ASIDE FROM HIS domestic challenges, the president-elect is also going to have to win over foreign leaders and investors leery of his populist record. A former labor leader who left school after the fifth grade to become a shoe-shiner, Lula has long been critical of American influence and wary of free-market trade. NEWSWEEK’s Geoffrey Gagnon spoke with Bruce Stokes, a Senior Fellow in economic studies at the Council on Foreign Relations, on the regional and global implications of Lula’s win.

NEWSWEEK: Is Lula’s win a signal that Latin America is moving to the left?

Bruce Stokes: Left and right don’t really work to describe what we’re seeing. We don’t really have the words to describe what people are imagining. It’s more populist, it’s more nuanced in the way it approaches economics. Advocates of free-market reform find it useful to describe any deviation from that as a return to communism. My guess is that we’re now in an interim phase here where people are slowly feeling out a new approach that isn’t going to be the capitalism of Ronald Ragan or the socialism of Fidel Castro. It’s going to be something else.

Brazil has seen its currency drop by more than a quarter of its value against the dollar this year; Argentina and Uruguay recently experienced their own economic failures. What implications does Lula’s win have for the rest of South America?

The implications are probably more political than economic. We’ve seen less extreme examples of contagion recently than in the past. When Russia ran into trouble, when Brazil ran into trouble before and–at least initially–when Argentina ran into economic trouble, we didn’t see a lot of contagion. There’s some who would argue, though, that [is because] we know better how to contain this contagion. But Brazil is the second largest economy in the Western Hemisphere, the ninth largest economy in the world and it accounts for about 30 percent of the market in Latin America. This isn’t Paraguay-it behooves us to be worried.

What kind of political fallout?

You have a leftist Workers’ Party that probably won’t act as radical as its rhetoric, but people in other countries will read the rhetoric. We have seen throughout Latin America growing restiveness because of the inability of the economies to prosper. There’ve been questions about freeing trade and frustration that reforms haven’t really paid off in the way people hoped they would. This may send a message to the rest of Latin America that it’s OK to elect a leftist president. That would make Wall Street and the Bush administration nervous.

What does Lula’s election mean to the future of free trade?

There’s the long-term goal of creating a free trade agreement throughout the Western Hemisphere, which is supposed to be done by 2005. I know nobody in Washington, except the negotiators, who believe that can happen. If things go from bad to worse in Latin America countries won’t even want to consider this. Lula has criticized the free trade for the Americas plan, but he hasn’t said he won’t talk about it. Brazil has always been the sticking point for free trade in the Americas and the Bush administration will have to address Lula’s concerns.

Is Lula a real populist, or has he moved the center?

I think he is a real populist. He’s run for president before and learned from it. In this modern media age he has modulated his public image and his public rhetoric. He demonstrates sensitivity to the constraints the government is going to be under in its ability to spend. Just this week he’s announced a new feeding program to help the hungry. That’s going to cost money and he hasn’t announced how he’ll pay for, but he has admitted the country can’t go on a spending spree.

With constraints like that, can Lula stick to his populist agenda?

It’ll be very difficult. His party only won 91 seats out of 513 in the lower house of the congress. It’s not as if he translated the overwhelming support for him into support for his party in congress. He’ll have to deal with the variety of interests represented in the congress and this will naturally constrain some of his populist tendencies.

Why was Lula so successful when his party wasn’t?

People are fed up with the frustrating financial situation in Brazil. I say frustrating because Brazil is not Argentina–this is not an economic basket case. But I think there’s a sense of frustration with the conditions there and a frustration with the establishment. The people may have said, “Let’s give power to a guy who’s different, who we’ve rejected a few times but who’s cleaned up his act a bit.” Lula’s not frightening, he doesn’t talk or dress like a radical and he is a bit older and more mature. The combination of these things may have given him his huge success.

Still, Lula has in the past called for a default on Brazil’s foreign debt and his party has promised to reduce what it calls Brazil’s subservience to foreign interests. Will he now be wary of such calls?

He will be particularly cautious about the former statement: about defaulting on the loans, because that is a real possibility even if he doesn’t want to default. They may be forced. He’s probably smart enough to realize that if this is going to happen anyway he won’t want to be blamed for it. To work their way out of the problem without help, Brazil would need 4 percent growth, lower interest rates and a stronger currency. The possibility of those financial stars coming into alignment at once is highly unlikely. So he’s toned down his image and quieted the rhetoric a bit.

With so many challenges in places, what does Lula have to do to calm investors’ fears?

He is now working with the outgoing government. They have a long transition much like [the United States], which is probably not helpful. He doesn’t go into power until January, so we could be having this conversation in December because we still wouldn’t know the answers to these questions. He can appoint 50 liaison people to work with the outgoing administration to send a strong message to the Brazilian business community. What he desperately doesn’t need is for Brazilian investors to flee. He needs to send a message that says he has the transition in hand. The outgoing administration would do the right thing by Brazil and by history if they take certain steps on themselves to make some of the painful decisions before Lula comes to power.