SAO PAULO, Brazil -- For decades, Argentina treated its neighbor to the east, tiny Uruguay, as little more than a colonial outpost. In the eyes of much of the world, it endured a fate perhaps even worse: near-total obscurity.

But the long-overlooked South American nation, which lacks Argentina’s flair for political melodrama and Brazil’s clout and ambition, finally is emerging from their shadows, becoming a darling among investors and even a model for democracy.

Last year when famed Silicon Valley venture-capital firm Sequoia Capital, an early financier of Apple and Google, made its first South American investment, it chose not an Argentine or Brazilian technology company, but one based in sleepy Montevideo, Uruguay’s capital.

Oil companies also are taking notice. Argentina has scared them with the abrupt expropriation in April of Spanish oil company YPF/Repsol, but Uruguay’s state-run oil company, ANCAP, is striking deals, approving oil exploration contracts with four companies in August, including British giants BP and BG. Dallas-based based Schuepbach Energy also has a contract for exploration, and ANCAP is expecting soon to begin drilling the country’s first offshore well since 1976.

Uruguay’s breakthrough into a sought-after investment partner is largely a result of how it handled a devastating financial crisis 10 years ago, when unemployment was soaring, its growth rate was a negative 11 percent and its currency had lost 94 percent of its value. In July, the credit rating agency Moody’s upgraded Uruguay’s sovereign rating to investment grade for the first time since. This followed a similar move by Standard & Poor’s earlier this year that put Uruguay’s bonds five levels ahead of Argentina’s and on par with debt from Brazil, Mexico, Peru, Colombia and Chile.

Uruguay’s average annual growth of 6 percent from 2007 to 2011 surpassed that of Brazil, Colombia and Peru, South America’s heavyweights. Its growth forecast for this year also leads that pack.

It isn’t only economic indicators that are catching people’s attention. In the most recent annual Democracy Index – assembled by the Economist Intelligence Unit, a research firm with ties to The Economist magazine – Uruguay was the only South American country in the “Full Democracy” category. Its overall 17th rank was even ahead of the United States, at 19, and the United Kingdom, at 18.

Two other countries, Chile and Israel – often talked about as models of democracy by Washington pundits – ranked 35 and 36, respectively, relegating them to the “flawed democracy” category.

Uruguay surpassed the United States in the index in civil liberties, functioning of government, and electoral process and pluralism.

In a separate ranking, Reporters Without Borders, a journalism advocacy group, ranked Uruguay 32nd in press freedom; it ranked the United States 47th.

For sure, the country faces challenges, in particular with Mercosur, the South American trading block of Argentina, Brazil, Paraguay and Uruguay. It’s long felt bullied by larger members Argentina and Brazil.

Uruguay’s vice president, Danilo Astori, said in an interview with McClatchy that while relations with Brazil had improved a great deal, the country’s “most important problems” are with Argentina; he cited protectionism and unpredictability.