Romancing the IMF
www.brazzil.com Brazzil Economy March 2003
Brazilian Finance Minister, Antônio Palocci, the former Trotskyist, is saying the right things. He is honest and sincere, although his successor as mayor of Ribeirão Preto has discovered plenty of unpaid bills from Palocci's administration.
Lula has returned triumphantly from a whirlwind trip to Europe, after his appearance at the World Social Forum in Porto Alegre. He was a hit in Davos at the World Economic Forum. Lula is the only president to have appeared at both gatherings. He is being touted as a link between the First World and The Third World. Lula provided a bit of optimism to the conference that was preoccupied about war and recession. His promises of fiscal responsibility together with increased social emphasis has set well with observes in Europe.
Not everyone in Porto Alegre was pleased with Lula's participation in the World Economic Forum. One woman, upset by the way that Lula's party, the PT (Workers' Party) and the President are behaving now that they are in power, hit PT president José Genoíno in the face with a cream pie during one session.
Brazil's best interests were served by Lula stellar performance in Davos. Antônio Palocci, Brazil's Minister of Finance, met in Davos with Anne Kruger the number two person at the IMF. The encounter took place in the hospital room of Henrique Meirelles, central bank president, who had slipped and fallen on ice breaking an ankle.
In Paris, Lula and Palocci had a productive meeting with IMF president, Horst Köhler. A cordial relationship with the IMF, who has another US$ 24 billion to disburse this year under the present agreement, is crucial for Brazil to meet foreign debt payments and pay for essential imports. An IMF team of technicians is due in Brasília in mid February to review figures and make recommendations to the board. There should be no problem in releasing this next US$ 6 billion as it appears as if Brazil is meeting the previously established targets.
Palocci has said that his objective is to reduce the Brazil risk factor and regain the confidence of the international financial community. The government's stated goal is to reduce dependence on foreign sources of credit. It is not easy to achieve credibility by words that are the direct opposite of what Lula proclaimed in the early days of his 2002 presidential campaign. Palocci, the former Trotskyist, is saying the right things. I believe he is honest and sincere although his successor as mayor of Ribeirão Preto has discovered plenty of unpaid bills from Palocci's administration.
Both Gerhard Schröder and Jacques Chirac warmly received Brazil's new President. Vague promises of friendship and cooperation were exchanged. France has enlisted Brazil's help in developing Africa. Lula did not make progress on the matter of agricultural subsidies and tariff barriers. As a man of humble origin and limited education who has risen to such prominence, Lula is somewhat of a novelty. The European media gave him excellent, positive press coverage. He was careful not to be critical of George Bush, merely stating that a diplomatic solution for the Iraq situation would be preferable to war. Brazil is not on the UN Security Council nor is it expected to provide any military help.
The reality facing Lula's government, so far intact, is tough. The economy is in the doldrums with unemployment at record heights. Inflation continues. The financial markets are uneasy. This is due not necessarily because of doubts over the capacity of Lula and the PT to achieve progress toward fulfilling some campaign promises, but because of the real prospect of a war of uncertain duration and consequences. Promised austerity has not yet been tested, although there is talk of increasing the target of the primary budget surplus above the present 3.75 percent and none of the bankrupt states have received handouts from the federal government.
Recent opinion polls show Lula has a record level of approval. Thus far there has been much talk and few measures of a concrete nature, other than an increase in interest rates and pay raises and other benefits for legislators. The population is patiently waiting to see what will happen. School vacations will soon be over and life will return to normal before long. Until Congress reconvenes there may be little excitement.
Lula could have luck in persuading Congress to pass the many announced reforms. Tax, political, labor and social security reforms as well as the matter of central bank independence are the principal items on the agenda. It appears that ex-president José Sarney of the PMDB will be elected as president of the senate. The PT promoted this by interfering in internal matters of this big party in order to gain their legislative support. Many jobs at the second and third level of government have not yet been awarded. PMDB will no doubt receive its share.
Good at PR
Many federal deputies are changing parties in order to be aligned with the government. The PT is fairly rigorous in accepting new members so these turncoats are joining other parties that theoretically back the government. Since few, if any, legislators have any ideological convictions, this musical chairs game is quite common. It is much easier for a deputy to obtain favors if he is "government" rather than opposition.
Hypothetically the government, with the support of the PMDB and other parties of a more leftist nature that have ostensibly supported Lula since the first round, has a majority sufficient to make constitutional amendments and pass other urgent legislation. The PT when in the opposition obstructed many of these same proposals that FHC tried to get through Congress when he was president. Now if the other two big parties that backed FHC most of the time, the PFL & PSDB, were to support these necessary reforms, Lula might make some progress. I wouldn't count on this happening.
My prediction is that little will be accomplished in Congress very soon. If Brazil's credibility abroad depends upon what happens in the legislative area, it will be a long time coming. Marketing and PR, at which so far this government excels, have their limit. Eventually tangible results must be evident.
Lula has now unveiled the much heralded "Zero Hunger" program. How it will work is a mystery. Brazil does not lack food but many people do not have the money to buy it. Hopefully funds doled out to poor people for them to acquire food will not be spent on soda pop, beer, candy, cigarettes and cachaça, Brazil's cane spirits that is the world's second most consumed distilled beverage after sake.
It will be interesting to see if administrative and distribution costs can be controlled in order that some benefit from this noble cause accrues to those who should enjoy better nutrition. The danger is that the government will create an inefficient bureaucracy that will minimize the benefits to those who need help.
Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. During the past thirty-eight years, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br