TURMOIL IN LATIN AMERICA THREATENS DECADES OF REFORM

Economic Woes, Political Unrest Raise Anxieties

BOGOTA - A convergence of political and economic upheavals in recent
weeks has plunged South America into turmoil, threatening to undermine
two decades of progress toward democracy and market
liberalization.

Financial meltdowns in Brazil and Uruguay have prompted huge bailouts
by the International Monetary Fund. Antiprivatization protests have
erupted in Paraguay, Ecuador, and Peru. The political and social
schisms in Venezuela have widened, and rumors abound of another coup
attempt against President Hugo Chavez.

Colombian rebels launched a mortar attack this month at the
inauguration of President Alvaro Uribe, killing at least 19, and the
government declared a state of emergency. To the south, Argentina slid
further into economic ruin.

The almost simultaneous crises have created an unstable political and
economic environment for this continent, where some nations are still
in their democratic adolescence after years of authoritarian rule and
where all nations are still trying to find secure footing in the
global marketplace.

''The region has run out of options, and what's at stake is
tremendous,'' said Michael Shifter of the Inter-American Dialogue, a
think tank in Washington, D.C. ''If this begins to break apart and if
there's a complete lack of confidence, a complete lack of credibility
in political leaders and institutions, the situation is going to
become much worse.''

Though the causes of the crises vary, similar obstacles bedevil
attempts to build functioning market economies, and all of these
nations are struggling to create effective democratic systems.

Many analysts trace much of the current strife to the free-market
principles that swept the continent during the 1980s and 1990s, either
because they were not implemented correctly or because they were
flawed to begin with. Governments embraced capitalist strategies
prescribed by international lending institutions and the United
States, lowering tariffs, privatizing state industries, and
encouraging foreign investment.

But with the notable exception of Chile, the strategies had limited
success. ''These measures brought immediately high returns, but once
that growth kicked in, governments lost interest in reform and stopped
halfway,'' said Ian Vasquez, an economic development expert at
Washington's Cato Institute.

In some countries, large-scale foreign investment didn't occur as
planned, and the foreign investment that did arrive was not
sufficiently labor-intensive. Private sectors didn't adjust fast
enough to competition, and corruption persisted, so growth evaporated
and crime rose.

''It was the open-market economy model [without] responsible
governments implementing the system,'' said Alberto Bernal, a Latin
America economist at IDEAglobal, a Wall Street think tank.

Argentina was the first to fall when, in January, it defaulted on its
$142 billion foreign debt. The collapse sent economic tremors across
the region and unnerved foreign investors.

Argentina's implosion destabilized its neighbors, including Paraguay,
which is facing the possibility of a banking collapse.

In Uruguay, known as ''the Switzerland of Latin America'' for its
banking sector, steady withdrawals by cash-strapped Argentines coupled
with falling Brazilian financial markets ignited panic. A run by
depositors forced Uruguayan authorities to close the banks for six
days in late July, prompting riots and looting in the capital, Montevideo.

Brazil, the world's 10th-largest economy, went into an economic
freefall in the spring. Spooked by the rising popularity of two left-
leaning front-runners for the Oct. 6 presidential election, investors
fled, and the Brazilian real's value against the dollar plummeted. The
South American giant looked as if it, too, was heading toward a
default on its massive public debt of $265 billion.

Worried that a Brazilian collapse would have the potential to upend
markets around the world, the IMF stepped in earlier this month with a
$30 billion bailout. It also tossed a $1.5 billion life preserver to
Uruguay. After a brief rebound, Brazil's markets have sputtered again.

''People are realizing the IMF can't change political uncertainties''
in the region, said Vasquez of the Cato Institute.

The economic and political deterioration throughout the region has
ignited populist movements against free-market capitalism. And the
backlash against the decade-old reforms has fostered the rise of
leftist politicians championing nationalist ideologies.

''Here we are in the age of DVDs and globalization, Internet,
relatively inexpensive travel, and at the same time you have in terms
of gross amounts more people living below the poverty line in Latin
America today than in 1980,'' said Larry Birns, director of the
Council on Hemispheric Affairs, a Washington think tank.

According to the World Bank, more than a third of the region's
population lives below the poverty line. In some countries, the
informal labor sector, in which workers lack regular employment and
protection of employment contracts or government regulation, has grown
as high as 70 percent of the total work force. Market reform, Birns
said, ''was a win-lose situation in many respects.''

Some examples of the problems:

In Peru, despite the economy's relatively good performance, President
Alejandro Toledo has failed to solve the problem of chronic poverty
since taking office in July 2001, and his approval ratings have
plummeted. In June, protesters rioted in the city of Arequipa over a
government plan to sell two regional power plants; they worried that
the sale would mean layoffs and higher utility prices, not to mention
more money for corrupt officials. Arequipa's mayor led the protests
and is now considered one of the country's most popular
politicians.

In Bolivia, Evo Morales, an indigenous leader of the country's coca
growers and a critic of market-based economies, narrowly lost the
presidential election to the reform-minded, US-supported candidate,
Gonzalo Sanchez de Lozada, who took office earlier this month.

In Paraguay, the government declared a state of emergency last month
after bloody riots against the economic policies of President Luis
Gonzalez Macchi, whose administration is plagued by a dismal economy
and corruption charges. In June, demonstrators derailed the sale of
the state phone company. Similarly, in Ecuador, the sale of 17
electricity generators collapsed under anti-privatization protests.

In Brazil, populist sentiment has buoyed Workers Party candidate and
current front-runner Luiz Inacio Lula da Silva. Disenchantment with
the government's inability to combat increasing poverty, joblessness,
and crime may finally catapult da Silva to victory.

''There is tremendous uncertainty about what else might work for the
region in terms of economic progress, in terms of political systems
that are both democratic and that also produce results,'' said Shifter
of the Inter-American Dialogue. ''This means that the ground is
fertile for different kinds of leaders emerging. There's a sense that
anything goes. It's a situation of great crisis.''

Some, however, see these reactions against failed economic and
political policies as themselves an expression of democracy.

Eduardo Gamarra, director of the Latin American and Caribbean Center
at Florida International University, points to the case of Morales,
the Bolivian runner-up, as an example. ''These people haven't followed
the Colombian route, armed struggle,'' Gamarra said. ''They're taking
advantage of the mechanisms of representative democracy: They join
parties. They run for office. They form unions. This is a deepening of
democracy.''

Several high-level Bush administration officials, during visits to
Colombia this month, insisted that many of the economic and political
difficulties facing Latin America are at root domestic issues that
require multipronged economic, social, and political strategies to
rectify.

''At the end of the day, these are democracies,'' US t rade
representative Robert Zoellick told reporters in Bogota the day after
the rebel attack on Uribe's inauguration, which Zoellick attended.
''They have to manage to gain political support for difficult
challenges. In some countries it's a question of security, as it is
here [in Colombia]. In some countries it's a question of trust in the
political class. That's something that has to be solved at home.''

He added that the United States will continue to buttress the
democratization efforts throughout the region, particularly by
providing free-trade incentives and, in the case of Colombia, military
support. Colombia is the third-largest recipient of US military aid
and has received nearly $2 billion in US assistance the past two
years, most of it military, to help fight its 38-year conflict.

But the volatile political and economic factors remain a challenge for
Washington. ''You find major stirrings taking place and there's a
potential for a very confrontational Latin America challenging the
US'' on trade and political issues, said Birns. ''This is a
transformative moment.''