Saturday, February 22, 2003
War fears permeate Latin American firms
Posted by click at 6:29 AM
in
brazil
www.bayarea.com
Posted on Fri, Feb. 21, 2003
By Alan Clendenning
Associated Press
SAO PAULO, Brazil - In a small factory in a blue-collar neighborhood of this vast industrial city, dozens of workers churn out parts for pressure cookers, essential items in most Latin American kitchens.
But the management of Acessorios para Panela de Pressao is worried about an economic threat half a world away that could lead to reduced sales and layoffs: a U.S.-led war against Iraq.
Higher oil prices linked to fear of war have already boosted inflation from Brazil to Chile. And a much-anticipated regional economic recovery is on hold, with concerns that the situation could get worse before it gets better.
Fears of war
Brazilian sales of Acessorios' parts for pressure cookers -- widely used to make feijoada, Brazil's national dish of black beans, rice and pork -- are down 50 percent since January because of double-digit inflation and consumer uncertainty over the economy's direction.
The firm has managed to maintain production and its 85-employee workforce only because of a spurt in exports to countries like Colombia and Ecuador.
But demand could plummet beyond Brazil's borders if war breaks out and consumers across the region limit spending and decide to use their old pressure cookers longer, said company manager Luciana Pereira Lopes.
Usually, sales pick up after Carnival, which takes place in early March this year, she said. ``But the uncertain thing is how the war could affect the Brazilian economy and the external market.''
The war fears have already hurt Latin American stock markets, curtailed foreign investment and prompted investors to push down the value of currencies in countries like Mexico, Chile and Brazil.
While their devalued currencies have helped Latin America boost crucial exports to the United States and Europe, experts warn that a war could reduce global demand for goods ranging from Brazil's diverse manufactured and agricultural products to Chilean wine.
Right now, talk of war has stalled everything,'' said Ricardo Amorim, head of Latin American research at the New York-based IDEAGlobal.
If war breaks out and the world economy performs worse, the impact on the Latin American economy will be deeper.''
The economies of Brazil and Argentina were hit particularly hard last year. Mexico also suffered because its economy is so tightly linked to the United States, and could face tough times in war if the U.S. economy stumbles more.
Experts say Argentina wouldn't suffer as much as Mexico or Brazil if war breaks out because the country has already virtually struck rock economic bottom, pummeled by a 5-year-old recession that has condemned one in two Argentines to poverty and 18 percent to joblessness.
Impact on Brazil
Brazil's economy -- South America's largest -- turned sour last year on investor concerns that its new leftist president might implement policies that could lead to a default on the country's massive foreign debt.
Since taking office Jan. 1, President Luiz Inacio Lula da Silva has pleased markets by filling key economic posts with moderates who say Brazil won't adopt unorthodox fiscal changes.
Silva's aides have pledged to fight inflation, and Brazil's central bank continued that course Wednesday by raising the benchmark interest rate to 26.5 percent from 25.5 percent.
But the Brazilian economy still struggles because of the war fears, with experts warning it will deteriorate if fighting begins.
Some speculate Brazil might have to return to the International Monetary Fund to seek additional funds beyond the record $30.7 billion loan program the IMF approved for the country last year. Others say Silva may have to make additional budget cuts, after announcing $3.9 billion in cuts earlier this month.
The war talk is already directly having an impact on some Brazilian companies. Shares of Embraer, the world's fourth largest commercial aircraft maker, slumped last week after a regional carrier for Continental Airlines delayed deliveries of new planes.
And Brazilian moving company Granero Transportes was forced to cut costs because Brazilian businesses and families are nervous about moving, said marketing director Julio Pires.
Lula's Moment
Posted by click at 6:24 AM
in
brazil
by MARC COOPER & TIM FRASCA
[from the March 10, 2003 issue]
Porto Alegre, Brazil
QUOT-We cannot have some eating five times a day while others go five days without eating," Brazil's newly installed president, Luiz Inácio "Lula" da Silva, told an appreciative crowd here on January 24. But what would be boilerplate in another context, tossed out by one more off-the-shelf Latin American populist to generate de rigueur roars from the faithful, was, in this context, strangely and quietly moving.
For starters, Lula--whose January 1 inauguration was dubbed the "first high point of the international left since the fall of the Berlin wall"by his adviser and renowned radical Catholic theologian Frei Betto--isn't your everyday populist. All Brazil knows how Lula was born in poverty and how his major campaign promise was to wipe out hunger. So when he spoke at the third annual World Social Forum, many of the 75,000 listeners at the Pôr-do-Sol outdoor amphitheater looked down and shook their heads; some wept. None left charged up and ready to chant party slogans or shake their fists in the air. Instead, the mostly Brazilian crowd melted away in a pensive mood, aware that this historic presidency and the entrance of the Brazilian Workers' Party (PT) into the government may be their last chance to make a humane country out of their grotesquely unfair society.
Brazil has the ninth-largest economy in the world but ranks fourth-worst on the globe in the gap between rich and poor--right behind Sierra Leone, the Central African Republic and Swaziland. Ten million citizens live chronically undernourished, while the Brazilian elite ring their highrises and helipads with razor wire and commute to Miami for weekend shopping binges. Today's Brazil, said Frei Betto, represents nothing less than "an offense to God."
President Lula attracted only two rounds of boos during his address: once when he outlined his plans for the next four years ("EIGHT! EIGHT!" the crowd insisted) and again when he mentioned his imminent trip to the rival World Economic Forum in Davos, Switzerland, to plead for the poor before the assembled planetary plutocracy ("DON'T GO! STAY!"). Everyone acknowledges that the PT administration faces vast difficulties, but disagreements are quickly emerging about the proper course for it to take: how far to negotiate with Brazil's adversaries in the wealthy North, and the precise location of the slippery slope where principles are abandoned and Lula, as one insider critic quipped, molts "from president into chief bookkeeper for the International Monetary Fund."
So while the debate thirty years ago around a similar leftist Latin American president--Chile's Salvador Allende--focused on the broad philosophical question of whether a peaceful transition to socialism was possible, today's interrogatives are more immediate, more pragmatic, more concrete: What is the likelihood of even minimal reform within the margins of the international financial architecture? What alternatives to the neoliberal "Washington Consensus" are possible? Can Brazil take regional leadership in fighting for fairer trade relationships with the United States? In short, how practical is a peaceful transition to anything beyond the unacceptable status quo? And, most important, how can Lula balance the pressing needs of a desperate Brazil with the intransigencies of the global market? "Expectations have never been higher," said Kjeld Jakobsen, until recently international relations secretary of Brazil's Central Labor Federation and an ardent Lula partisan. "Everyone knows that change is going to be slow and difficult--Lula said so in his campaign. But you never know just how long this expectation can be delayed before it all collapses."
Lula won the presidency in October with an unprecedented 61 percent of the popular vote, after nearly copping an outright majority in the first round. It was his fourth attempt as the standard-bearer of the PT, an amalgam of liberation Catholics, trade unionists and assorted leftist intellectuals that emerged from the long struggle against Brazil's vicious military dictatorship (1964-85). At age 57, short and paunchy with a whitening beard, Lula is nevertheless an extraordinary, Lincolnesque figure. One of eight siblings from an impoverished town in the arid northeast, his family migrated to gritty São Paulo, where he left grade school to shine shoes, and apprenticed as a metalworker at 14. He entered politics through trade-union activities, which also landed him in jail for a brief stint. In the shadow of Brazil's military dictatorship, Lula led the rejuvenation of the national labor movement and engineered the building of the PT--a sui generis mass leftist party that is neither orthodox Marxist nor social democratic but somewhere in between.
Although now more polished and groomed, Lula is not considered a great orator and was often belittled by his enemies over his struggles with Portuguese grammar. In fact, he belongs to another century, before the advent of the Bob Forehead-type politician, the golem hatched and shepherded by imagemakers and nurtured with cash channeled from on high. As he phrases it, "I wasn't elected by a TV network or because of my intelligence or personality but through the high level of political awareness of the Brazilian people." And unstated, but always present, is the fact that Lula isn't just the first president to be for the Brazilian poor, but to actually be one of them.
Lula's first month in office illustrated the PT's awareness of the importance of symbols in holding together its popular majority. The president's executive jets were mothballed, the gourmet cook dismissed and plans to spend $760 million on a fleet of new fighter planes were postponed. Lula then led his entire Cabinet on a two-day "reality tour" of one of northeastern Brazil's vast swaths of misery. At its conclusion, a teary-eyed Luiz Fernando Furlan, one of the few businessmen in the government, said he will be forever marked by the experience. "Without a doubt," he said, "I'll be more socially aware." Lula also immediately raised Brazil's international profile, offering trade assistance and political support to languishing Argentina and mediation in the Venezuelan crisis engulfing Hugo Chávez (in the latter case, keeping a studied distance from the messianic ex-comandante). Most dramatically, Lula set off for the Swiss Alps to take his message of fairness and equity straight into the lion's den at Davos.
Lula's twenty-eight Cabinet appointments broke precedent left and right, and are in themselves a mini-revolution. Two are black--a first--and another seven are unionists. Environment Minister Marina da Silva, a former rubber cutter, learned to read at age 16; Benedita da Silva, the Minister for Social Development, used to pick through rubbish during her upbringing in a Rio slum. José Dirceu, Lula's chief of staff and top strategist, was trained as a guerrilla fighter in Cuba and re-entered Brazil after plastic surgery; his own wife didn't know his real identity until years later.
But while the social portfolios all went to the left, Lula packed his economic team with conservatives: Vice President José Alencar is a textile magnate, and Central Bank president Henrique Meirelles is orthodox enough to calm the troubled sleep of Brazil's Wall Street investors and inspectors. Indeed, there is ample room for skeptics to suggest that the great Lula experiment might soon have to abandon its radical pretensions because of international financial pressures, a possibility its chief architects deny. "We are only in the government now because we did not and will not forget our past, nor will we abandon our ideals," answers Dirceu. "But there is no possibility of change without alliances among different political sectors."
Lula's going to need some real and productive alliances to achieve his major campaign vow: to eradicate hunger, which afflicts at least the 24 million citizens who are officially destitute and a good many of the 30 million more who survive under the poverty line, out of a total population of 174 million. The obstacles are daunting: Unemployment in the main industrial region of São Paulo hovers near 20 percent, the economy is anemic and inflation remains pesky. Per capita income has dropped sharply in recent years. In addition, Brazil is second only to the United States in cocaine consumption, and its powerful drug gangs almost co-govern Rio de Janeiro, whose murder rate is 50 percent higher than that of Washington, DC.
But the darkest and most immediate storm cloud on the horizon is the burden of Brazil's crushing debt, now the equivalent of 65 percent of GDP, compared with 45 percent for Argentina when it went belly up in 2001. Lula's predecessor, Fernando Henrique Cardoso, promised that opening the country to a torrent of foreign capital would be a quick route to economic modernization. As usual, things didn't quite work out that way, but before leaving office Cardoso secured a front-loaded bridging loan through the IMF that some consider impossible for Brazil to pay. The country's new leaders will go into debt negotiations enormously vulnerable not only to IMF demands but, lurking close behind, speculative pressures on the country's currency, which could quickly throw Brazil into an economic tailspin.
Lula desperately needs breathing room to start work on his ambitious program: land reform, overhaul of the tax and pension systems and minimum-wage increases, as well as Zero Hunger. Underlying the strategy is an implicit shift of Brazil's economic model away from dependence on exports and foreign capital and back to industrial production and concentration on the internal market. That's what Dirceu means about building alliances--specifically, with national capitalists devastated by the past decade's free-market policies. "The project is schizophrenic after all the concessions," said Luis Fernando Novoa, a sociologist and member of the PT's organized left wing--about a third of the party. Brazil's big industrialists support Lula, said Novoa, because he has promised continuity and is "more Catholic than the Pope" on the debt question. Instead, he said, Lula should initiate a deep transformation to "a real national development project, not just redistribute the crumbs left by the IMF."
Left-wing criticism of Lula, including from respected, long-time militants and parliamentary deputies, is already dogging the new administration. Some of it is less serious, but expressive. At a news conference in Porto Alegre, a woman claiming to represent "Bakers without Borders" gave current PT president José Genoino a cream pie in the face to protest Lula's attendance at the Davos meeting. On the opposite front, the PT's proximity to the militant land-reform movement may cost it some middle-class support; while Lula triumphed nationwide, the PT lost its governorship of the state of Rio Grande do Sul, of which Porto Alegre is the capital, some say in part because of backlash from farmers. By satisfying the most militant, Lula will always alienate part of his coalition, as in the fight over pensions. Balancing these competing interests will require real skill and the maintenance of a high level of overall credibility.
Some critics clearly expect that to occur, pointing, for example, to the PT's openness to negotiate with the Bush White House on the US-initiated Free Trade Area of the Americas. Until recently some 500 Brazilian products, including all its key exports such as steel, coffee, citrus and soy, were excluded from easier import into the US market. Now reports indicate a possible willingness by the Bush Administration to lower tariffs on some of those items if Brazil sings the FTAA tune. The devil, of course, is still in the details.
These critics suggest that the moderate middle doesn't exist under current circumstances. In a foot race with a speeding automobile, some say, it doesn't matter how many gold-medal sprinters you have on your team. If Brazil's debt is in fact unpayable, the prospect of default could threaten the banking system and bury Lula's dreams for good. Indeed, at an evening soiree a few hours after his moving address in Porto Alegre (an industrial city of 1.3 million that has been run by the PT for the past fourteen years), an NGO activist and PT sympathizer predicted that the Lula administration "won't be any different from its predecessor." Zero Hunger, said this dissident, is mere "marketing" to neutralize the left opposition and distract attention away from the plans to proceed with business as usual and solidify all sorts of nefarious alliances. In this view, Lula cannot and will not resist whatever Washington and the IMF overlords dictate.
But Frei Betto, reflecting the low-key optimism of Lula's circle, argued that the forty-year social process that produced Lula is a source of great strength that may not be immediately apparent. "How is it possible to elect a lathe operator to the presidency of the republic?" the friar said with a smile. "Those who ask that question don't understand how over forty years we have built up this popular movement." Brazil, he said, can exercise enormous moral suasion, and the figure of Lula is symbolically compelling.
Furthermore, driving Brazil into bankruptcy is hardly an attractive prospect for some of the biggest banks in the world, like Citigroup, whose exposure here amounts to 10.2 percent of its total equity. If Brazil is pushed beyond its limits and tanks, investors are also liable to take a nasty hit. Twenty percent of all US exports go to Latin America, and US direct investment in the region amounts to $163 billion. The idea of watching Brazil nosedive, taking half the continent's GDP along with it, can't be comforting, even for Republican right ideologues put off by the Lula entourage. And this at least partially explains why Lula has--so far at least--found Washington far more accommodating than Salvador Allende did.
So for every sworn enemy, for every commentator already comparing him to Fidel, Lula has plenty of allies in the world of business, among them many members of the financial press. Conservative writers suggest that he might be capable of combining reform with stability, which is increasingly undermined by the ever-grosser inequalities Lula wants to address. Bad alternative examples abound, such as bankrupted Argentina, polarized Venezuela and the new populism in Ecuador, embodied in recently seated President Lucio Gutierrez, a politically untested former army officer. The conservatives' cautious, wait-and-see attitude reflects a grudging recognition that the orthodox models, while good for quick profits, have failed to resolve the continent's long-term structural problems. Brazil might provide, mused Britain's Prospect Magazine, "a social democratic model for Latin America."
One area where Lula, the IMF, the World Bank and Wall Street may find themselves in harmony is on the new government's determination to revamp Brazil's demented retirement system, termed by the newsweekly Veja as "Robin Hood in reverse." The country's coffers are currently drained of some $2 billion a year to cover the growing deficit caused by the civil service elite's pension arrangements. While private-sector retirees may get $100 a month, public servants average $650, military officers over $1,000 and federal judges $4,200. Lula and the PT's announcement that they would go after this system's skewed priorities immediately raised howls of protest from the vested interests. But the PT will be backed on this one by its erstwhile foes at the IMF, albeit in the name of cutting back government spending and "making markets work."
At the Porto Alegre cocktail party, the Lula skeptic had few takers for his business-as-usual analysis. Instead, all the others seemed sympathetic to the new government. "When Lula talks, it gets to you," said one partygoer, while others nodded in agreement. "He has a knack for touching a chord, and it's not calculated. His awkwardness, if anything, makes it more real." Said another Lula supporter, anthropology professor Veriano Terto, "People don't expect miracles, but there is a hopeful atmosphere, a change in mentality." If the PT makes gains at the next municipal elections, he said, its skill at administering innovative projects at the local level would generate important new support.
Upcoming trade talks with the United States will be the big test. Lula has repeatedly called the proposed FTAA nothing less than an "annexation" of the Brazilian economy. No surprise, then, that Brazil--conscious of its role as the key player on the continent--clearly wants to get tough and insist that the terms not be dictated by Washington. On the other hand, reaching an agreement with real benefits for both sides--overcoming low growth without too much radical experimentation--would be historic.
Lula's inner circle counters the pessimistic view of what is possible by pointing to the process that brought Lula to the presidency. The Brazilian left, said Frei Betto sardonically, did not have a "metaphysical crisis" of the sort the "academic left" did with the crumbling of the Berlin wall, because it had never lost touch with the popular movement. Davos also emitted a broad signal that the First World is moderately nervous about its own moral authority. ("Building Trust" was the theme of the $22,000-a-head Swiss confab, implying clearly enough that there isn't an overly generous supply of that in the post-Enron environment.) Although it may be a stretch to say that the Washington Consensus on free-market liberalization and monetary orthodoxy has been "defeated," as Lula's chief of staff Dirceu proclaims, some tentative struggle with the straitjacket of dogma is undoubtedly taking place. Unnoticed in much of the commentary about Lula's rise, for example, is the simple fact that his inauguration marked the first normal transfer of power between elected presidents in Brazil in forty years.
Negotiations, several PT spokespeople implied, are the way to go forward, both domestically and internationally; and Brazilians are famously skilled diplomats. Lula, who gained negotiating experience as a union leader under military rule, has said his government's approach will be both tough and loyal: Agreements will be respected but Brazil will not buckle to unfavorable demands. "We will say yes to some things, no to others," said PT chief Genoino. "We will not just denounce, nor just accept; we will get them to change." Just how the coming negotiations over free trade between Washington and Brazil play out could greatly influence the course of overall hemispheric relations. If Brazil holds fast and wins tangible concessions from the United States or if it ultimately refuses to sign the FTAA, Lula will emerge as a key regional leader and US hegemony will be weakened, if not directly challenged.
But, to quote the cliché, four years is an eternity in politics, and reality can intervene in many ways to alter US-Brazilian relations during Lula's tenure, starting with war in Iraq. Some have argued that US preoccupation with Iraq has distracted Washington from taking a harder line against Lula. The Brazilians, for their part, are unlikely to consume scarce political capital fighting Washington over issues not directly related to Brazil.
Yet Lula has consistently criticized Washington's war plans and is likely to be an even more vocal opponent once the bombs start falling.Such a war could be economically devastating to Brazil and to Lula's social plans. Former labor federation official Jakobsen notes that "war in Iraq could raise oil prices. And Brazil imports oil. You can imagine the rest."
In the meantime, Brazil's new leftist government is forgoing all ritual denunciations of "imperialism," eschewing the Sandinista tack of declaring the "yanquis" the "enemy of humanity," and staying away from the rhetorical rants of Venezuela's Chávez. Instead, its response to Washington on all matters is: Let's talk. Filtering through these constant references is the suggestion that President Lula can turn his subjective resources into real facts, including, if need be, direct appeals to the conscience of the world, as he did at Davos.
There is an important precedent for this approach: Brazil faced down and defeated the powerful pharmaceutical multinationals in defending its patent-free generic AIDS drugs; its tactics included confrontational full-page ads in the New York Times. The strategy: Set the stage by building a convincing and respected national program, show it to the world and then go out and kick butt. The message was so simple and compelling--sick people dying of AIDS while drugs are denied them--that Big Pharma was disarmed. Even the notoriously impervious World Trade Organization had to cave briefly; at its 2001 meeting in Doha, Qatar, the WTO exempted some drug patents from its intellectual property protections, a concession the United States is now scrambling to take back. George W. Bush even tried to climb aboard in a way, with his mawkish State of the Union announcement of concern for AIDS-beleaguered African states.
Doing the same for the hungry and malnourished now at the center of Lula's social program won't be as easy. Frei Betto said that during a visit to Santa Monica, California, he found dozens of AIDS groups in the phone directory but none dealing with hunger. "AIDS can affect anybody," he explained, "so everybody feels sympathy. But hunger is only a problem for the poor." Nevertheless, he continued, slavery was once normal too; now, it's a crime. The same thing can happen with hunger, even poverty itself. It's certainly a long shot, but if anyone can pull this off, a soft-spoken, 57-year-old former lathe operator who never finished high school might just be the guy to do it.
Brazil may curb regulators' powers
Posted by click at 6:21 AM
in
brazil
washingtontimes.com
By Bradley Brooks
UPI Business Correspondent
RIO DE JANEIRO, Brazil, Feb. 20 (UPI) -- Brazil's new president may seek to limit the powers of regulating agencies, saying regulators may have de facto "dollarized" segments of the country's economy and too extensively controlled pricing.
President Luiz Inacio Lula da Silva criticized the agencies and their methods for setting tariffs in a meeting with government party leaders on Wednesday, those in attendance said. Lula, as he is known, complained that Brazil's political leaders didn't learn about changes in pricing policies until they read about them in the newspaper.
"The decisions that affect the day-to-day life of the population aren't approved by the government," he said. "(The regulators) are procuring the political power of Brazil. They've created a wall between themselves and the government."
Most of the regulating agencies were set up after 1997 in the midst of former President Fernando Henrique Cardoso's eight years in office, and during a time of rapid privatization. Cardoso created the agencies, which largely have autonomy from government intervention, to attract international investors. If investors could see that the pricing policies of key sectors weren't at the whims of the government, Cardoso reasoned, they would be more inclined to make longer-term investments in the country.
Since his election late last year, Lula and his team have been studying the country's regulators, targeting for changes those that they say benefit specific economic sectors more than they do Brazilians.
"Ethanol, gasoline and steel prices rose because of the dollar. How can you explain a 47 percent hike in local steel prices? The raw materials are all produced here," Lula said.
Brazil's currency lost 35 percent of its value in 2002, which made sectors with pricing methodologies pegged to the dollar or those that must rely on imports more expensive. For example, Brazil must import about 25 percent of the oil it uses because of a lack in refining capacity, which sent prices higher.
Specifically, Lula is targeting the agencies Aneel, which oversees electricity rates, and Anatel, which has responsibility for telecommunications.
The ANP agency monitors the oil market, but pricing policies are set by state-run oil giant Petrobras.
Lula said his government has already put the brakes on recent attempts to increase energy rates by more than 40 percent over the next 4 years. Instead, an increase of between 28 percent to 30 percent will be seen.
Workers' Party Sen. Aloizio Mercadante, a confidant of Lula's and the government's leader in the Senate, said the government is hoping to "rescue the intelligence of the State" by wresting some power away from the regulators.
"There are serious problems with the agencies, from the area of tariffs to that of regulation," Mercadante said. "The government has lost the ability to regulate and administer important sectors, such as utilities."
Congressman Roberto Jefferson said Lula won't have much trouble getting lawmakers to go along with curtailing regulators' powers.
"We are certain that the regulators (are acting) above the law," he said. "They're treated like a parallel power. I think the performance of these agencies is really an abuse."
War talk prompts economic concerns from Brazil to Mexico
Posted by click at 6:18 AM
in
brazil
boston.com
By Alan Clendenning, Associated Press, 2/20/2003 14:58
SAO PAULO, Brazil (AP) In a small factory in a blue-collar neighborhood of this vast industrial city, dozens of workers churn out parts for pressure cookers, essential items in most Latin American kitchens.
But the management of Acessorios para Panela de Pressao is worried about an economic threat half a world away that could lead to reduced sales and layoffs: a U.S.-led war against Iraq.
Higher oil prices linked to fear of war have already boosted inflation from Brazil to Chile. And a much-anticipated regional economic recovery is on hold, with concerns that the situation could get worse before it gets better.
Brazilian sales of Acessorios' parts for pressure cookers widely used to make feijoada, Brazil's national dish of black beans, rice and pork are down 50 percent since January because of double-digit inflation and consumer uncertainty over the economy's direction.
The firm has managed to maintain production and its 85-employee work force only because of a spurt in exports to countries like Colombia and Ecuador.
But demand could plummet beyond Brazil's borders if war breaks out and consumers across the region limit spending and decide to use their old pressure cookers longer, said company manager Luciana Pereira Lopes.
''Usually, sales pick up after Carnival,'' which takes place in early March this year, she said. ''But the uncertain thing is how the war could affect the Brazilian economy and the external market.''
The war fears have already hurt Latin American stock markets, curtailed foreign investment and prompted investors to push down the value of currencies in countries like Mexico, Chile and Brazil.
While their devalued currencies have helped Latin America boost crucial exports to the United States and Europe, experts warn that a war could reduce global demand for goods ranging from Brazil's diverse manufactured and agricultural products to Chilean wine.
''Right now, talk of war has stalled everything,'' said Ricardo Amorim, head of Latin American research at the New York-based IDEAGlobal. ''If war breaks out and the world economy performs worse, the impact on the Latin American economy will be deeper.''
The economies of Brazil and Argentina were hit particularly hard last year. Mexico also suffered because its economy is so tightly linked to the United States, and could face tough times in war if the U.S. economy stumbles more.
Experts say Argentina wouldn't suffer as much as Mexico or Brazil if war breaks out because the country has already virtually struck rock economic bottom, pummeled by a five-year-old recession that has condemned one in two Argentines to poverty and 18 percent to joblessness.
Brazil's economy South America's largest turned sour last year on investor concerns that its new leftist president might implement policies that could lead to a default on the country's massive foreign debt.
Since taking office Jan. 1, President Luiz Inacio Lula da Silva has pleased markets by filling key economic posts with moderates who say Brazil won't adopt unorthodox fiscal changes.
Silva's aides have pledged to fight inflation, and Brazil's central bank continued that course Wednesday by raising the benchmark interest rate to 26.5 percent from 25.5 percent.
But the Brazilian economy still struggles because of the war fears, with experts warning it will deteriorate if fighting begins.
Some speculate Brazil might have to return to the International Monetary Fund to seek additional funds beyond the record $30.7 billion loan program the IMF approved for the country last year. Others say Silva may have to make additional budget cuts, after announcing $3.9 billion in cuts earlier this month.
The war talk is already directly having an impact on some Brazilian companies. Shares of Embraer, the world's fourth largest commercial aircraft maker, slumped last week after a regional carrier for Continental Airlines delayed deliveries of new planes.
And Brazilian moving company Granero Transportes was forced to cut costs because Brazilian businesses and families are nervous about moving, said marketing director Julio Pires.
Besides higher gas costs for its fleet of 1,000 trucks, the price of cardboard boxes Granero uses rose about 45 percent in recent months. The company cut 30 jobs from its 1,000-employee work force, parked some trucks and reduced spending on advertising and maintenance.
''We're in the cascade effect right now,'' Pires said. ''When gas goes up, everything goes up. If it wasn't for the threat of war, the economy would be improving, not getting worse.''
Make or break
Posted by click at 6:13 AM
in
brazil
www.economist.com
Feb 20th 2003
From The Economist print edition
Reuters
Under its new leader, Luiz Inácio Lula da Silva, Brazil could take a leap into prosperity—or slide back towards poverty, says Peter Collins. Which will it be?
Get article background
WHY has the United States prospered and Brazil has not? Both are giant countries, each dominating its half of the Americas, each amply endowed with people, land and natural resources. Each has remained united, with a strong sense of nationhood, after gaining independence from former colonial masters in Europe. But whereas the United States has become the world's economic superpower, its South American sibling is a social and economic under-achiever, the eternal “country of the future” (as it calls itself ironically) whose future never arrives.
Brazilians have tortured themselves with this comparison for decades (see article). Some of the country's thinkers blame their compatriots' misplaced faith in Messiah figures who will come and perform miracles, and contrast this unfavourably with the Americans' ability to organise themselves and work together to build their nation. Indeed, judging by the adulation accorded to Luiz Inácio Lula da Silva since being elected president in October, some Brazilians seem to think that he is the long-awaited Messiah. However, Lula, as 176m Brazilians simply call him (as will this survey), realises that he cannot work miracles alone. He aims to strike an unprecedented “social pact” with all levels of society, which will enable Brazilians as a whole to take a leap into rich-world standards of prosperity, justice and equality, striving together to create “the nation we have always dreamed of”, as he said in his inaugural speech last month.
Make or break
Paradise lost
Fixing the finances
Three square meals a day
Jobs that grow on trees
Start at the beginning
Getting away with murder
What sort of president?
Author interview
Acknowledgments
Offer to readers
Paradise lost
Feb 20th 2003
The next steps for Lula in Brazil
Feb 20th 2003
Sao Paulo
Brazil
Latin American economies
The IMF reports on Brazil. See also Brazil's government, its president and the Workers' Party (last three sites in Portuguese).
The gap between Brazilians' dreams and their reality is enormous. Although by international definitions Brazil is a middle-income rather than a poor country, its glaringly unequal income distribution means that the poorest 50% account for 10% of national income—and so do the richest 1%. Brazil's educational performance has, until very recently, been dismal. Despite recent improvements in environmental health standards, 19% of households still lack running water. Poor communities on the peripheries of Brazil's cities suffer from a plague of violent crimes.
Lula won the election, as oppositions usually do, by criticising the then government for incompetence and inaction and by promising drastic policy changes to bring about rapid improvements. However, he also abandoned much of the radicalism that lost him the three previous presidential elections. He stopped calling for Brazil to break with the International Monetary Fund and its economic strictures and for the country's debts to be “renegotiated”. Two months before polling day, he nodded his approval of a $30 billion loan from the Fund that committed him not just to keeping the strict financial targets of his predecessor, Fernando Henrique Cardoso, but to tightening them, as he has now done.
Lula's election propaganda constantly harped on about the need for mudança (change), and once elected he claimed that he would begin rebuilding Brazil “starting from scratch”. In fact, though, the best prospect of success for the new government lies in continuity. Brazil's frequent political ruptures since independence from Portugal in 1822 led to a lack of follow-through in pursuing public policies that has cost the country dear, but Mr Cardoso, Brazil's longest-serving democratic president, made a good start on overcoming such debilitating short-termism. This survey will argue that, far from starting from scratch, Lula should build on Mr Cardoso's achievements by continuing to pursue many of his predecessor's best policies—especially in welfare, education and health—and to press on with reforms that Mr Cardoso's government started in areas ranging from pensions to policing.
To get an idea of the benefits of continuity, contrast the fortunes of education and justice in Brazil during Mr Cardoso's term of office. In the education ministry, the same minister, Paulo Souza, was in charge for eight years, during which time Brazil achieved near-universal primary schooling for the first time in its history, and a surge in enrolments to secondary and university education. By contrast, during his eight years in office Mr Cardoso presided over a succession of no fewer than nine justice ministers, none of whom made his mark in the job. Murder, armed robbery and other violent crimes continued at shockingly high rates, aided and abetted by a still inefficient and corruption-riddled police and judiciary.
No time to lose
Even if Lula manages to get re-elected (as Mr Cardoso did) in 2006, to give him an eight-year mandate, the maximum allowed under the constitution, he will have little enough time to achieve progress on the scale he is promising. But because of Brazil's precarious financial situation, in reality he has a much shorter period in which to achieve visible results. The government has debts of around $250 billion, or 56% of Brazil's GDP. Much of it is short-term and needs constant rolling over. Most of the debt is tied either to short-term interest rates or to the real's value against the dollar, both of which are strongly affected by investors' fears that Brazil might default on its debts. If those fears increase, the government's financing costs will rise steeply. The risk is that a default might become a self-fulfilling prophecy.
That is the way things seemed to be heading in the middle of last year, as investors fretted about the growing likelihood of Lula beating José Serra, Mr Cardoso's lacklustre candidate. Was the recent move to the centre by Lula and his Workers' Party (PT) genuine, or would they return to their old radical form straight after the election? And even if they did not, would Lula, a man without any significant administrative experience, really be capable of governing such a large and diverse country? Or would he turn out to be like Fernando de la Rua, who in late 2001 was forced to quit as Argentina's president, leaving behind a bankrupt government and an imploding economy? Fears of another Argentina caused the real and Brazil's bonds to plunge to levels that suggested the country was heading for default within months. Only when the IMF stepped in with a large loan package last August did the markets recover.
After Lula's victory in last October's election, the gradual recovery of the real and Brazilian bonds continued. The markets were cheered by sensible-sounding pronouncements from the new president's economics team, and by the appointment of some respected business and financial figures to key government jobs. But the situation remains fragile. If investors conclude that not enough is being done to avoid a default, they will bring one about in their stampede to avoid being caught. On the other hand, if in the coming months Lula's government can convince investors that it is putting the public finances on a sustainable footing, it will be able to cut interest rates and stoke up economic growth, thereby making a default much less likely.
It is now possible to foresee two drastically different outcomes for Brazil in the near future. The dream scenario is that Lula will be able to use his popularity to push through controversial reforms that will banish the markets' fears of an imminent default. The resulting improvement in the economy will keep the public on his side, and the government's improving finances will provide him with the money to make the big social advances he has promised. Congressmen, mindful of public and media opinion, would feel obliged to collaborate with the president. As long as Lula remains popular, his main opponents—Mr Cardoso's centre-right Social Democrats and their biggest partner in his former coalition, the catch-all Brazilian Democratic Movement—are more likely to keep their promise to be a principled opposition that will back him on reforms vital to the national interest. They might even be persuaded to join his government, giving him a majority in Congress.
The optimists (of whom Brazil is never short) reckon it may be no bad thing that many of the vested interests Lula must overcome are on his own side. Who better than he to persuade unionised workers that they have to make sacrifices? And given his background, at least he did not owe his election to Brazil's avaricious conservative elites, so he will be less beholden to them—unlike Mr Cardoso, who continually had to buy them off.
But a nightmare scenario is also possible in which Brazil follows its southern neighbour, Argentina, into default and economic slump, resulting in rising poverty, crime and unrest. Pessimists say that although Lula and his team are now making the right noises, they will be unable to deliver. If Mr Cardoso, with his big congressional majority, could not complete his reforms of pensions, the tax system, the labour laws, policing and justice, what chance has Lula with his minority government? He cannot even rely on the support of his own party, which still contains many unreformed radicals.
Lula's campaign material portrayed the former union boss as a “great negotiator” who will sit everyone around the table, persuade all sides to make sacrifices and reach a national consensus to push through reforms. He hopes to achieve this through various grandly titled talking-shops, such as the Council of Economic and Social Development and the National Labour Forum, with representatives from different sectors of society. The danger is that while Lula waits for results he will lose his initial momentum. If the markets lose patience with him and a renewed financial crisis undermines his popular support, Congress may be less willing to support unpopular but necessary reforms.
Indeed, if Lula starts to lose force, the representatives of various vested interests in Congress may seize the opportunity to try to undo some of Mr Cardoso's reforms. Already, some state governors (who often have a lot of influence in Brasília) are pressing for a relaxation of Mr Cardoso's fiscal-responsibility law, which put an end to the spending excesses of local government. If they succeed, the nightmare scenario of Brazil unravelling before Lula's eyes will come a step closer.
For now, either triumph or tragedy seems possible. Much rests on Lula himself, a man whose rise from shoe-shine boy to strike leader to president of one of the world's largest democracies has demonstrated remarkable personal achievement—but who remains an unknown quantity. His first and biggest challenge will be to get the economy right.