As he reflected on the ironies of his first term, Ronald Reagan must have found it remarkable that so many difficulties had arisen in what he thought of as America’s front yard. In comparison, the 1970s must have come to seem almost idyllic, at least on the surface; Mexico, Brazil and Venezuela had grown and prospered, the Panama Canal issue had been resolved. But then a double crisis—conflict in Central America and near bankruptcy almost everywhere—exploded just as Reagan’s watch began.

II

Of the two, Central America looked to be the bigger headache at the start of 1984. The debt problem was, to most Americans, an ominous but ill-understood technical exercise; Central America was quite another matter. With the presidential election campaign about to move into high gear, there was painfully little to show for the first three Reagan years. In El Salvador, the war was stalemated. The Sandinistas were consolidating their grip on Nicaragua. The economies of traditionally democratic Costa Rica and newly democratic Honduras were in a shambles. Guatemala had experienced one of the most repressive periods of its history. The Administration was vulnerable to a Democratic attack for failing to solve the Central American puzzle in its first three years.

The President decided to turn for advice and counsel to a national bipartisan commission, chaired by Henry A. Kissinger. Its report, submitted on January 10, 1984, concluded that Central America was indeed important to the United States, but circumstances there were ominous: a severe economic decline and "war and the threat of war" almost everywhere: "The hemisphere is challenged both economically and politically. While the double challenge is common to all of Latin America, it now takes its most acute form in Central America."

The report identified Nicaragua and El Salvador as the obvious flash points. The commission went beyond Administration policy to urge a negotiating effort to bring Nicaragua into a regional settlement based on the 21-point agreement of September 1983 among the Contadora countries—Mexico, Colombia, Venezuela and Panama. As to El Salvador, the commission emphasized the need to incorporate the insurgents there into the political life of the country, but rejected power sharing, and urged that the President reinstate the link between progress on human rights and U.S. aid to that country (though the chairman and several members warned against making conditions on aid so strict as to risk the survival of the government).

The commission’s most important contribution was to lift the domestic debate over Central American policy above the immediate and the tactical to the strategic and the conceptual. To that end it said two unconventional things. First, it emphasized that progress was a seamless web—that there could be no security without growth, and therefore no simple, one-dimensional military solutions. A coordinated effort on all fronts, economic, political and social, as well as military, was essential to success on any.

Second, the commission advanced the view that the engagement of the United States in Central America should move from the bilateral onto the multilateral plane. The conflict was not just a matter between the United States and the Central Americans. It engaged the concerns of other nations, most particularly the region’s two closest neighbors, Panama and Mexico.

The commission therefore proposed the quick injection of emergency aid to stabilize the situation, and an ambitious longer-term development program under multilateral auspices. That program would link economic modernization, political legitimation and social reform to outside assistance adequate to bring living standards in Central America at least back to 1979 levels by the end of the decade. The commission calculated that this meant fresh external financing of about $24 billion by 1990. Of that, the United States should commit itself to $8 billion over the next five years. Taking a leaf from the experience of the Alliance for Progress, and something from the Contadora process, it proposed that the effort be a cooperative one, under the supervision of representatives of the regional states and such other nations as were prepared to make a contribution to Central American development.

The commission recognized that such an undertaking would represent a considerable increase—by some measures, a virtual doubling—of the nation’s commitment in the region. Yet it concluded that, together with adequate military help, the aid effort was an essential element in what was certainly the best, if not the last, hope to meet what it saw as a challenge to vital national interests in the home hemisphere.

The commission’s aid package was embraced by President Reagan, who dubbed it the Jackson Plan in honor of the late senator who had first argued for a bipartisan approach. The executive branch sent the package to Congress with a warm endorsement, though one which did not reflect the commission’s effort to make American diplomacy in the region more multilateral. Congress responded by authorizing one year’s economic aid.

In the end, the commission’s report had little effect on the 1984 political campaign. The President occasionally invoked the Kissinger name in defense of Administration policy. In the primaries, Walter Mondale moved to the left, promising to stop what he called the "illegal war" in Nicaragua. After the San Francisco convention, however, the Democratic candidate veered off in the opposite direction, surprising some of his adherents with his call for a "quarantine" if the Sandinistas did not improve their behavior. In the end, the hopes of Democratic strategists that Central America would persuade the voters that President Reagan was reckless in foreign affairs had collapsed. The 1984 campaign made no real contribution to a definition of the issues in Central America or of the ways the nation should address those issues.

III

One thing had become clear by the year’s end: the Sandinistas were a frontal challenge to the Administration’s foreign policy. The Soviet Union had chalked up no gains elsewhere in the hemisphere in 1984, in spite of the rift between the United States and its Latin friends during the Falklands War two years earlier. The failure to block American missile deployments in Europe, to break out of the quagmire in Afghanistan or to gain much ground in the Middle East all stood in marked contrast with the more interesting, and less risky, prospects for Moscow in Central America. Nicaragua was one corner in the world where Marxism-Leninism seemed to be on the march, consolidating its influence, threatening by example and growing military power to spill over into neighboring countries. The fact that this was occurring so close to home only made the contrast the more galling for U.S. policymakers.

In Nicaragua, the economy was in steep decline, as even the Sandinistas were forced to admit. There were shortages of the most common necessities. Nevertheless, on January 14, 1984, to the surprise of Washington, the regime announced that national elections would be held; talks were initiated with the political opposition over terms for its participation. The negotiations ended in stalemate—in spite of the late involvement from Rio de Janeiro of the Socialist International. Voting went forward in early November without the Coordinadora, the most moderate and presumably the most popular of the opposition groups. Junta leader Daniel Ortega was elected president, but by less than two-thirds of the vote (while a good quarter of the population abstained). It was not much of a down payment on the Sandinistas’ promise of pluralism in Nicaragua.

Nor did the Administration’s efforts to dislodge or alter that regime generate any very decisive results in 1984. Compared to the sanctions directed against Cuba and Libya, for example, the economic pressures were ambivalent—no aid, but no cutoff of trade—and produced classically ambivalent results. Popular dissatisfaction rose, but the Managua authorities responded with an even more strident anti-Americanism, laying the blame for all difficulties on Washington.

The military effort was another matter; it was scarcely half-hearted. To some it almost seemed that by 1984 the Central Intelligence Agency had become the chosen instrument of Administration policy in Nicaragua. And, whatever might be said about the purpose of the exercise, in execution it ranged from ineffective through unfortunate to counterproductive.

As the year began, the last shreds of deniability had been torn away from America’s support for the armed opposition; what little remained was dissipated in the course of 1984 in a flood of leaks, including revelations from within the insurgent ranks. Congress had stipulated in 1982 that U.S. assistance to Nicaraguan rebels was not for the purpose of overthrowing the Managua government. By 1984, it was still possible to argue from the perspective of Washington that the effort distracted the Nicaraguan armed forces and, in the end, might persuade the Sandinistas to negotiate seriously. But it was hard to believe the official version: that the guerrillas themselves were defending El Salvador, or fighting to protect a country to which they had no loyalty and had probably never seen. So Congress was engaged in an open debate for most of 1984 over whether to continue the covert CIA funding. The Kissinger commission’s report, which had not attempted a collegial judgment on this aspect, had no calming effect—and did not mask the fact that the United States was supporting a military uprising against a recognized government with which Washington was simultaneously carrying on conventional ambassadorial relations.

The paramilitary effort within Nicaragua was backed by an unprecedented U.S. military display in neighboring Honduras—featuring the stationing of U.S. forces, the construction of airports and ground facilities, combined maneuvers, and intelligence-gathering on a scale never before seen in the hemisphere, even during the prelude to the Bay of Pigs. Then, when in early April it came to light that the United States had been assisting the anti-Sandinista forces in laying mines in the approaches to Nicaragua’s harbors, Managua was not the only world capital to react. The news caused a storm in Congress. Support for continued aid to the Nicaraguan opposition collapsed. Senate Intelligence Committee Chairman Barry Goldwater publicly blasted CIA Director William Casey for failing to disclose the operation.

Nicaragua formally denounced the paramilitary effort before the World Court in The Hague in April. Forewarned, and mindful of the fact that the United States was one of a few nations which had accepted the compulsory jurisdiction of the court, the Administration tried to withdraw. The effort failed as a legal tactic; on May 10, as a preliminary measure, the World Court, for the first time in its history, ordered the United States to respect the sovereignty and political independence of another country. In December, in the face of vigorous U.S. objection, the court ruled that it had jurisdiction and would proceed to the merits of the case.

The decision was a political setback. It allowed critics to charge that President Reagan was prepared even to abandon the rule of law which had been the very essence of Wilsonian idealism in American foreign policy. The propaganda advantage at The Hague was Nicaragua’s by a wide margin. And there was no prospect for relief in the months ahead. The court’s determination to take jurisdiction and weigh the charge that the United States was violating international law by using force against another state posed a particularly nasty issue for the Administration, and one which would have repercussions beyond Central America—especially as the United States decided to turn its back on the World Court altogether.

And there were still more recruits to the legion of Central American troubles before 1984 ended. In November it was revealed that the CIA had written a manual for the Nicaraguan guerrillas seeming to countenance assassination and taking for granted that the insurgent effort was aimed at overthrowing the regime in Managua. This was followed by a leak on U.S. election day, from within the executive branch, that advanced MiG aircraft were on their way to Nicaragua aboard a Soviet cargo ship. The uproar over the manual stirred apprehensions that the CIA was succumbing to its old instinct for dirty tricks in violation of congressional and executive branch restraints. The report about the MiGs was never confirmed, and the secretary of state denounced the leak as "criminal." But the incident, like so much of the CIA paramilitary effort in 1984, played straight into Sandinista hands.

IV

By year’s end, the Administration was at an awkward crossroads. Within the CIA itself, as well as in the press and Congress, there were growing reservations about "Casey’s War," and the attempt, as some saw it, to use an intelligence institution for paramilitary purposes. Moreover, covert military operations, some thought, did not fit with the increasingly open character of American foreign policy in the 1980s. There was even the suggestion that, given the likelihood that any major covert operation would not remain covert for long, almost no secret military effort in Central America was feasible.

In any event, there was strong indication that the effort to move Nicaragua primarily by the application of raw military pressure, through armed opposition within and American military maneuvers without, was coming to a dead end as 1985 began. Congress had determined in 1984 that further aid to the Nicaraguans fighting the Sandinistas should cease unless it legislated new approval by March 1985; the chances were fairly low that that consent would be given. Even the new chairman of the Intelligence Committee, Senator David Durenberger (R-Minn.), announced his opposition.

There was something ironic in all this. For, while opposition to the covert war had grown, so too had opposition to the Managua regime. Indeed, what sympathy the Sandinistas had enjoyed in the first few years after overthrowing Somoza’s dictatorship was well nigh gone. Thus, almost any other anti-Sandinista policy would have enjoyed popular support in the Congress.

The covert military pressure had not been without results. It had served to interdict some of the arms flow to El Salvador and to blunt the offensives there in 1983 and 1984. But, as the contras themselves were badly divided and had no charismatic leader, U.S. assistance had not precipitated the popular uprising in Nicaragua that some optimistic covert operatives had predicted. Nor had it induced the concessions that the State Department had hoped for from the Sandinistas. The regime was stung by the raids and fearful that more was on the way—as witness junta leader Daniel Ortega’s warning to the U.N. General Assembly in October that the United States was about to mount an invasion. But the Sandinistas were not soon to be dislodged by force alone.

Managua’s intelligence and military capabilities were far superior to those of the armed opposition and were greatly bolstered by a substantial flow of new Soviet military hardware in 1984. The consequence was that the diplomatic opportunities to exploit the military pressures after the invasion of Grenada in late 1983 had been considerably dissipated a year later. At the end of the President’s first term, U.S. paramilitary pressure was producing more and more embarrassment in Washington and less and less intimidation in Managua.

There was no evidence at the start of the second Reagan term that the Administration had pieced together a credible new strategy. Indeed, the evidence pointed the other way. The impression was of an Administration in disarray, resorting to competitive leaking in the absence of policy decisions. No great difference of opinion was discernible in the Administration—or in Washington or in the country—over ultimate objectives, if a negative can define an objective. As Administration spokesmen summed it up: no more Cubas, but not another Vietnam either. In other words, opposition to the entrenchment of a second Marxist regime in the Americas, but no willingness to risk another war which would divide the nation.

Washington was painfully aware that an invasion of Nicaragua would produce strong reactions in Mexico and throughout South America, and would significantly set back U.S. interests. Managua, in spite of its recurring alarms, had been exquisitely careful to provide no pretext for an invasion; nor was there much prospect that it would respond to provocations from Honduras in 1985 with a lurch across the northern border. Though the Grenadian invasion had suggested to many that the President might try something similar in Nicaragua, the odds at year’s end for a frontal U.S. assault seemed low.

The disinclination to use American force reflected a broad national uncertainty about the nation’s interests in the region. Not that many Americans found anything to admire in the Sandinistas. But, in spite of the Kissinger commission, there were also not many who fully grasped the strategic importance of Central America itself. It was easy enough to see that the United States would have something vital at stake if Panama or Mexico, at either end of the isthmus, were threatened. But Mexico, by most accounts, had emerged from its financial purgatory, and Panama was moving, if somewhat uncertainly, from rule by the Guardia Nacional to the civilian presidency of Nicolás Barletta, in what could be an authentically democratic chapter in that nation’s history.

There was thus a reluctance in the United States to believe that the fire in Central America would spread, in part because it had not during the first four Reagan years, in part because U.S. experience in Southeast Asia since 1975 had not created a strong belief in the domino theory, in part because Central America’s anguish seemed so particular to its special circumstance and history. The President had also contributed to this sanguine attitude. Revived American confidence about the nation’s prospects in the world reinforced that strain in the American character which tended to assume that time, reason and good will could erode most international hostility. Thus, if America was standing taller in the world after Ronald Reagan’s first term, it did not have a crusader’s sword in its hand, at least not in Central America.

V

How to steer a course between the threat of another Cuba and the risk of another Vietnam had generated an increasingly bitter and public dispute within and between the foreign affairs agencies. The CIA advocated more of the same, arguing that the paramilitary pressures had been responsible for whatever conciliation Managua had displayed in 1984 and that the secret war, even if it did not produce a military victory, might yet split the Sandinistas or precipitate a popular uprising. Some in the Defense Department suggested a more imaginative course, breaking diplomatic relations with Managua and openly recognizing the insurgents as a legitimate government.

Most in the State Department, on the other hand, argued for a redoubled negotiating effort. In a surprise visit to Managua in June 1984, Secretary of State George Shultz had opened a bilateral negotiating channel that continued between Ambassador Harry Shlaudeman and the Nicaraguan deputy foreign minister, Victor Hugo Tinoco, into the new year. These talks were intended to move in cadence with the Contadora discussions. The two negotiating tracks presented the best chance of finding out whether it was possible to arrange a tolerably enforceable system of containment of Nicaragua, a reduction and stabilization of the arms in the region, and something tangible in the way of guarantees to the Nicaraguan political opposition. Peace abroad and pluralism at home might over time permit a more open and less expansionist regime in Managua, at least so the State Department contended.

But a solid block of opposition within the Administration—to say nothing of the conservatives in Congress—opposed the accommodationist implications of the State Department’s negotiation policy. First, it was argued, the world lived by a double standard; totalitarian regimes do not abide by international agreements, while democratic ones feel obliged to honor them. Second, a deal would legitimize the Sandinistas. Third, almost any Washington-Managua accord would have to abandon the insurgents, who had risked much in reliance on U.S. support, and this would send precisely the wrong signal to other friends of the United States around the world.

The Cuban example was also cited as a warning. The Cuban Missile Agreements of 1962, as supplemented by the Kissinger-Dobrynin exchange over a Soviet naval base in 1970, had been the example of how to defuse superpower competition. By the end of President Reagan’s first term, some in the Administration had begun to suggest that the 1962 arrangement was, in fact, quite unfavorable. Their argument was that the agreement, by explicitly banning only the installation of offensive weapons in Cuba in exchange for a no-invasion pledge by the United States, had by implication authorized almost everything else, while the United States remained bound by its own promise. Thus, it was argued, Washington had to acquiesce in the colossal expansion of Cuba’s power between 1970 and 1984, its installation of world-class antiaircraft defenses and its projection of military might into Angola, Ethiopia, Yemen and, finally, Central America.

The opponents of the negotiating option were also skeptical of the Contadora process. The Contadora countries and the Central American nations, had, with much travail, followed up the September 1983 Twenty-One Points with drafts in June and then in September 1984 of a treaty, or "Acta," to be signed by the five Central American governments. The Acta contained elemental commitments of nonintervention, arms control and internal democratization. Nicaragua noticed that the draft would stop U.S. military aid to both the government of El Salvador and the Nicaraguan opposition on the spot, while postponing any reduction of existing arms to later leisurely talks, and embraced the proposal immediately and as drafted. Washington, on the other hand, reacted with a huff. Once again, the propaganda initiative was Managua’s.

Those who opposed negotiations claimed that the incident revealed the inherent flaws of multilateral bargaining. To the contention that such a negotiated regional settlement, even if imperfect, would at least enjoy the support and endorsement of the regional powers—who after all were closer to Central America than the United States—the no-negotiation school responded that even the drafting of the Acta had proved almost too much for Contadora; to expect any real policing of Nicaragua’s weapons stock by Mexico and the others after the signing of the Acta was hopelessly naïve. Furthermore, they contended, the Contadora countries seemed convinced that the real danger was not Marxism, but a new war; the greater the U.S. military involvement, the higher the risk of war.

In this way the governmental debate had produced by year’s end a fair definition of goals—but a stalemate over means and methods. The stage was set for what was likely to be a bitter struggle over American foreign policy in the region in the second Reagan term.

The disarray polarized popular concerns. Liberal Democrats charged that the Administration would never bring itself to a negotiated compromise. They saw the call for pluralism in Nicaragua as a smokescreen (as proof they cited Washington’s attitude toward the Pinochet regime in Chile). The President, they charged, would never be satisfied until the Sandinistas signed their own political death warrants. The United States should ease up on efforts to change the internal political arrangements in Nicaragua and settle for whatever security guarantees it could get. Conservatives, on the other hand, argued that Central America was the acid test for Reagan’s foreign policy; they saw immediate Nicaraguan democratization as indispensable to peace and threatened to make the adoption of a hard line on Nicaragua the litmus test for nominees to high diplomatic posts in the second Reagan term.

The implications of the struggle extended beyond Central America. For the argument in fact mirrored larger East-West issues—whether containment was enough; whether the West, safe behind an adequate security shield, should look to its economic, political and moral strengths to work their corrosive effects on Soviet ambitions over the long term, or whether, on the other hand, Washington should finally conclude that agreements served no purpose and that moderation in Moscow—and in Managua—could be expected only under pressure.

Thus was the Nicaragua issue defined as President Reagan began his second term.

VI

It was Cuba which had made Nicaragua so significant for the United States. Cuba, the only Latin nation dedicated to regional revolution, conducting a world foreign policy, defining itself by its opposition to the United States.

For most of the first Reagan term, U.S.-Cuban relations were frozen. Cuba had made no effort to mask its sympathy for the Sandinistas, and had been the primary agent of the massive military buildup in Nicaragua after 1979. Then Secretary of State Alexander Haig had called Havana the "source" of Central America’s troubles. Such rhetoric did not flow trippingly to the lips of his successor, but there was no evidence of movement in the relationship of Washington and Havana for much of 1984. Then, almost as the year came to an end, Cuba and the United States announced an agreement. The 2,700 Cubans who had come to the United States as part of a mass exodus from Mariel Harbor in 1980, but who, either because of criminal or psychiatric disqualification were excludable under U.S. immigration law, would be returned to Cuba. In exchange, the United States would reinstitute regular immigration for Cubans to the United States.

The question immediately arose whether the new agreement hinted at a broader settlement between Washington and Havana in the second Reagan term. Could the Administration, now free of reelection concerns, contemplate a diplomatic opening to Cuba in 1985 on the model of Nixon’s China achievement? Would this reshuffle the Central American deck?

The odds were low. Crusades end when the crusader is either defeated or becomes exhausted. From all the evidence, Fidel Castro’s self-image as hemispheric leader is undiminished. He also continues to enjoy a Soviet subsidy, now inching toward $4 billion each year. Both parties to that bargain receive full value. A Cuba less hostile to the United States could not expect such favors. For the Soviet Union, Cuba’s support for those who would reduce U.S. influence carries a low risk. Moscow’s prestige is not on the line in Central America; it can disclaim responsibility. And a more conciliatory attitude would tarnish Castro’s revolutionary image, which, after all, underpins his pretensions to a world role and to ultimate historic meaning. In sum, the Mariel agreement did not look like a harbinger of any basic change in Cuban-American ties.

VII

In El Salvador, in 1984, events took a more positive turn. For much of President Reagan’s first term, that nation had been perilously close to collapse. The hopes for reform spawned by the military coup of 1979 had been mostly unfulfilled; many non-Marxists had concluded that there was no place for them in the government; a very few had even joined the insurgents. The nation was bankrupt, its economy torn by guerrilla violence and capital flight. Murder remained a principal instrument of politics. The death squads went about their work. The Administration persisted in the effort to nurture a democratic center, to its permanent credit, and in spite of skepticism from both the left and the right. But for the first three Reagan years the prospects in El Salvador were distinctly unpromising. As 1984 began, Congress, though reluctant to take responsibility for a complete cutoff, was moving to adopt human rights conditions so stringent as to threaten the continued U.S. aid program on which the Salvadoran economy depended.

Instead, the year brought a dramatic change of fortunes. The long effort began to pay off. In elections in March and May, which even the insurgents had difficulty faulting, José Napoleón Duarte emerged a clear victor over his right-wing opponent, Roberto D’Aubuisson (though the opposition gained a majority in the National Assembly). Duarte’s post-election visit to Washington confirmed the shift in mood; Congress responded with a new show of affection and support. The murderers of four American churchwomen were tried and convicted in El Salvador and, in any case, there was a general willingness to accept that the new president was not responsible for the continued, if somewhat lower, level of activity of the death squads, and to take on good faith his own claims that he was doing all he could to restore law and reinstitute order. A $70-million supplemental military appropriation was approved in August, thus bringing total military aid to $196 million for 1984—an amount equal to the previous three fiscal years combined.

Duarte entered his presidency with a strategy. First he turned to the right, strengthening his hand with the military leadership and separating them from the reactionary extremists. The effort, which enjoyed strong but tactfully expressed American backing, may have worked more rapidly than the new president thought possible. Shortly after the election, he and his close associates had announced he would not talk with the rebels in his first year in office. By the time he came to New York to address the U.N. General Assembly on October 8, however, he was ready, with the backing of Defense Minister Carlos Eugenio Vides Casanova, to announce the opening of direct talks with the insurgent leadership.

The first meeting took place in La Palma, El Salvador, on October 15; it sparked a national outpouring of the well-nigh universal desire for an end to the killing. But the high initial hopes were not realized. At later talks in December the rebels reaffirmed their insistence on power sharing, a fundamental reordering of the central government’s military structure and a merger of the two armed forces. Guillermo Ungo, designated political spokesman for the insurgents, said that in El Salvador there are two nations, two forces, two powers. The Duarte government, he insisted, must recognize the opposition on terms of virtual equality.

Though the government and the insurgents were far apart at year’s end, the Reagan Administration was doubly fortunate with developments in El Salvador in 1984. First, Duarte’s election, the improvement in human rights and the peace talks disarmed the liberal Democrats; their campaign demands that further aid be conditioned on the willingness of the Salvadoran government to negotiate had been met, and they were not tempted to go further and urge a rebel share in government power before the insurgents won that share at the polls. Second, Duarte changed European opinion; after the elections in El Salvador it became far more difficult for Europeans to attack America for supporting the right.

By the turn of 1985, furthermore, the military situation had improved markedly. The rebels had had no major victories for months, and were in some disarray. The war was confined to the eastern provinces; the tempo of city life and commercial activity was resuming, slowly but palpably.

Nevertheless, the conflict was far from over. There was no prospect for a quick bargain to end the killing and reintegrate the rebels into the political processes of the nation—only for a long, slow, slogging effort to resuscitate the economy, create opportunities for productive private foreign and local capital, rebuild the highways and powerlines, and reinspire land reform. The need for a sustained U.S. commitment, which the Kissinger commission had tried to illuminate, remained, and the Administration knew it. Congress had approved only one year of economic aid on the last day of its 1984 session. The question of a long-term pledge was left for the 1985 legislative term, and the new year would determine whether the American people were ready for such a commitment, even in the face of the remarkably good news from El Salvador in 1984.

VIII

If the quarrel over the U.S. role in Central America was noisy and inconclusive, there was at least a debate. This was not true for all of Latin America. For 1984 the rest of the region was in mid-passage toward a future heavy with consequence for the United States. But the struggle in the rest of Latin America earned far less attention than that in Central America—except on the financial pages.

Again, as in the case of Central America, troubles had arisen just as Ronald Reagan became President. Latin America had made remarkable economic progress through the 1970s, so rapid, in fact, as to create a general impression that internal development and international lending could continue indefinitely. U.S. bilateral aid to Latin America dwindled to almost nothing in the late 1970s, and no official thought had been given to safety-net mechanisms to sustain growth should the international environment turn sour.

The hemisphere and Washington were unprepared for the second oil price increase, the explosion of international interest rates and the drying up of capital lending by the private banks. Bowing to the inevitable need for internal adjustment and help from the International Monetary Fund (IMF), Latin America went into economic reverse gear in 1981—and seemed to be stuck there through 1982-83.

The consequences in human terms were fairly hideous—for the poorest, declines in nutritional standards and a rise in the numbers scavenging garbage; for all, the slashing of public expenditures for schools, housing and medical services, and a general business recession. Employment, output and standards of living were down in almost every Latin country in every year of the Reagan presidency. (And unemployment would have been even more severe but for the decision in Brazil and other countries to reduce nominal wage increases below inflation.) And yet there was no explosion and no swing to radical extremes—nasty demonstrations in Argentina, Peru and the Dominican Republic, for example, but no rending of the political fabric.

Indeed, just as it was passing through its most severe economic crisis in modern history, Latin America was also experiencing a remarkable resurgence of political democracy. Two decades earlier, in the golden glow of the Alliance for Progress and Latin America’s love affair with President Kennedy, freedom went into decline; in South America, only Venezuela and Colombia were able to preserve elected civilian governments through the 1960s. In contrast, by 1985 the measure of freedom of the people of Latin America was higher than at any time since independence. In all of South America, only Chile, Paraguay, Guyana and Suriname remained under authoritarian rule.

The coincidence of political democratization and economic discipline and distress did not fit traditional stereotypes about Latins in the United States. This may explain why America’s response was so wondering, so distant from the reality of what was occurring south of the troubled isthmus. In the United States authoritarian regimes had been accepted as Latin America’s natural fate; the tougher the economic circumstance, the more authoritarian the regime. No government could hold an austerity line, it was thought, unless it was prepared to use force. The early 1980s ended that double standard. Latin Americans were proving that they had as deep an aspiration and as strong a claim to representative government, guaranteed personal rights and the elimination of arbitrary power as North Americans, Europeans and Japanese.

In fact, it was the progress of Latin America in general, and Brazil and Argentina in particular, toward more free political systems that may have made the new austerity less incendiary. Had military rule continued in those two countries, or had Mexico, Jamaica, Venezuela, Peru or Ecuador been controlled by illegitimate regimes in the early 1980s, the likelihood of explosion would have been considerably higher.

In Brazil, the change was positively majestic. For much of 1984, the government party made periodic efforts to push its candidate, Paulo Maluf, on the electoral college. All were turned back, thanks to an electoral court which discovered the virtues of judicial integrity none too soon and to a military president, João Baptista Figueiredo, prepared to sack those of his fellow generals who threatened to block the process. Thus, at almost the very moment Ronald Reagan was to be inaugurated for a second time, Brazil would celebrate its swing back to democracy by electing Tancredo Neves, the first civilian president of Brazil since 1964 and a member of the opposition at that. And to mark the new era on the economic front, late 1984 forecasts suggested that Brazil would enjoy positive growth of over four percent, with another strong trade surplus of some $12 billion in 1985.

But the good news for Washington was not merely the swing toward democracy. The electoral process was producing new Latin leaders who, taken together, were a surprising cut above the historic average—less corrupt than their predecessors, more competent to deal with the economic challenge, more prepared for a new tone in the U.S.-Latin American relationship. Too often in the past the United States had been faulted by its southern neighbors both for intervening and for not intervening—for doing too much and at the same time attempting too little. An increasingly democratic Latin America seemed also to be working its way to a more mature view of the United States.

Considerable progress was also made in 1984 on the international debt crisis, which was so predominantly a Latin American phenomenon. Mexico and then Venezuela negotiated agreements in principle with the private banks, based on domestic adjustment programs blessed by the IMF, for stretching out their repayment obligations well into the 1990s. The banks agreed to forego up-front commissions and to accept interest-rate spreads significantly lower than those on the 1982-83 Latin American debt restructurings. The IMF undertook new responsibilities for monitoring the programs. These two arrangements set a pattern, and Brazil could now look forward to a similar understanding when it came time to renegotiate its debt. In consequence, the mood at the September meeting of the IMF and World Bank was almost euphoric in contrast with the general pessimism over the financial prospects for Latin America in 1982 and 1983.

IX

But the Latin debt crisis did not end in 1984. Even restructurings and export surpluses in the major countries would not guarantee success if the governments could not at the same time improve economic conditions for their citizens. No nation in Latin America had yet proven that it could combine strong growth with international solvency in the 1980s. None had even fully implemented the promised economic reforms; the full effects of those were still to be felt. Even with restructuring and successful adjustment, Latin America’s debt service obligations will represent a large fraction of its total export earnings for the rest of the decade.

And some countries had not moved so far back from the edge of disaster as Mexico and Brazil. New to the democratic experience, Argentina had for much of 1984 resisted the adjustment measures accepted by the other two. It was only in September of 1984 that President Raúl Alfonsín could bring himself to accept the IMF’s terms, and only in the last days of December that the nation, the foreign banks and the IMF came to a three-way undertaking to provide fresh outside capital in exchange for stringent restraints on public sector deficits, domestic money growth and inflation—commitments that only the most optimistic expected Argentina fully to meet in the months ahead.

Peru’s President Fernando Belaúnde Terry, though an elected civilian, faced severe challenges. The Maoist Shining Path movement was embarked on the most vicious campaign of domestic terrorism in South America. Like Alfonsín, Belaúnde had refused austerity and adjustment, and opted instead for continued social and infrastructure spending, with a third of the budget earmarked for the army. By year’s end, Peru seemed to be falling into the black hole of social chaos predicted for Latin America ever since the financial crunch began. The prospect of presidential elections in 1985 offered some hope, but—for 1984 at least—Peru had demonstrated that democracy did not automatically guarantee economic success.

Such was also the case in Bolivia, where inflation rates of over 2,000 percent set a record remarkable even for Latin America. An elected but weak president, Hernán Siles Zuazo, was unable to control trade union featherbedding demands and could only look in vain for a large foreign aid package to finance his way out of trouble. In Chile, with close to the largest per capita international debt in the world, unemployment soared; one out of three people was out of work or employed only part-time.

In short, though democracy may have made progress possible, debt and recession could yet turn the political clock back in Latin America. Indeed, Central America could be seen as a warning of what might develop in the rest of the hemisphere if no longer-term solutions are found. The stakes for the United States in Central America would seem small indeed compared to the implications of a collapse, or a lurch into Marxist revolution, in one or more of the big South American countries. The likely inability of Latin America to service its collective debt obligations and grow rapidly at the same time was as direct a challenge to the international interests of the United States as any to come out of the hemisphere in the century—surely as serious as Castro’s rise to power in Cuba, the battle over the Panama Canal or the rise of the Sandinistas in Nicaragua. The international financial system was hostage, the geostrategic stakes around the world sizable. Yet, through 1984, the Administration passed up its opportunities to develop a more forward policy.

It was reluctant to see the economic crisis in political terms. In contrast to its heavy engagement in Central America, Washington seemed to think that Latin America’s financial problems should be left as far as possible to the private banks and the IMF—with an occasional (and admittedly crucial) bridge loan from the Treasury Department to smooth things over.

It could not be said—though some Administration officials came close to saying it—that the United States had no responsibility for the problems. International interest rates went through the roof in the early 1980s in part because of the dazzling incompatibility of Washington’s fiscal and monetary policies. If economic decisions in President Reagan’s first term were largely determined by domestic considerations, the consequences were certainly international. Brazilian treasury officials claimed, for example, that the deterioration of Brazil’s terms of trade from the overvaluation of the dollar, combined with the additional interest charges resulting from inflated international interest rates, had added $25 billion to that nation’s external debt.

Though the 1984 restructuring-cum-adjustment agreements were made in form between the private banks and the Latin debtors, they involved in practice large public policy decisions—how tight to turn the economic screws, how much to expand the flow of fresh financing. The United States was engaged in those decisions, not as part of a long-term strategy defined through diplomatic discourse with the nations whose futures were so vitally affected, or even through the established foreign policy departments, but on an ad hoc basis. The key Administration participant was not the State Department, or even the Treasury, but Federal Reserve Chairman Paul Volcker, who was largely responsible for defining U.S. attitudes toward the debt renegotiations, speaking for the United States in the inner councils of the IMF and determining how far to press the banks for new capital, lowered commissions and flexibility on stretching out repayment.

This curious arrangement had helped the world through the first stage of the crisis. The U.S. government had been instrumental in staving off disaster for Mexico and Brazil, in fact. But there was no evidence that Washington was preparing anything more systematic for the longer term. On the policy level, it had concentrated in 1984 on conducting a successful rear-guard action against the effort of some Latin American countries in the so-called Cartagena Group to construct a common debtors front. But it was slow to suggest anything positive or to help chart a course to 1988, even after the reelection of President Reagan. Washington’s rhetoric about nurturing the democratic trend in Latin America was impressive enough. But the words—and certainly the deeds as well—lagged behind the reality of the region’s economic difficulties, to say nothing of their political significance.

Democracy picked up momentum in Latin America in the early 1980s. This was more than an aberration, or a temporary swing in the pendulum. The causes were fundamental—a decade of economic advance, the containment of the subversive threats of the 1970s, in Argentina the sobering after-effects of the Falklands War, a willingness of the military to go back to soldiering, a less demagogic attitude among civilian politicians in the region. But systemic as these factors were, a reversion to authoritarianism was by no means inconceivable; the political progress of Latin America in the early 1980s was not irreversible.

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The United States is scarcely a disinterested observer; what it does will directly affect Latin America’s future. At a minimum, the United States must be willing to give greater weight to the international repercussions, particularly in its own hemisphere, of its national economic policies. The American budget deficits may on balance have been beneficial to Latin America during the first Reagan term. But the consequences of another four years of continued massive U.S. borrowing could well prove disastrous. The geostrategic interests of the United States in this hemisphere demand that America make a major effort to assure continued growth in the industrial nations with moderating international interest levels, greater policy convergence, a gradually declining dollar and more stable exchange rates. In trade, too, a commitment by the United States is essential. Latin America’s capacity to service its stretched-out debt, even under tight domestic conditions, will depend on continued access for its exports to the markets of Europe, Japan and North America.

But even lower interest rates and healthy exports will not be enough. Washington’s concern must move beyond adjustment and trade to financial flows, if the new debt agreements are to be worth much more than the paper they are written on. This has a host of implications—expanded resources for the IMF, the World Bank and the Inter-American Development Bank, additional official bilateral aid, measures to expand the flow of private equity investment and cooperative efforts to reverse the outward tide of Latin American savings.

Latin America cannot avoid taking stern measures of its own. It must reorder its badly misaligned economies, and move beyond the statist development strategies of the past. More Latin American leaders are prepared to accept this grim truth than ever before (and the U.S. Administration deserves no little credit for the change in perception). But those leaders also know that no government can ask its people for permanent sacrifice just to maintain an international credit rating. Further adjustment will require economic growth. The coexistence of democracy and austerity is not sustainable forever.

The United States has a central role to play. It has done so before, with the Alliance for Progress in 1961, when it recognized a threat to the very fabric of the nations of Latin America, and an opportunity to make a crucial contribution to the social, political and economic development of the hemisphere. The Americas are at another turning point as 1985 begins. The second Reagan Administration has an opportunity to build on the achievements and good luck of the first. But to do so will require a more forward strategy, and a willingness to dedicate to its large stake in the rest of the hemisphere some of the commitment it has to date so heavily concentrated on Central America.

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  • WILLIAM D. ROGERS is Assistant Secretary of State for Inter-American Affairs and Under Secretary for Economic Affairs in the Ford Administration, is a partner in the Washington law firm of Arnold & Porter.
  • More By William D. Rogers