LATIN AMERICAN DIPLOMACY

To some people, Treasury Secretary Paul H. O’Neill is to modern financial markets what the Rev. William A. Spooner was to English syntax in the early 1900s: He has a knack for saying precisely the wrong thing at the wrong time. Yet sometimes he is right on target.

Three weeks ago, he was urging our new best friends in Central Asia to continue their support for our war in Afghanistan. “Security,” he said, “depends on a shared stake in the future of the global economy, ties of trade, investment and enterprise.” This week, O’Neill is scheduled to visit old friends in Argentina, Brazil and Uruguay. They will want to hear how his and President Bush’s vision of a “shared stake” applies to them. What he says and does will be closely monitored throughout the hemisphere and in the global markets because Latin America is in an economic and political meltdown.

Venezuela, the third-largest supplier of oil to the U.S., is boiling with revolutionary fervor stirred up by a president who recently turned to Libya’s Moammar Kadafi for a loan. Paraguay has been paralyzed by rioting spurred by growing unemployment and a powerless leader. Bolivia is flirting with electing an openly anti-U.S. president who admires Fidel Castro, considers “capitalism the enemy of humanity” and wants to establish coca growing as a legal business. Peru’s president recently sacked his two most market-savvy Cabinet officers and is considering backing off free-market reforms. Uruguay, once the Switzerland of South America, has gone from 5% annual growth and an investment-grade credit rating to recession and junk status and is rapidly running out of monetary reserves. Argentina is reeling with social unrest and has had a revolving-door presidency now occupied by a leader who has decided he too must exit before his term is finished. Brazil, sharing borders and economic ties with all these churning countries, faces an uncertain national election in October.

Against this backdrop of political turmoil, financial contagion has begun to raise its ugly head. Latin currencies are sinking almost as rapidly as the Dow Jones industrial average and the Nasdaq. The Argentine peso is down 73% since the start of the year. The Venezuelan bolivar is off 43%, the Uruguayan peso 38% and the Brazilian real 30%. All this against a declining dollar. The purchasing power of Latin Americans and the ability of newly privatized Latin companies and governments to create jobs have imploded.

In this vortex of chaos, O’Neill must talk straight. There is no room for even the most innocent malapropism. He can begin with reinforcing the point that Argentina and Brazil are separate countries. This sounds elementary, but it is an important distinction when Brazil’s political and economic challenges are being broadly, and inaccurately, portrayed as Argentina II. Brazil has serious economic problems, but it has not reached Argentina’s dysfunctional state. And we cannot afford to let it go there.

Argentina is suffering from what has been called “the slowest train wreck in history.” It routinely deferred tough choices until the country now finds itself with only the shell of a functioning economy. This creates an opportunity for O’Neill. He should make clear to President Eduardo Duhalde, to the brave souls who aspire to replace him early next year and to rank-and-file Argentines that the solution to their economic predicament is in their hands: Put serious and committed managers in the Casa Rosada and the governors’ mansions; enforce the rule of law; protect investors; and get the nation’s financial house in order by unfreezing the banking system; establish an independent central bank; and, tempting though it may be, resisting the impulse to use its remaining foreign monetary reserves to buy out disgruntled bank depositors.

O’Neill should also promise that the U.S. will lend financial and other support once substantive changes are made. The four international bankers from Europe and Canada now brokering between Argentina and the International Monetary Fund have the credibility to demand reforms and the power to be helpful. O’Neill should let them do their work without commentary.

In Brazil, a country O’Neill knows well from his days in the aluminum business, he has a very different task. He must acknowledge that Brazil is the watershed country of the region. Representing 41% of the economic output of the Americas south of Mexico and 21% of the population, Brazil is of continental proportions, economically, politically and symbolically. If Brazil turns its back on the economic, financial and political reforms begun by the administration of outgoing President Fernando Henrique Cardoso, it will become indistinguishable from the rest of struggling Latin America. Should Brazil sink, President Bush can kiss goodbye his goal of using the negotiating authority he so artfully secured from Congress to complete a Free Trade Area of the Americas.

Were Brazil to withstand the tide, however, it could serve as an anchor for drifting Latin economies, saving the day for market-friendly economic organization backed by the rule of law and expanded trade. In the heat of a national election, it is too much to expect any Brazilian presidential aspirant running against the incumbent party to publicly declare he will support whatever solutions the outgoing government negotiates with the IMF and other creditors to stem the slide of the nation’s currency and economy. The two most prominent opposition candidates, Luiz Inacio Lula da Silva of the leftist Workers Party and Ciro Gomes, who leads a coalition of center-left and right parties, have more to gain politically from railing against the economy’s current pathology than from supporting preelection solutions.

Under such circumstances, O’Neill should deliver a simple, straightforward message to Brazilians: The Bush administration will work with whoever wins the presidency and is eager to do so. He must refrain from even the slightest hint that the U.S. has taken sides in the upcoming election and, instead, proclaim loudly and clearly that whatever issues divide us at the moment, the U.S. believes our security rests on working with Brazil and its neighbors to achieve a shared prosperity. And that shared prosperity will only flow from policies jointly developed by the “bookends” of the hemisphere, the U.S. and Brazil.

Recently, O’Neill said that “I’m constantly amazed that anybody cares what I do.” If he thought his words and deeds were watched before, wait until he experiences Latin America and the region’s hunger for U.S. understanding, attention and support. He ain’t seen nothing yet.