Marketing himself as a completely redesigned 2007 model, with sleek new lines and reassuring sound bites, Sandinista leader Daniel Ortega per­suaded 38 percent of Nicaraguan voters to elect him president in November 2006 on his third try since leaving office in 1990. Ortega, now 62, assumed the presidency for the second time in January 2007. As he approaches the first anniversary of his inaugura­tion, however, many design flaws in the clunky 1979 model Ortega are beginning to manifest them­selves again.

Across South America, a number of countries are backsliding into a variety of long-discredited social­ist models. In some cases, countries are being ruled by despotic hard-leftist and populist caudillos (strongmen). The leaders of this resurgent Latin left­ist wave generally fall into two camps: "vegetarian" democratic socialists, who see the many benefits of capitalism and are willing to work within the mar­ket-based economic system to create good and sus­tainable private-sector jobs, and "carnivorous" hard-left socialists (e.g., Fidel Castro and Hugo Chávez), who oppose and appear determined to tear apart market-based democratic capitalism and replace it with a form of "neo-communism."

Daniel Ortega certainly has a carnivorous pedi­gree. He led the Sandinistas when they seized power in 1979 after a long, bitter, and violent gue­rilla war against the Somoza dictatorship. Yet Ortega's performance since taking office in January 2007 does not indicate a clear preference between the vegetarian and carnivorous socialist camps. The former Comandante is walking a tightrope, appear­ing to support capitalism and the U.S.-Central America-Dominican Republic Free Trade Agree­ment (CAFTA-DR) and maintaining relations with the U.S. while seeking close relations with and cash from world troublemakers such as Iranian Presi­dent Mahmoud Ahmadinejad, Chávez, and Colo­nel Muammar Qadhafi of Libya.

What the U.S. Should Do. The U.S. should carefully monitor the situation in Nicaragua and give Ortega every encouragement to continue down the path of democratic governance and neoliberal market reform. If he chooses to follow the Chavista path instead, the U.S. should take every opportu­nity to counter Ortega's influence and steer Nicara­gua back onto the right track.

Specifically, the Bush Administration should:

• Conduct a review of the U.S. Millennium Challenge Corporation's $175 million, five-year compact with Nicaragua to determine whether or not the Ortega government is complying with its terms and then report its findings to Con­gress. If needed, the MCC compact should be renegotiated to keep the Nicaraguan government and economy headed in the direction of market-based democratic institution-building.
• Review all U.S. Agency for International Development programs in Nicaragua. USAID programs should be revised if the review deter­mines that USAID funds are not producing the market-based democratic institutions and poli­cies that Nicaragua needs.
• Seek additional funding from Congress for more democracy and governance programs to encourage the development of strong, trans­parent, and pro-democracy political parties and institutions in Nicaragua. The Administra­tion should request this additional funding regardless of the results of the review of existing USAID programs.
• Request that the Office of the U.S. Trade Representative and the U.S. Department of Commerce conduct a study of Nicaragua's participation in and benefits from CAFTA-DR and then report those findings to Congress. If, as is expected, Nicaragua is found to be bene­fiting from CAFTA-DR, the U.S. embassy in Managua should launch an aggressive public diplomacy campaign to inform all Nicara­guans of the proven benefits of free trade and CAFTA-DR.
• Ask the Inter-American Development Bank, World Bank, and International Monetary Fund to conduct detailed studies on the effec­tiveness of their programs in Nicaragua. The Administration should request that they change any program that is failing to achieve goals that are consistent with U.S. policy.
• Increase and enhance the State Department's public diplomacy efforts in Nicaragua to en­courage the development of strong, transpar­ent, market-based, and pro-democracy political parties, economic policies, and institutions. New programs should take advantage of the suc­cess that nearby countries, especially El Salvador, have experienced in making the transition to stronger market-based democratic systems.

For its part, Congress should:

• Increase funding for public diplomacy efforts in Nicaragua and
• Hold hearings to assess the situation in Nic­aragua and to determine whether or not the Ortega government's actions constitute any threat to U.S. national security.

Conclusion. Ortega has walked a tightrope since taking office in January 2007, appearing to support capitalism and DR-CAFTA and maintaining rela­tions with the U.S. while seeking close relations with and cash from world troublemakers from Ahmadinejad to Chávez to Qadhafi.

U.S. officials should carefully monitor Ortega's high-wire balancing act while still working to main­tain and expand democratic and free-market institu­tions in Nicaragua. The U.S. needs to be prepared to act promptly if Ortega jumps (or is pushed) off the tightrope and moves closer to Venezuela and Iran.

James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for International Trade and Economics at The Heritage Foundation. Caroline Walsh, Research Assistant in the Center for International Trade and Economics, made many valuable contributions to this report.