The One Country That Might Avoid Recession Is...

Brazil is no stranger to economic crises. In the 1970s and '80s, Latin America's economic giant turned financial mismanagement into an art form. The current global turmoil has not left Brazil unscathed: stock prices, exports and growth are all down. But something interesting is at work this time around, and the best place to see it is in one of Brazil's favelas, the vast urban slums that are desperate even in the best of times. Walk through São Paulo's sprawling Brasilândia, though, and you don't sense the relentless doom and gloom gripping other cities in the world. Take Efigênia Francisca da Silva, who exudes middle-class expectations and remains positive despite the tsunami of bad news. Thanks to a government scheme to encourage entrepreneurs, the once dirt-poor housewife has received some $8,000 in low-interest bank credits in recent years and now owns three shops that sell everything from shampoo to public-transit tickets. "I didn't have a bank account before," says Da Silva, 37, standing beneath graffiti-covered walls and pirated power lines. "I never had a car. I bought a Fiat Palio." Does she fear the global recession will quash her dreams? "I trust Lula. I don't think we'll be hit that hard."

"Lula" is President Luiz Inácio Lula da Silva (no relation to Efigênia), and most Brazilians believe he's the reason their country is surviving the current downturn better than other places. In past crises, Brazil was usually the nation in need of the largest life preserver. If it wasn't drowning under fiscal recklessness, it was being held under by draconian austerity plans. Brazil, the old joke goes, is the country of the future — and always will be. Now, in the middle of the worst global downturn for decades, Brazil could finally be the country of the moment. According to a recent study by the Paris-based Organization for Economic Cooperation & Development (OECD), Brazil may be the only one of 34 major economies that avoids recession in 2009. While the U.S. debates whether to nationalize its crippled banks, Brazil's remain comparatively sound. Oil companies worldwide are slashing investment, but Brazil's state-run Petrobras is going ahead with a four-year, $174 billion expansion plan. "Brazil," Lula boasted to TIME, "is riding the current crisis better than many developed countries."

To be sure, the boom — years of 5% growth and soaring exports — is over. Industrial production has plunged. Even Embraer, the aircraft maker whose jets sell to scores of airlines, and which has become a symbol of Brazil's newfound confidence, recently announced plans to lay off 4,000 employees, almost one-fifth of its workforce. Commodity exports — soybeans, steel — are weak. The main stock market is down 25% since September. But Lula, a former shoe-shine boy who heads the leftist Workers Party (PT), has so far kept the good times from becoming a hellish bust. In Brazil, that's nothing short of miraculous.

There may be another miracle in the making. Because unfettered capitalism is widely blamed for the global meltdown, economists and laborers alike say Brazil has become an example of what Lula likes to call "the financial strategy of the future." By that he means a postideological approach that is equal parts wealth creation for corporations such as Embraer and wealth redistribution for underdogs like Da Silva. All this under the kind of prudent financial regulation that seems to have gone missing in the developed world of late.

Brazil still faces huge challenges; its education system is dysfunctional, its political system squalid, corruption endemic. But consider: 53% of Brazil's 190 million people now occupy the middle class, up from 42% in 2002. This increased social mobility happened at the same time the country's main stock index soared some 480% before last fall's downturn. Lula seems to have cracked Latin America's chronic conundrum: how to expand underachieving economies while reducing epic inequality. In so doing, he's created a model that's "an insurance ticket, not a lottery ticket," says Marcelo Neri, head of the Center for Social Policies in Rio de Janeiro.

All Change

In an interview last fall at the Planalto presidential palace in Brasilia, Lula, 63, told TIME that he wants to "change the world's political and economic geography" before he leaves office in December 2010. It may be futile to stump for a permanent Brazilian seat on the United Nations Security Council, but the developed world's financial shambles has made Lula's campaign to challenge U.S. and European hegemony in global trade talks less quixotic — and enhanced Brazil's leadership role among developing nations. "Capitalism will be a different animal once the turbulence is over," Lula told TIME. "Developing countries will be responsible for a major percentage of world economic growth."

Twenty years ago, when Lula was a firebrand unionist, that sentiment might have been dismissed as dreamy rhetoric. Not today. However the crisis ends, there is widespread agreement that developing economies such as Brazil, China and India will be crucial to ensuring that demand remains buoyant. Lula, too, has changed. These days he's a pragmatist who is as popular inside corporate boardrooms as he is in the favelas. On March 17, he will meet new U.S. President Barack Obama — a fellow moderate liberal who shares Lula's passion for green-energy ventures — in the White House. He will be the first Latin American leader to meet Obama since he took office, a sign, perhaps, that the new U.S. Administration sees Brazil as a key partner in forging a new policy for the Americas.

That too would mark a change. Brazilian officials have long wanted to make a mark outside their neighborhood, but until recently, the world rarely noticed what went on there — unless it involved beaches, soccer or Carnaval. "Brazil always suffered externally because of its internal poverty," says Lula's foreign-policy adviser, Marco Aurelio Garcia. The nation's founding monarchy, which lasted until 1889, insulated the country from the region's 19th century upheavals but also spawned a quasi-feudal class system that led to the inequalities that persist today. In 2000, fewer than 3% of Brazilians still owned more than two-thirds of the arable land, and the divide between the rich southeast and destitute northeast, where Lula was born, was as stark as ever.

Lula's predecessor, Fernando Henrique Cardoso, was the first President to recognize that change was needed. He restored fiscal sanity by slaying hyperinflation, but his attempts at social reform were timid. Lula's victory in 2002 panicked Wall Street and the Brazilian élite. But instead of defaulting on Brazil's foreign debt or busting the budget, as they feared he would, Lula embraced one of the few positive legacies of Brazil's royalist roots: deliberate, negotiated consensus-building. It's a hallmark of Brazil's widely respected diplomatic corps — and it tempered Lula even when he was a metal-workers union boss in the 1970s. Unlike more radical Latin leftists, such as Venezuelan President Hugo Chávez, Lula "was always a negotiator," says union pal and former congressional Deputy Djalma Bom, who recalls Lula telling him to stop reading Lenin 30 years ago. Even rivals like Rubens Ricupero, a former finance minister and Cardoso ally, agree. "The danger with Lula is that he can be rather messianic," says Ricupero. "But he's one of the world's most intelligent politicians."

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