CLAI Commentary

A series of occasional commentaries on important
policy issues affecting
Latin America and the Caribbean.
October 31, 2002

 

Lula at Last
                               
By Dr. James Ferrer, Jr. and Eduardo Segatore1

 

  After three successive presidential electoral defeats, on October 27 Brazilian Labor Party (PT) candidate Luiz Inacio “Lula” da Silva finally achieved his objective. Both rounds of the elections, at the national and state levels, were an exemplary display of representative democracy. Some ninety million people went to the polls without any significant mishap or disturbance. The votes were rapidly counted and the results were announced in record time.
 

  Now that the campaigns and the celebrations have ended, the future administration must quickly face its many challenges. Its principal difficulty will be Brazil’s severe domestic and external financial constraints. The national budget has little room for new discretionary spending, especially since 2003 receipts are expected to be smaller than in 2002. Moreover, the inflation rate is rising and will surpass the present targets for both 2002 and 2003. On the external side, the picture is much the same. The current account should continue its recent improvement, and perhaps even be nearly in balance. However, the capital account could offset this positive development because Brazil has virtually no access to the international financial markets. In summary, the balance of payments will be tight.
 

  President-elect da Silva seems to have a surprisingly good grasp of the delicate context within which his party is taking office. He and his inner circle, measuring their public statements very carefully, have emphasized their intention to continue the present stabilization program, including the IMF agreement. They have sought to dampen some of the public expectations that were stimulated during the election campaign. For example, they noted the unlikelihood of achieving 4% growth next year, they stated their desire to reform the retirement system, they acknowledged the impossibility of giving public servants the pay raises they expect, and they stressed that land reform must occur within the context of the law.
 

  Some observers felt that the statements by the President-elect and his principal advisors implied a virtual extension of President Cardoso’s economic policies. Rumors even arose that Arminio Fraga would remain as Central Bank president for at least a few months into the new administration, something that da Silva had previously rejected publicly. Perhaps to change the impression that the PT was abandoning its focus on social issues, and recognizing that the government’s limited revenues will not permit the innovation of multiple social programs, the President-elect announced that his 2003 policies will focus overwhelmingly on eliminating hunger. Implicitly, he seems to be saying that most of the promised reforms will have to wait until the nation’s financial situation improves.
 

  The money markets have thus far responded rather favorably to da Silva’s statements and actions. This week the Central Bank was able to roll-over almost US $2 billion in dollar-tied domestic debt, something it was unable to do earlier in the month. Similarly, the real strengthened significantly compared to the low levels it had reached earlier this month. Both Brazilian and foreign bankers apparently have been somewhat reassured by da Silva’s moderate statements. Obviously, they now are waiting to see whether his cabinet choices signal a continuance of this moderate tone.
The public may have to wait a few weeks to have this question answered. The President-elect may be ready to announce the new Finance Minister and the Central Bank President, but some in the PT want to delay these announcements until da Silva can announce also the new ministers in the social area. These PT elements believe that filling the economic slots first would again suggest that the PT gives priority to economic questions, not to the social agenda. However, the President-elect will have to negotiate with other political parties before announcing his full cabinet because the ministerial positions will be an integral part of the negotiating trade-offs.
 

  The PT must enlarge its power base in Congress if the next administration is to implement a meaningful portion of its platform. The party is certainly stronger than ever. Because the PT did exceptionally well in the recent legislative elections, several parties will almost automatically enter its coalition in Congress and individual deputies and senators will switch to the PT or to one of its coalition partners. Even so, the administration may have difficulty forming a simple majority in Congress, to say nothing about the 60% majority needed for constitutional amendments. The PFL and the PSDB have already stated publicly that they will be in “light” opposition to the government; the PMDB has indicated that it is prepared to negotiate. These statements signify that the administration will have to negotiate and barter for every significant piece of legislation it wants Congress to approve. Thus, the more parties it can bring into its governing coalition, the stronger its negotiating position.
 

  For now, da Silva and his team are off to a good start, thereby confirming that their brilliant campaign strategy was no accident. They will have to sustain their performance, carefully balancing increasing pressures from both inside and outside the PT. Innumerable demands will soon emerge for a large increase in the minimum wage, for a more aggressive land reform program, for more employment-creation spending, for a reduction of state debt payments to the federal government, etc., etc., etc…. The future President will be able to govern only if he resists most of these pressures and simultaneously maintains a very delicate balance among numerous political forces. If he overcomes this awesome challenge, he will hopefully be able to initiate some of the social changes he has advocated. If he fails to meet this challenge, Brazil could face a difficult situation and the PT could seriously damage its future electoral prospects.
 

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