather regions of the United States will redouble.

The fifth will be a serious erosion of political institutions--an independent judiciary, a free press, even the existence of opposition political parties--as messianic leaders attempt to counteract the unfavorable fallout of their economic policies. It is unlikely, however, that any of them will succeed as thoroughly as Fidel Castro in insulating themselves from the disastrous effects of their stewardship, if for no other reason than that the United States is not about to open its doors to the entire Brazilian, Argentine, and Ecuadorian middle classes.

Finally, an attempt will be made to reposition these countries internationally, joining a new international bloc of "have not" nations. (The composition of this body varies--in some versions it includes Brazil, Russia, India, Iraq, Iran, and China; in others it encompasses the entire "non-aligned" Group of 77.) At a minimum, one can expect these countries to consistently vote against America at the United Nations and at the Organization of American States. In this role they (and their leaders) may become new reference points for the adversarial left in Europe and the United States.

Back to the Seventies?

In many ways what we are seeing is a revival of the 1970s in parts of Latin America. That era, let us recall, was characterized by extreme anti-Americanism, boom-and-spend populism, mindless foreign borrowing, and strong restrictions on foreign investment and on the movement of capital and goods. (It also saw the United Nations mandate a Charter of the Rights and Duties of States, which amounted to legislating socialism as a global world system.) The principal threat to Latin American development, it was said at the time, was the threat represented by "multinational corporations." Not surprisingly, many countries experienced negative investment in this period, and ended that decade heavily indebted, but with nothing to show for their obligations.

There are some differences with the seventies, of course. The first is that the petrodollars that were readily available then are nowhere to be found. Neither public nor private lending agencies are likely to provide irresponsible Latin American governments with the resources to cushion their leaders from the consequences of bad decisions. The second is that all of these countries are now electoral democracies, however imperfect, and the public will expect results and rapidly punish governments that fail to deliver. The third is that a successful alternative will be clear for all to see--countries like Mexico, Chile, El Salvador, or Costa Rica, that will be prospering while behemoths like Venezuela, Brazil, or Argentina continue to founder. The example of Chile alone has probably had more impact on Latin American economic policy generally than any other single factor. Its incorporation into NAFTA will raise interesting questions across the Andes, and quite possibly act as an alternative pole of ideological and political attraction.

These points are particularly important to bear in mind given the media analysis to which we have been subjected surrounding Lula's election in Brazil (that this is a huge setback for the United States, and particularly for the Bush administration; that it is all due to "neglect" of Latin America since September 11; that it "proves" that "neoliberalism" does not work). To be sure, it would have looked better for the United States if Lula's opponent, José Serra, had emerged victorious. But given that almost all of the candidates in that race were running from the left--even, until he began his campaign against Lula in the runoff, Serra himself--it is possible to drastically overstate the danger to U.S. interests. The banks and brokerage houses have already factored in the threat of a Lula presidency. It remains to be seen how far outside the conventional mainstream he will take his country, at what cost and at what risk, with implications for a large part of the region as well.

Mark Falcoff is a resident scholar at AEI.