Analysis - Pragmatism x Extremism: Lula On The Tightrope...

www.infobrazil.com by Alcides Ferreira          Feb 01 - 07, 2003

President Luiz Inácio Lula da Silva's honeymoon with the public is sweet. His political support among Brazilian voters, according to the latest surveys, is still at record high levels. And, as is usually the case following elections in Brazil, congressmen run to the parties that side with the high-flying Lula and his PT in Congress, expanding his support base in the federal legislature.

Conservative economists and analysts, mostly from banks, are surprised by Lula's early measures in the economic arena. As predicted here some weeks ago*, Lula's economic team has put forth a conservative start to this administration. They raised interest rates and, soon after, announced an even greater budget surplus than the target set by former President Fernando Henrique Cardoso.

These are quite logical moves. The economic team had to gain approval from the conservative side of public opinion, since the leftist or sympathetic segments had already voted to elect Lula. And, again as expected, reactions are already popping up, initially – and predictably – among diehard Lula supporters and PT members.

The past week saw a most interesting development in this context. Finance Minister Antonio Palocci met with the Worker's Party contingent in the newly-elected Congress, and although it was a closed meeting whose topics were never meant to reach the news media, one participant taped the proceedings and gave the recording to Brazil's top national news service, Agência Estado. The contents made it clear that while Lula's honeymoon with the public may be sweet, the same cannot be said about his Worker's Party and its relationship with the government economic team. Palocci had to address bitter arguments from party members, against his initial measures as Finance Minister. Party leaders were decidedly angry about the leak, saying this was the first time a PT meeting had been "bugged".

Also in the past week, Worker's Party Senator Heloisa Helena, who has become the most prominent voice for "far left" party members in opposition to what the government has announced so far, went further. In a raging interview published by Brazil's top weekly newsmagazine, Veja, she harshly criticized Lula and much of what he and his government have done in just over a month in office.

The fact is the Worker's Party was elected promising heaven, but the first items it delivered were precisely of the type that the extreme left within the party believed only the devil himself could offer up: even higher interest rates, and further budget cuts and restraint. Enough to make many within the PT who thought they were winners in the presidential election feel somewhat like losers.

More of this is likely to be on the horizon, since the government will soon have to announce the new salary levels for public servants. The amounts are likely to seem quite old, as the type of upward movement servants have been hoping for is not in the cards. Then there's the pension system reform, which will certainly affect what many in the public service consider to be unshakable rights. In May there's the annual Labour Day ritual, with the "new" minimum wage announced by the government, and again, there will be little to celebrate as any adjustment will seem remarkably like the meager raises of the past few years under President Cardoso.

Since there is no reason to state or believe the economy will suddenly begin to expand at a vigorous pace, the obvious conclusion is that bad news will begin to pile up. All of the above, plus high unemployment and low wages – frequent headlines in the final months of the Fernando Henrique Cardoso administration, which will not go away without strong, sustained economic growth.

The question then is, will Lula stay the course or be tempted to try a more populist approach, and perhaps hang on to the support he so obviously enjoys at this stage? Sticking to the current track means using monetary and fiscal policies to curb inflation, something that is caustic anywhere in the world. A populist approach in this case would mean trying to allow the economy to grow at a faster pace than the country can handle without allowing inflation to roar its way back into the lives of Brazilians.

Like many in Brazil, outside investors and companies that sell to, buy from or have a subsidiary in Brazil are likely asking the same question. And like many in Brazil, they will probably wait a bit longer before reaching any conclusions. This is already quite noticeable: in spite of several positive economic steps during Lula's first month in office, markets are hardly reacting at all.

One could argue the world is afraid of a possible war in Iraq, which would be partly true. It would also help to explain the behaviour of Brazilian markets. But clearly, with or without war in Iraq, players are still waiting for more reassurance from the Brazilian government itself before forging ahead.

In my opinion, Lula has enough political assets to stick with the conservative approach on the economy, while nourishing the social aspects and demands from society so dear to him and his party, with programs like "Zero Hunger". However, if his economic policies don't produce results in a reasonable amount of time – say, one year – such as lower inflation and faster growth, Brazil might then move to a dangerous scenario. Lula might find himself getting bad press, both because of his own failure, and because there is no social program in the world that will solve Brazil's entrenched, secular inequalities in such a short time span.

That's when Lula might be tempted to do "the right thing" in the wrong way.

• See InfoBrazil Year IV, issue 168, week of December 14 – 20, 2002: Lula's Economic Team: New Names, Old Policies? by Alcides Ferreira;

Related sites: Zero Hunger – unofficial website in support of the government's anti-hunger program (Portuguese only) www.fomezero.org.br

Veja weekly newsmagazine (Portuguese only) www.veja.com.br