CLAI Commentary
A series
of occasional commentaries on important
policy issues affecting
January 2, 2003
Brazil’s Labor Party President Takes Office:
Will He Pursue His Vision of Social Justice and Economic Independence?
By
Dr. James Ferrer, Jr.
Luiz Inacio
Lula da Silva, the victorious Workers Party presidential candidate, took
office on January 1, 2003, amid the largest popular inauguration celebration
Brazil has ever had. Lula’s inauguration was the first time in forty
years that a Brazilian democratically-elected president transferred the
office to another democratically-elected president. The event marks a
watershed in the country’s history in that the new administration represents
a clear ideological break with its predecessor. In fact, the new President
won the election on a platform of change from the Cardoso administration.
He promised more social programs, an emphasis on nationalism, and greater
national independence.
During last year’s presidential campaign, the prospect of a Workers
Party (PT) victory raised concerns in financial markets, both domestic and foreign.
Although most Brazilians welcomed the PT victory, or at least enjoyed José Serra’s
loss, people were nervous. Brazil’s currency, the real, fell significantly against
the dollar, foreign banks would not lend to Brazil, and rising domestic prices
raised fears of renewed inflation. Observers were waiting anxiously to see how
President-elect Lula, as he likes to be called, would approach his new responsibilities.
The President-elect and his advisors apparently were well aware of,
and quite sensitive to, the economic environment. Throughout November and December
they acted and spoke cautiously, anxious to avoid stimulating capital outflows.
They announced their intention to continue the existing IMF agreement, to honor
contracts as required by law, and to maintain both the financial stabilization
program and the fight against inflation. Significantly, they began to suggest
that the economic situation would prevent them from delivering on their campaign
promises for 2003. Lula moved carefully to select his cabinet, picking ministers
who represent all the parties of his electoral coalition as well as several independents.
Perhaps most important for the financial markets, he chose a well-known international
banker, who had just been elected to Congress in opposition to the PT, as the
new Central Bank president.
The financial markets responded favorably to Lula’s calming gestures,
but the new administration still faces serious economic constraints and the danger
of a financial crisis. The public debt, approximating some 56% of GDP, is a heavy
burden; domestic interest rates are among the highest in the world; and consumer
prices are rising at a double-digit pace. Moreover, the administration and the
PT have yet to win the market’s confidence. Fortunately, the government is simultaneously
benefiting from several favorable trends. The current account deficit of the
balance of payments has fallen to less than two percent of GDP, the dollar depreciated
somewhat vis-à-vis the real during November-December, and the wholesale price
index rose less in December than in November. On balance, however, the economic
situation will not allow the President to implement much of his promised social
program in 2003. A significant increase in social outlays would court economic
disaster for the country and political disaster for the PT. Thus the government
has little real choice but to make financial stability its first priority. Constrained
by this situation, the administration seems to be accepting the financial policies
of his predecessor. It has reaffirmed Brazil’s commitment to a primary “surplus”
equal to 3.75% of GDP, has reportedly signaled its concurrence with the recent
increase in the federal funds rate from 22% to 25%, and has advised incoming
ministers that their budgets will be tight. This approach, including some additional
social outlays, seems like a minimalist approach.
These policies are not forceful enough. They could help avoid a domestic
financial crisis, but they would neither improve Brazil’s financial basics nor
shield the country from an international shock. The debt would continue to rise,
interest rates would remain high, and inflation would still threaten. The country
deserves an effective, comprehensive solution rather than the continuation of
partial, inconclusive measures.
The new administration is positioned to implement a much bolder policy,
one that would free the nation from IMF tutelage, prepare it to resist international
shocks, and create conditions for faster economic growth. The administration
should not pursue merely a primary “surplus;” it should seek a genuine surplus,
or at least a balanced budget, and should do so largely by reducing expenditures
rather than by increasing revenues. It would have to implement vigorously both
its promised anti-corruption campaign and several reforms, the most important
being that of the public sector retirement system. The administration must obtain
legislation in early 2003 that will immediately and substantially reduce the
government’s net expenditures on the retirement system, and that will make the
system self-financing in a minimum number of years. Properly implemented, the
combination of reforms, corruption-reduction, and strict budgetary discipline
could produce a budget surplus or, at least, a balanced budget in 2003.
The determined pursuit of the policy outlined above would, within
a relatively short time, put the country in a virtuous economic cycle. A balanced
budget means the government would not borrow new money in the market. Because
the government has been by far the largest borrower in recent years, its absence
from the market would encourage a substantial and quick drop in interest rates.
The tighter restrictions on government spending, including a net reduction in
the retirement system deficit, should help depress domestic demand. The lower
interest rates and smaller domestic demand would, in turn, lessen inflationary
pressures and stimulate exports. With these positive trends, investment would
tend to increase and the country could begin a period of significant, sustainable
growth. Another factor is equally important over the short term. A lower interest
rate and a reduced level of corruption would, by the end of 2003, free up budgetary
resources. Billions of reais would become available for investments and for social
projects. The government would possess adequate funds to finance a truly significant
social program without jeopardizing financial stability.
Implementing such a bold policy would not be easy. Government officials
will have to demonstrate courage, determination and exceptional leadership. The
year 2003 would be extremely difficult, both economically and politically. The
administration’s supporters would grow quite impatient. The economic interests
that profit from rising inflation, from widespread corruption and pork-barrel
projects, and from high interest rates would pressure for a change in policy.
They would seek to protect their interests forcefully regardless of the negative
medium-term impact on the nation.
Because the PT constitutes the core support of the new administration,
the latter is well-positioned to implement an effective, dynamic policy for three
reasons. First, since the PT has not been in the federal executive previously,
the government can pursue its anti-corruption effort without fear of where its
investigations might lead or whom they might ensnare. Second, the President comes
to office with a historically large popular majority vote, one that permits him
to adopt visionary policies. Finally, in the past the PT obstructed passage of
some necessary reforms. If the President now fights for those reforms, he should
be able to obtain adequate support in Congress for necessary legislation. The
results could be excellent for Brazil, and they would certainly strengthen the
image of both the government and the PT.
The real question is not what policies the new administration should
follow. The question is whether the President’s campaign promises to promote
an independent, self-reliant, just and proud Brazil were simply electoral rhetoric,
or whether he and his inner circle will demonstrate the capacity, courage and
skill to fulfill the vision they outlined so eloquently during the campaign.
1 The views expressed in this article are the authors’ and do not necessarily reflect the views of the Center for Latin American Issues or The George Washington University