CLAI Commentary

A series of occasional commentaries on important
policy issues affecting
Latin America and the Caribbean.
 
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