Twenty years ago, the central plaza in earthquake-ravaged Managua, Nicaragua, came alive with a celebration marking the end of the 40-year Somoza regime. Hopes ran high among tens of thousands of the revelers that a new Nicaragua would be born.

The leaders of the rebellion, the Sandinistas, promised to fulfill a dream: to end strongman rule by ushering in a "people's democracy" accompanied by sweeping economic and social reform. The United States was not enthused but appeared willing to accept radical change in Nicaragua. The Carter administration had broken with the 40-year U.S. tradition of supporting or suffering the Somozas. Its human rights policy had shaken the flawed regime of Anastasio Somoza, and in the endgame, the Carter administration had brokered his departure.

Nonetheless, Washington was sensitive to the charge that it had been the handmaiden of a "communist takeover." Despite its misgivings about the Sandinistas' Cuban and Soviet Bloc ties and the anti-U.S. rhetoric, the administration befriended the new leaders in a policy of constructive engagement. It offered the carrot of economic assistance coupled with advice to hold early elections, allow press freedom and desist from arbitrary arrests and confiscation of property.

Carter's policy was halted in January 1981, however. The incoming Reagan team was hostile to the Sandinista regime. Whereas Carter's policy preserved some civil space and encouraged moderation, the Reagan team exaggerated Nicaragua's threat to its neighbors, even to the United States, thus limiting itself to the military option.

This approach strengthened the radicals in Nicaragua. What followed was almost inevitable. The Reagan administration financed and directed the contra war in violation of international and U.S. law. The cost to Nicaragua was enormous; in addition to the tens of thousands of noncombatants killed, economic production collapsed.

The Reagan team's obsession with the Sandinista threat obscured the harm done to our international image and regional interests. We undermined democracy in Honduras and allied ourselves with Noriega in Panama, even though the Sandinistas were never a serious threat to their neighbors. The greatest irony is that the contra war gave the Sandinistas a nationalistic shield to mask their domestic mismanagement, repression and corruption.

When George Bush became president, the contra war was ended and the United States supported a regional peace initiative that induced the Sandinistas to hold national elections in early 1990. To the world's surprise, but not to Nicaraguans' -- who had had their fill of revolutionary rhetoric and failed promises -- the opposition candidate, Violeta Chamorro, defeated Daniel Ortega of the Sandinistas.

The Chamorro government received economic support from the United States and the international community to stabilize the currency, demilitarize the war-torn country, initiate institutional reform and pay down the huge foreign debt. After several years, the economy began to grow for the first time since the year before Somoza fell. But poverty ballooned, unemployment soared to 50 percent and income distribution reached new levels of inequity.

In 1996 Arnoldo Aleman became president by free election. For the first time in Nicaraguan history a democratically elected president was replaced by another. That's on the positive side of the ledger. On the negative side, Nicaragua still lacks a social contract that institutionalizes checks and balances and accountability while involving the marginalized majority. Consequently, those in power are not responding to the broader needs, and the divide between rich and poor continues to grow.

The authoritarianism of the Somozas and the Sandinistas is not gone. It hovers behind the scenes as an opportunistic quick fix that can reemerge if frustration with democratic governance is allowed to continue to grow. This is not the time for the United States and the international community to rest on the positive developments in countries such as Nicaragua.

In the absence of radicalism or military threats, the large donor nations and the international institutions (particularly the International Monetary Fund and the World Bank) through which these countries work tend to overlook the social deterioration in Nicaragua and other developing nations. The lesson is that decades of thoughtless U.S. policy preceded the rebellion that was celebrated 20 years ago.

Lawrence Pezzullo was U.S. ambassador to Nicaragua from 1979 to 1981. David Pezzullo, an international consultant and journalist, was an editor of the Nicaraguan daily La Prense in 1996.