Make or break

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?

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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.