Going South
Populism Loses
Appeal for Voters
In Latin America

Venezuela's Chávez Aside,
Leftist Campaigns Flag;
Ecuador Is Latest Test

Craving Economic Stability

By JOHN LYONS
November 22, 2006; Page A1

QUITO, Ecuador -- The populist political tide that seemed to be sweeping through Latin America earlier this year is sputtering.

Although disappointment with free-market reforms still runs deep through the region, voters have been choosing presidential candidates who tap into a more powerful force: economic stability. Across Latin America, inflation has been on a steady decline for the past decade, and has dropped to the low single digits for the first time in decades in Mexico, Peru, Ecuador and Brazil. Economic growth, while far from spectacular, has been solid for the past five years.

With that stability, more working-class voters have been able to buy homes, take out loans and obtain their first credit cards. As voters get a stake in the economic system, they become wary of risking it all on populist nostrums -- debt repudiation, deficit spending, state ownership of industries -- that in the past produced economic disasters and left them worse off.

This dynamic has played out in election after election across the volatile region this year, despite high-profile efforts by Venezuelan President Hugo Chávez to fuel anti-U.S. sentiment. In February, Nobel Prize winner Oscar Arias won the presidency of Costa Rica against a candidate who wanted to scuttle a free-trade deal with the U.S. In June, onetime populist Alan García regained the presidency in Peru by embracing free trade and open markets -- and by playing off voter fears of Mr. Chávez's growing influence. In Mexico a month later, the populist former Mexico City mayor, Andrés Manuel López Obrador, lost after failing to find support among the working classes of fast-growing central and northern cities.

And while longtime socialist politicians won in Brazil and Chile, they did so by championing market-friendly policies. This month in Nicaragua, former Sandinista leader Daniel Ortega won the presidency, but even he positioned himself as a candidate of stability and reconciliation. He used John Lennon's "Give Peace a Chance" as a theme, not Vladimir Lenin's economics. The sole presidential candidate who looks likely to win this year on a platform of state intervention, income redistribution and anti-American foreign policy is Venezuela's President Chávez, who has billions of dollars in oil wealth to hand out to supporters.

"We haven't achieved [politically] what we thought was going to be achieved at the beginning of the year," says Efren Andrades, a former agriculture minister in Mr. Chávez's government, who now teaches at the University of the Andes in Mérida, Venezuela.

The diminishing electoral appeal of candidates promising radical economic and political change is on display here in Ecuador, ahead of this Sunday's presidential election. Early this fall, Rafael Correa, a telegenic university professor, leapt ahead of his rivals by wrapping himself closely with Venezuela's Mr. Chávez and vowing to dissolve Congress, redo the constitution and renegotiate the foreign debt. During rallies, he snapped his belt to show how he planned to lash the country's rich into submission to help the poor.

But as voters grew wary of his showmanship, Mr. Correa retreated to the middle. In campaign stops, he now rarely mentions his plans to redesign the economy or rewrite the constitution. Instead, he focuses on issues that even his conservative opponent, banana magnate Alvaro Noboa, embraces, such as improving housing. After moderating his stance, Mr. Correa has regained his footing and is now in a virtual tie with his conservative rival. "Ecuador's economy isn't sustainable," says Mr. Correa. "I am talking about changes to create jobs [and] create productive industries."

Populism is far from dead. Latin America remains fertile territory for politicians who promise a heavy government hand and a retreat from market economics. That's because the benefits of recent economic growth have flowed disproportionately to elites, sustaining income inequality rivaled only by sub-Saharan Africa. Resentment simmers among the working class and poor.

Mexico's conservative president-elect, Felipe Calderón, who won by less than a percentage point, is likely to be dogged during his term by Mr. López Obrador, who claims the election was stolen and swore himself in on Monday as the "legitimate" president. In Argentina, President Nestor Kirchner, who slashed foreign debt payments, set price controls and spent heavily, is the early favorite to win a second term next year.

"Voters are opting for stability, but it would be a big mistake to interpret that as a ringing endorsement of politics as usual in Latin America," says Michael Shifter, vice president of the Inter-American Dialogue, a Washington, D.C., think tank. "There is still a lot of frustration in the region."

Even so, the electoral failure of populists so far has been good news for foreign investors and businesses. U.S. companies such as Citigroup Inc. and Wal-Mart Stores Inc. have poured billions of dollars into the region in the past decade on the expectation that economic stability and growing consumer wealth would expand local markets. U.S. officials can also breathe easier because Mr. Chávez hasn't managed to form a potent anti-U.S. economic and political bloc in Latin America.

There are also powerful constraints on governments seeking to govern as populists. In December, leftist Indian leader Evo Morales won Bolivia's presidential election and set about nationalizing the country's oil and gas industry. But the staunch Chávez ally hasn't been able to complete the nationalizations because the state lacks the managers and resources to run privately owned fields.

Ecuador, an oil-rich nation of 13 million, illustrates the rise and ebb of radical politics in Latin America this year. Even in a region known for instability, this Colorado-size country stands out. It has had seven presidents in the past 10 years, three of whom where exiled, jailed or both. In 1997, Abdalá Bucaram, who recorded a record album -- "The Madman Who Loves" -- during his presidency, was deposed by congress for "mental incapacity."

The economic situation has been equally volatile. A fierce rivalry between the Sierra mountain dwellers and residents of the muggy coast has made it difficult for the Quito government to work out necessary compromises that could limit government spending. Instead, the Central Bank printed more Ecuadorian sucres to pay for salary increases, public-works projects and repeated bank bailouts -- short-term fixes that boosted inflation. Between 1979 and 2000, the sucre plummeted from 25-to-the dollar to 25,000-to-the-dollar, wiping out savings and prompting the government to default on its debts twice.

John Lyons

Nelson Rivadeneira

As in all Latin American currency crises, the working and middle classes suffered especially sharp declines. In the mid-1990s, Nelson Rivadeneira, an auto-parts salesman in Quito, owned a home and two cars, and hoped that his son, who attended an inexpensive private school, would climb higher up the economic ladder.

Then the sucre plunged, interest rates soared, and he lost his job as the economy nosedived. Facing bankruptcy, he sold his cars. One went to pay his loans and the other to pay his son's tuition.

As the country's banks started to fail, Mr. Rivadeneira and thousands of other Ecuadorians lined up at teller windows to withdraw their savings. Burger Kings started selling Whoppers for dollars, setting their own exchange rates as the sucre lost about 65% of its value. A newspaper printed photos of financiers boarding planes to Miami. To stem a run, the government froze deposits and allowed banks to issue savers like Mr. Rivadeneira promissory notes. These proved to be worth less than their face value, since confidence in the banking system had vanished.

The economy hit bottom in 2000. Desperate to halt inflation, the Ecuador government dumped its own currency and adopted the U.S. dollar. Although many economists criticized the move because it limited the government's ability to manage the economy, the tactic succeeded in slashing inflation, which now runs about 3% annually -- Ecuador's lowest ever. Interest rates have plunged as well.

Over the past few years, consumers have benefited. Home builders are pouring money into projects in the working-class area south of Quito, where a shopping mall called El Recreo has doubled in size. The highway that climbs a mountain pass to connect the southern neighborhoods with jobs in the city center is crammed with traffic each dawn for the first time in memory.

Banks are handing out credit cards, spurring a consumption boom. Sales of television sets and major appliances are growing at a 35% annual clip at Comandato, one of Ecuador's biggest retailers. Spurred by financing, General Motors Corp.'s annual sales of cars and trucks in Ecuador have quadrupled to 87,000 since 2000.

Against this economic backdrop, Mr. Correa mounted his populist campaign. He played on his close ties to Venezuela's Mr. Chávez and on a nationalist backlash against a U.S. military base used to fight Colombian drug lords. Also a big theme: the growing wealth of the elites who escaped much of the hardship of the late 1990s economic crisis.

A 43-year-old economist, with a doctorate from the University of Illinois, Mr. Correa had considered a presidential run since his university days, his colleagues say. He burnished his populist credentials during a four-month stint last year as finance minister when he declared that half of the oil revenue the government set aside in a "rainy-day fund" for debt reduction could instead be spent now on welfare for the poor.

That prompted a fight with the World Bank, which said the move could undermine the country's creditworthiness, and pressured Ecuador to change course by retracting a Bank credit line. In response, Mr. Correa flew to Caracas to arrange $300 million of financing from Mr. Chávez. Wearying of the conflict, Ecuador's president fired Mr. Correa.

The battle, though, lifted Mr. Correa's profile and powered his presidential bid. When Mr. Chávez called U.S. President George Bush "Satan" during a speech to the United Nations in September, Mr. Correa said he considered the comment an insult to Satan.

But that turned out to be Mr. Correa's political high-water mark. His plans to renegotiate foreign debt payments encouraged foreign investors to sell Ecuador's bonds, creating fears of a return to crisis. His ties to Mr. Chávez created concern as Chávez-inspired policies in Bolivia spawned protests there as well as a fight with Brazil. His popularity took another hit when he hinted that he would ditch Ecuador's link to the U.S. dollar when he took office. Polls show most Ecuadorians view the greenback as the central pillar of the newfound stability.

Mr. Correa, who had written academic papers attacking dollarization, quickly tried to assure voters that he wouldn't tamper with the currency.

Mr. Correa's political problems became evident in the first round of voting in October, where he came in second after leading in most polls to the 56-year-old Mr. Noboa, regarded as Ecuador's richest man. Since neither candidate won a majority in the first round, they must face each other in Sunday's runoff.

In many ways, Mr. Noboa embodies the plutocracy that Mr. Correa likes to rail against. Mr. Noboa inherited his business empire from his father and consolidated his position after a nasty fight with his siblings. He has taken positions well to the right of Mr. Correa, including promising a free-trade pact with the U.S.

Mr. Noboa also has skillfully used Mr. Correa's left-wing rhetoric against him, warning that Mr. Correa would endanger the country's newfound stability. Borrowing a page from conservative campaigns in Peru and Mexico, Mr. Noboa ran television and radio ads linking Mr. Correa to Mr. Chávez, suggesting that the Chávez-style anti-U.S. bravado would bring about ruin for the country by turning the U.S. into an enemy. One TV ad featured ordinary voters saying, "We can't have Chávez meddling in our country."

After his poll numbers sank, Mr. Correa put some distance between himself and Caracas. "Look, Chávez is my friend, but I haven't talked to him in months, and he has nothing to do with my campaign," he said.

Mr. Correa denies he is retreating from his principles. "My positions on the constitution and other things are already well known, so it makes sense to now to talk about new issues. I haven't changed a thing," he said as the SUV he campaigns in zipped between a 7 a.m. television interview and his children's French-language private school.

But that's not the message voters are getting. "Correa is coming back to reality," says Mr. Rivadeneira, the former auto-parts salesman who now has a good job selling Chevrolets. He says Mr. Correa's new campaign pitch is more in line with his own views, and that Mr. Correa may even get his vote. "I don't think anyone wants to risk stability," he says.