POPULIST LATIN American presidents (from left: Fidel Castro, Cuba; Hugo Chavez, Venezuela; Néstor Kirchner, Argentina; and Luiz Ignácio "Lula" da Silva, Brazil) continue to voice nationalist rhetoric that concerns foreign investors.

Throughout Latin America in the 1930s and 1940s, government ownership expanded at the expense of foreign investors. Today, with Latin American populism on the rise again, global investors do not have to look too far to find signs that history may be repeating itself.

The resurgence in Latin populism shows no signs of weakening. The recently sworn-in president of Bolivia, Evo Morales, is the latest–and probably not the last–in the new breed of populist leader. In Mexico, Andrés L—pez Obrador has been the frontrunner in this year’s race for the country’s presidency. Ollanta Humala, an enigmatic populist and former military officer in Peru, garnered a slight edge in the first round of the nation’s presidential elections in April by criticizing the country’s elite. If these join the ranks of Argentina’s Néstor Kirschner, Venezuela’s Hugo Chavez and Brazil’s Luiz Ignácio "Lula" da Silva, the populist wave will have washed over tens of millions of Latin American citizens.

ULTIMATELY, the future security of foreign investment in Latin America will hinge on the political climate of each country.

This trend provides global investors with legitimate reasons for both fear and optimism. Earlier this year, Venezuela canceled oil contracts with Italy’s ENI and France’s Total, and even went so far as to seize oil fields. In April, Bolivia’s Morales followed suit, ordering troops to seize the country’s natural gas fields. Hugo Chavez’s increasingly belligerent threats to further nationalize oil operations in Venezuela, the world’s 10th-largest petroleum producer, continue to spook global oil markets, which are already jittery because of events in the Middle East. Yet, while such actions are alarming, they do not necessarily herald a return to the angry anti-American and anti-European populism of the 20th century. Brazil’s Lula, who in the more distant past advocated a debt moratorium and the reversal of privatizations, has proven quite conventional in economic policymaking. In Bolivia, Morales may have seized control of the gas fields, but he has not evicted foreign companies currently operating there. By itself, Bolivia does not possess the infrastructure or expertise to fully exploit its enormous natural gas reserves. Morales’ nationalization of the oil and gas industry may turn out to be more of a renegotiation of the terms of the contracts signed by his predecessors than an expropriation.

Ultimately, the future security of foreign investment in Latin America will hinge on the political climate of each country. It will also depend on whether the neopopulists will evolve to resemble the populists of old, like Argentina’s Juan Per—n and Brazil’s Getúlio Vargas, or merely stick to populist posturing.

Popular Appeals
Populism first emerged in the 1930s in countries such as Brazil and Mexico as a political response to the Great Depression, and later swept throughout Latin America. The original populists were heroes to the urban working class, and villains to foreign investors. Vargas, Cárdenas and Per—n all established minimum wage laws, made it possible for workers to unionize and strike, and created an array of other benefits for the working class for the first time in their nations’ histories.

TOP VIEW The current rise of populism throughout Latin America has alarmed global investors, who fear a return of the industrial expropriations of the 1930s and 1940s. Yet contrary to some recent moves toward nationalization, neopopulist leaders in the region continue to embrace pro-market policies. But how long this will last is anyone’s guess: A downturn in the booming global commodities market could shift the political and economic landscapes for the worse.

Their governments paid for these policies by hijacking a large share of foreign-held assets. Also, rather than raise the taxes required to service their debt, the original populist governments defaulted on sovereign bonds with abandon. Brazil’s Vargas defaulted in 1931 and again in 1937. Mexico, already in default, failed to follow through with the terms of a 1930 debt renegotiation agreement; it settled in 1942, forcing investors to write off some 90 percent of interest and principal. Populist leaders nationalized the gas and petroleum industries that had been built with foreign capital, erected high tariffs and other trade barriers, regulated foreign investors nearly to the point of exclusion, padded the government payroll, ran up deficits and printed lots of money. The foreign firms that survived the first wave of populism earned revenues in currencies that seemed to be in a perpetual decline against the dollar and pound sterling, while seeing their costs rise continuously as a result of local inflation.

The populist legacy took a long time to shake off. First-generation populists used the government to capture their home markets (holding them hostage for domestic producers), arguing that industrialization would occur more quickly and development more broadly. Both democratic and military-authoritarian governments sustained this policy over decades, yielding few benefits despite staggering costs. The economies of Brazil, Argentina and Mexico all evolved around heavy government ownership, absurd levels of price inflation, exchange and capital controls and repeated problems with debt. Foreign investors were hard to find in most of Latin America. The largest multinational corporations, such as auto manufacturers and beverage producers, maintained a presence in the region, but were tightly controlled by host governments.

The neopopulists of today spew rhetoric reminiscent of their forebears: socialist, anti-trade and, in some cases, stridently anti-American. Yet they eschew the inward-facing nationalistic policies so prevalent in the ’30s and ’40s. Generally, neopopulists have sponsored no sweeping nationalizations, expropriation of foreign economic interests or repudiations of debt. Indeed, once in power, they have frustrated supporters bent on aggressively advancing economic nationalism and redistribution. For example, Brazil’s Lula has carefully crafted policies geared toward macroeconomic stability and the maintenance of established neoliberal economic models. Even Bolivia’s Morales has placed experienced businessmen and neoliberal policymakers in his cabinet.

Neoliberal reform began in Augusto Pinochet’s authoritarian Chile in the 1970s and then swept across much of newly democratic Latin America in the late 1980s and 1990s. The sale of government-owned companies attracted investors from around the world. Today, Spain’s Telefonica plays an important role in telecommunications markets in the region. HSBC, Banco Santander, BankBoston and Citibank, among other foreign banks, are now prominent.

Realists on the Balconies
Countless other companies thrive with the backing of foreign investment. Likewise, domestic firms benefit from the new business environment, a fact that ties the hands of new populist governments in many ways. Although critics point out that much of the region’s population has not benefited from economic liberalization, stronger ties to international product markets have, in fact, created new business and employment opportunities and new export interests in much of Latin America.

Admittedly, the rate of Latin American privatizations has slowed dramatically from its peak in the 1990s. Yet there has been little movement by populists to undo the efforts of neoliberal reformers, who opened Latin American markets to imports and capital flows, and successfully privatized many government-owned companies.

PRESENT-DAY perceptions of the benefits and costs of radical populist policies might shift a good deal when the current global commodities cycle hits an inflection point.

The neopopulists are also acutely aware that the original populists came to sorry ends. Their radical economic policies were not sustainable. Per—n, Latin America’s most celebrated populist leader, was undone in 1955, not just by the country’s military, but also by the shortcomings of his economic policies. Today, with vigorous competition in the region’s democratic political systems, economic viability is crucial to political survival.

Openness has accelerated the transfer of technology from abroad and has raised productivity, competitiveness and profits. Corporate governance is improving in many countries, as are government finances, so that firms and states alike are able to secure credit at a lower cost. Foreign investors in Latin America have demanded less of a risk premium of late. The political theater of neopopulism thus stands alongside remarkable economic conditions, at least for the time being. Brazil is in its third year of superlative stock market performance. Rates of return (in dollars) for 2005 on the stock markets in Argentina, Colombia, Peru and especially Venezuela were well into double digits. Inflation is relatively tame under the new populists, especially by historical standards. Fiscal discipline is thus far strong. Argentina and Brazil have settled their accounts with the IMF.

Despite such promising signs, relationships between the Bush administration and the leftist-populist leaders of the region have been tense. There is some frustration throughout Latin America, not with the U.S. role in the region, but rather a lack of U.S. engagement. In the post-9/11 world, Latin America has simply not figured prominently in U.S. foreign policy. Other than the verbal sparring between Venezuela’s Chavez and Washington, the most contentious issue between the governments of the region and the U.S. has been international trade. Indeed, many observers believe that trade policy is the one area where the neopopulists have most visibly pursued their goals. Trade is a thorny question in most of Latin America, and the populist-led countries of South America have actively opposed the creation of the Free Trade Area of the Americas. But this anti-trade bias may be more superficial than real. Brazil’s obstructionism in global trade talks has been motivated more by its goal of seeing the U.S. and European governments reduce their agricultural subsidies than by any sort of a blind opposition to trade. In any case, disputes over trade have not created any stinging backlash against American-owned firms, nor even U.S. products exported to Latin America.

Indeed, exports are crucial to the region’s economic success. Strong export earnings helped speed Argentina’s recovery from default and recession. Soaring stock markets, low levels of country risk in debt markets, higher business profits, expanding GDP and rising employment throughout the region have been driven in good part by exports to Asia.

This context has made it easier for populists to put (and keep) their fiscal and macroeconomic houses in order. A prudent measure on the part of the region’s governments would be to remedy underlying problems of a more microeconomic nature, so that economic expansion might prove more sustainable and more robust. But they have made little or no progress toward removing institutional obstacles to growth: strengthening their property rights–the shortcomings of which now undermine local capital markets and investment; improving woefully inadequate public education; reducing crime and violence; and addressing the sad toll inflicted by bloated bureaucracy. If and when economic times turn tough, more radical economic policies might hold greater political appeal. And if neopopulist rhetoric becomes economic policy, and the new populism starts to more closely resemble the old populism of Vargas, Cárdenas and Peron, foreign investors will need to look elsewhere.

Photography © David Mercado/Reuters/Corbis.