Scandalous Brazil

NOT MUCH HAS been going right for the U.S. in Latin America. Mexico and Chile spoke for many countries in the region when they opposed the war in Iraq in the U.N. Security Council. And now Venezuelan President Hugo Chavez, with the support of Fidel Castro, is intent on building a Latin American anti-U.S. coalition.

One bright spot has been Brazil’s economically viable center-left government led by President Luiz Inacio Lula da Silva. But through the summer, a spreading corruption scandal has threatened the country’s financial stability, and that is bad news for him and U.S. interests in the region.

Lula’s Workers’ Party stands accused of illegally financing political campaigns and bribing congressional allies for votes on key issues. Several of the president’s closest advisors have been forced to resign, the party’s leadership has been humiliated and replaced, and impeachment proceedings threaten a raft of its congressional members.

Lula’s role in the debacle remains unclear -- he has not been tied directly to wrongdoing -- but his poll numbers are dropping and so are his reelection chances. It is no longer unthinkable that the scandal could bring down Finance Minister Antonio Palocci, the country’s second most powerful official who is widely regarded as the linchpin of its economy.

It has been a hard fall. Lula took office in January 2003 in a seamless democratic transition from a center-right predecessor. With tight monetary and fiscal policies to control inflation, spur growth and attract investment, the new government quickly gained the respect of the world’s financial community. In 2004, Brazil’s economy grew by 5%, its biggest jump in a dozen years, and it continues to expand this year.

Lula seemed a shoo-in for reelection in October 2006. Internationally, Brazil was considered a Third World heavyweight, with sufficient stature to be grouped with India, Japan and Germany as a top candidate for a permanent seat on the U.N. Security Council.

All of this may help Brazil weather the scandal with a soft landing instead of an economic or political meltdown. Its public institutions over the years have shown considerable resilience, and no one thinks the country’s democratic politics are in danger. As the scandal has widened, Brazil’s economy has remained on an even keel, only lightly shaken.

For the time being, the opposition seems prepared to allow a diminished Lula to finish his term rather than trigger his impeachment or resignation. Nobody wants to provoke -- or inherit -- political turmoil or economic collapse.

There are other scenarios, however, most of them more destructive for Brazil -- and for U.S. interests in the region. Evidence may emerge implicating Lula directly in the corruption and, whether he is forced out or not, the intensified scandal would mean that the country would remain rudderless until next year’s election. Government decision-making would be paralyzed. Foreign and domestic investors, spooked by the turmoil, could decide to withdraw capital, putting Brazil’s still highly indebted economy in a hole.

A slump in Brazil also would put a damper on most other South American economies -- and several are just recuperating from recent busts. Economic dislocations could, in some places, translate into new social and political upheavals. U.S. goals -- stable democracies, prospering market economies, stronger trading partners, effective cooperation to battle drugs and terror -- would be set back. Anti-democratic and anti-market forces would surely gain ground.

The U.S. has been doing what it can to mitigate Lula’s problems. Treasury Secretary John Snow’s applause for the Lula government’s economic policies on a recent visit to Brazil may have been modestly helpful. The U.S. could show its willingness to back a special IMF program to avoid a run on the currency or a sudden stop in investment.

Yet even with the best intentions, there is only so much the U.S. can do, however important Brazil’s fortunes are to American interests. The Workers’ Party scandal is essentially a domestic problem, and it must be solved not by outsiders but by the country’s own leaders.