The 'Axis of Lula' vs. the 'Axis of Hugo'

Latin American leaders face a choice between provocation and progress.

The same weekend that Venezuelan President Hugo Chvez celebrated Mauricio Funes's election as El Salvador's new president, his Brazilian counterpart, Luiz Inácio Lula da Silva, was meeting with U.S. President Barack Obama. The election in El Salvador and the meeting at the White House are manifestations one of the most important trends that will shape Latin American politics in coming years.

Funes was the candidate of the former guerrilla movement, Farabundo Mart National Liberation Front, and his election marked the peaceful transition from two decades of government by its archrival, the Arena party. Thus a right-wing government closely allied with the United States handed power to a leftist party whose most prominent leaders have a long history of confrontation with Washington. As significantly, Obama's invitation to da Silva marks the end of a long period of estrangement between the United States and Latin America and opens new possibilities for rebuilding tattered relations between Washington and the region.

According to Chvez, Funes's victory consolidates the historical current that has been rising in Latin America in this first decade of the 21st century, referring to the left's ascent to power in several countries of the hemisphere.

Does this mean that El Salvador is the newest member of the Axis of Hugo? In addition to Venezuela and Cuba, the core of that axis is formed by Bolivia, Ecuador, and Nicaragua. Honduras and Paraguay are also part of this alliance, though their governments have an internal opposition that prevents their leaders from becoming full-fledged members.

While the axis countries build their anti-Yankee alliance and try to implement what the Venezuelan president calls 21st-century socialism, the Brazilian government is successfully developing a very different geopolitical project: ensuring Brazil's presence at the table when the world's most important decisions are negotiated. Brazil has thus become an indispensable voice in the debates concerning the rules governing international trade, energy, the environment, and the redesign of the international financial system.

So, while Hugo Chvez spends his time and oil revenues trying to influence countries such as Bolivia, Nicaragua, and Paraguay, da Silva hangs out with leaders in India, South Africa, and Europe.

The Brazilian government does not carry out this strategy in direct competition with Chvez's axis. It maintains close and friendly relations with the axis governments and goes out of its way to praise Venezeula's president. It has also been very effective in containing Chvez's more extreme international gambits, such as his enthusiastic support for Colombia's FARC guerrillas, and moderating his propensity for conflict. Brazil has enthusiastically supported his grandiose plans (the transcontinental gas pipeline, the Bank of the South, the merging of the Venezuelan and Brazilian oil companies, Venezuela's entry into Mercosur) while subtly sabotaging them and ensuring that none of them come to fruition. (None have.)

This frictionless coexistence between the Axis of Lula and the Axis of Hugo is going to become harder to sustain as the Brazilian president deepens his ties with Obama's White House. Hopefully, Obama's overture to Brazil signals a change in the long-held propensity of the United States to spend all of its time on Latin America's smallest countries and issues while neglecting the continent-size country in the middle. If the Obama administration were to give Brazil the time and political capital usually spent by the U.S. government on Cuba, it would find much higher rates of return.

And here is where El Salvador's election becomes such an interesting gauge of larger trends. Sooner rather than later, countries like El Salvador will have to choose. Do they want to join an alliance predicated on the willingness of the Venezuelan president to give away large chunks of his country's (declining) oil income, and constant confrontations with the United States? Or would they rather get as close as possible to Brazil -- a giant continental ally that has good and improving relations with the United States and a real influence in the global forums where decisions that affect Latin America are made?

The new president of El Salvador now faces this dilemma. Although he claims to be a moderate, his party's leadership is to his left and strongly pro-Chvez. They will push hard to tilt the new government toward the Axis of Hugo. Moreover, despite the fall in oil revenues, Chvez still has enough money to influence the internal politics of a small country like El Salvador, and there is no doubt that he will try. President Funes surely knows this and is also likely to understand that his best bet is to be as friendly as possible with Chvez without becoming another of his satellites.

To pull off this difficult balancing act, he can count on the Axis of Lula. And perhaps because he knows this, his first decision as president-elect was to travel to Brazil. For me, President Lula and his government are my reference of a leftist, democratic government that can instill confidence in foreign investors, Funes said in Brazil. Let's see what he says when he visits Hugo.



Is China the New America?

The Great Depression made the United States the world's unquestioned financial leader. The current crisis can do the same for China.

In the Great Depression, as in the current economic crisis, the downturn was particularly severe because of a lack of leadership in the international order. The dominant financial power of the 19th century, Britain, was financially exhausted by the First World War. The new major creditor, the United States, had emerged as a strong economic player, but did not yet have leadership committed to the maintenance of an open international economic order. The simple diagnosis was that Britain was unable to lead, and the United States unwilling.

If the scenario sounds familiar, it should. The story from the Great Depression has an uncanny echo in current debates about international economic leadership, with the United States playing the role of Britain -- the exhausted debtor economy -- and China taking the place of the United States as the world's largest creditor. But if China is the America of this century, can it do a better job than the United States did in the 1930s? The way in which the emerging superpower takes to this role will determine in large part how the world will emerge from the downturn and the shape of the new global economic order that will follow.

Charles Kindleberger, the late economist, argued that the United States should have acted as a lender of last resort in the early 1930s, continuing to keep its financial markets open to investment and its market open to foreign goods, rather than heading down the path of protectionism. It should also have stimulated the world economy through countercyclical fiscal policy.

But at the time of the Great Depression, there were all kinds of convincing reasons why Americans did not want to take on the burden of a worldwide rescue. Sending more money to Europe was seen as pouring money down the drain, and after all, Europeans had fought the world war that had been the root cause of the financial mess. Economically, helping Europe would have made a great deal of sense from a long-term perspective, but politically it was a non-starter with no short-term payoff.

In the middle of the current financial crisis, a deep-pocketed China faces the same dilemma: swallow its pique and help save the same countries that got us into this situation, or look to its own short-term interests first. Today, there are increasing demands that China contribute more to internationally coordinated rescue packages through a reformed International Monetary Fund (IMF). China is also one of the few economies still growing in 2009, though most economists have reduced their estimates of growth rates. Finally, China and the United States are the only countries that are large enough, and have sufficiently well-ordered government finances, to launch major efforts at fiscal stimulation.

Beijing's leaders might feel like they have already taken their best shot. The initial stages of the credit crunch in 2007 were managed so apparently painlessly because sovereign wealth funds (SWFs) from the Middle East, but above all from China, were willing to step in and recapitalize the debt of U.S. and European institutions. Between November 2007 and March 2008, the SWFs provided $41 billion of the $105 billion injected into major financial institutions. Had this process continued, the events of 2008 would have included problems with U.S. real estate and a severe stock market decline, but no meltdown of financial institutions.

But after March 2008, the availability of funds to prop up the global financial system shriveled up. The pivotal moment in today's events came when the state-owned China Investment Corp. (CIC) was unwilling to go further in its exploration of buying Lehman Brothers. CIC's turning back will be held up in the future as a moment when history could have shifted in a different direction.

Today there may be plenty of reasons why the Chinese will be tempted to pull back from their engagement with the world economy, and the external political logic sounds very much like the U.S. case of 1931. Some of the economic arguments reverberating around Beijing are very reasonable: There is a great deal of uncertainty, and the SWFs have lost a lot of money already and might lose more. China's investments in U.S. securities in 2006 proved to be a huge costly mistake. Clearly the CIC would have initially lost further billions had it tried to rescue Lehman. Other lines of thought are more emotional and political: Might not 2008 be a righteous payback for the U.S. bungling of the 1997-1998 Asian crisis? Trying times tend to heighten paranoia.

There are also many domestic reasons why China might be wary about opening up to the global economy. The Chinese banking system is still quite opaque and might still have to wrestle with the legacy of problems of the 1990s, in particular, bad loans to big state-owned corporations that were the consequence of a political logic of directed credit. China is investing large amounts in education, but it may be more difficult to build a creative and innovative society that replicates the dynamism of the United States in the second half of the 20th century (which was fed in large part by openness, above all openness to immigration). China also faces a problem of aging and even demographic decline after the 2040s as a legacy of its one-child policy, which has also created a potentially destabilizing surplus of young males. With all these threats to stability, an authoritarian though reformist regime may find it harder to respond flexibly to popular demands and may be prone to try to mobilize a reactive nationalism to fend off challenges to its authority.

The pressure to engage in large-scale fiscal stimulation is also likely to alter the balance of China's economic development. The Chinese model of capitalism is very different than that of the United States, and even before the economic crisis, there were two alternative models. The first was the rural, family, and small-business-based boom of the 1980s. But by the 1990s, some of the private-sector growth was being choked off by a rival vision of economic growth built around prestige projects and the large, state-owned enterprise sector. Consider Shanghai, which impressed many commentators as the most modern city in the world: Analysts of the Chinese economy have suggested it is one of the least entrepreneurial cities in China. Yasheng Huang, in his book Capitalism with Chinese Characteristics, described it as a classic industrial-policy state. The new stimulus package is likely to push the balance of Chinese development more decisively in this latter direction, toward state capitalism.

China thus has plenty of reasons why it might want to close itself off to the forces of globalization, as the United States did in the interwar years. This thinking will be reinforced by the structure and character of the international order. Again, an interwar analogy is appropriate. The United States felt uncomfortable with the international institutions of the interwar period, in part because they were aligned with the interests of the old hegemonic power, Britain. The League of Nations looked as if it was an instrument of British power. Similarly, in the modern context China worries about whether it is adequately represented in U.S.-dominated international institutions. Its influence in the IMF and World Trade Organization clearly does not correspond to its real position in the world economy and to the role that China could play in economic stabilization. Reforming international institutions is thus a key issue in deciding whether the coming geopolitical alterations will be crisis-ridden, abrupt, and disruptive, or whether a more gradual and peaceful path of adjustment can be achieved.

Just before the Asia-Europe meeting last October, President Hu Jintao stated that China would behave with a sense of responsibility. It remains to be seen what stake China really has in the survival of the global economy. As in 1931, the political arguments are all against a rescue. Only the farsighted will see that the economic case for such an operation is compelling. Much depends on the extent of China's voice in an altered international institutional architecture.

But that voice will make demands that are increasingly difficult for the old world to accommodate, including demands for a guarantee of China's U.S. asset holdings and suggestions for an alteration of the world's reserve management. In proposing a global reserve currency to replace the dollar, the Chinese central bank president recently followed in the footsteps of Charles de Gaulle in the 1960s. But unlike France, China is in a much stronger position to assert its preferences for international monetary reordering.

In other words, the world may be asked to transition from an American to a Chinese model of capitalism, and as in the 1930s, that won't be an easy switch for any of us.