Lula's Balancing Act.(Brazilian President's busy year)

This time last year, Brazil was a nation in suspense. Luiz Inacio da Silva, a former capitalist-bashing steelworker, had just been elected president, and no one had a clue what to expect. Throughout the campaign, the leftist Workers Party (PT) leader known to all as "Lula" had kept his countrymen guessing, now breaking bread with bankers and industry titans, now blaming Brazil's woes on an international conspiracy of the rich and powerful. Millions of Brazilians, and plenty of foreign investors besides, feared Lula would tear off his tailored suits and turn the country upside down with his party's cherished socialist nostrums. Millions more feared that he wouldn't. Lula called his victory "the triumph of hope over fear." In truth, it was a shot in the dark. Which Lula, everyone wondered, would be running Brazil--the fiery left-wing radical or the prudent capitalist?

The answer, it seems, is both. Being everything to everyone is the oldest ruse in politics; Brazilians call it "lighting a candle to all the saints." But Lula's ecumenism has been brazen. First he muscled his fractious, Marxist party into the capitalist mainstream, while also promising a bonanza of jobs, health care, housing and "dignity" for millions of Brazilians. Then, instead of creating a "rupture" with the country's fiscally conservative economic policies, which his companheiros clamored for, Lula embraced them. He has unflinchingly slashed budgets, curbed government salaries and hoisted interest rates. The parsimony has worked: his government has beaten back resurgent inflation and reassured skittish investors that Brazil's economy is stable, though struggling with a decade-high 9 percent jobless rate. What's more, Lula browbeat Congress into passing some vital constitutional reforms, starting with the profligate social-security system. Today the charismatic president, who has a preacher's gift for rhetoric, wins applause on Wall Street. "He's surprised many people," says Walter Molano of BCP Securities, a U.S. investment bank. "Bankers love Lula."

On the other hand, Lula's "conversion" to economic orthodoxy has not gone lost on traditional party allies, who feel seduced and abandoned. The PT's ballyhooed hunger-relief and anti-poverty plans--meant to pay Brazil's historic "social debt" to some 40 million desperately poor-- have faltered due to bureaucratic bumbling.

What's remarkable is that Lula's something-for-everyone strategy hasn't seriously eroded his credibility--or his popularity with the people. His approval rating has slipped but not collapsed--from 67 percent in June to 59 percent in October, according a recent poll. That's an enviable number for a leader in a regicidal region. Not even Brazil's $14 billion deal with the International Monetary Fund, the PT's favorite bete noire, appears to have caused lasting damage. How has he done it? In large part by championing populist causes abroad, such as opposition to U.S. trade policy, which has freed him to be a fiscal conservative at home.

It's a risky strategy. Although the PT hierarchy has forced the radical rank-and-file to the center, a doctrinaire reflex twitches in Brasilia. Communications Minister Miro Teixeira caused a minor scandal earlier this year when he exhorted Brazilians to sue telephone companies over rate hikes. (The increases were lawful, and Teixeira was forced to back down.) Then last month the head of the government utility, Eletrobras, warned that if the U.S. power company El Paso dared cut off service to a delinquent local distributor, Brasilia would "send in the troops." Lula himself sometimes slips into ideological default mode, such as when he recently told the 22d Socialist International conclave that under the rules of world trade, "our sovereignty was and is under threat."

The former Brazilian Finance minister Mailson da Nobrega, ...