Regression analysis

"Brazil is the country of the future, and always will be," goes a familiar saying in Brazil. On Oct. 27, the country that never seems to reach its potential took a huge step into the past with the election of Luiz Inacio Lula da Silva of the leftist Workers' Party to the presidency.

The win for "Lula," as the president-elect is known, was the second major setback in less than a year for free-market reform in South America. (Argentina defaulted on its massive government debt last year and since then has sunk back into economic misery.) It's also a signal that Latin America may be reverting to the statist, anti-U.S. policies that kept the region mired in poverty for decades.

Few would have predicted this trend even two years ago. Over the past decade, many Latin American leaders had embraced, at least rhetorically, the free-market model that alleviated poverty in Asian countries. They lowered tariffs, sold off public monopolies, and halted hyperinflation by anchoring their currencies to the dollar.

But like Argentina (and unlike Chile, see p. 14), Brazil never fully embraced reform. A highly complex tax code, restrictive labor laws, and--most harmful--a culture of entitlement remained. These kept the economy from picking up steam, and government spending (fueled by social security) began to pile up the country's debt. That debt now totals $250 billion, or over 60 percent of Brazil's GDP. Many economists predict a default.

It was in the midst of this mess that Lula apparently began to sound a little less loopy to Brazil's voters. The 57-year-old former factory worker and union activist first ran for president in 1989, but his fiery socialist rhetoric had turned off voters. This time he toned it down and won 61 percent of the vote. "I want to promote land reform, but I don't have to do it shouting, the way I used to do," he said. "I saw myself on TV, and even I was scared of myself." He also has reversed past calls for the nationalization of industries and a moratorium on debt repayment.

But investors are still nervous. A protectionist, Lula opposes President Bush's call for a Free Trade Area of the Americas. Opposing free trade plays well politically with some of Brazil's special interests, which like captive markets, but it also closes down the best hope for the country to grow its way out of its problems. And while Lula has called vaguely for "fiscal responsibility," many powerful forces in his party have pushed for "breaking up" the policies of neoliberalismo, or free markets.

This means that South America's largest country seems to be running away from the one model that has proven able to produce lasting prosperity in the continent--Chile's. With low taxes, low tariffs, and a privatized pension system, Chile has weathered the storm that swamped Argentina and seems to be swamping Brazil.

Perhaps Lula's change in style will lead to changes in substance, and perhaps he can rein in the far-left forces in his party. Brazilians better hope so, because otherwise, the "country of the future" may find that its best days are behind it.