Split growing over Brazil's economic moves

www.upi.com By Bradley Brooks UPI Business Correspondent From the Business & Economics Desk Published 2/20/2003 6:19 PM

RIO DE JANEIRO, Brazil, Feb. 20 (UPI) -- Less than two months in office, Brazil's new government is beginning to show the strains of trying to push one of the world's largest emerging markets out of the doldrums.

On Thursday, officials close to President Luiz Inacio Lula da Silva were split over the previous day's decision to raise interest rates to 26.5 percent from 25.5 percent.

Some argue that the move will only stifle credit and choke the economy. Others say the hike was needed to help keep inflation at bay.

Adding to the schism, parts of the base of Lula's Workers' Party -- the largest and best-organized leftist party in Latin America -- have been taking to the streets of the capital Brasilia to register their discontent with reforms.

Hundreds of public sector workers -- an integral part of the Workers' Party -- protested in front of the presidential palace on Wednesday.

They voiced opposition to the government's push for pension reforms and a plan to give the central bank more autonomy -- both moves investors are hoping to see passed this year, but which are looking quite unlikely.

Analysts had been optimistic that Lula's entrance into power would help push through reforms to the pension system for public workers.

Many label the pension plan an inefficient scheme that does little more than add to the country's $240 billion debt.

But the problem is reform means taking money out of the recipients' pockets, which is never an easy task for politicians, let alone if it affects their political base.

As for the increased interest rates, Lula's chief of Cabinet on Thursday said they were "incompatible" with economic growth.

"The country cannot survive with these levels of rates," Jose Dirceu told reporters after meeting with Lula on Thursday. "High interest rates and economic growth are incompatible."

Dirceu conceded that the external situation -- a potential war in Iraq -- is keeping inflation at a dangerously high level and making it difficult for the central bank to bring rates down.

"It's a moment of transition. The country needs to halt inflation and prepare itself for a more dangerous internal situation," he said.

But Finance Minister Antonio Palocci stands by the central bank's moves.

Palocci on Thursday discounted the short-term negative effects of high interest rates and the increased reserve requirement for banks -- which jumped from 45 percent to 60 percent.

The government, Palocci said, has been and will continue to take aggressive steps to both dampen inflation and at the same time try to increase investor confidence.

But Dirceu opined that it shouldn't be the job of the central bank to stimulate economic growth.

"It's the government that has to solve the problem of economic growth."

It is tax and pension reforms, as well as some smart funding to production sectors, that will spark a turnaround in Brazil, Dirceu said.

Richard Feinberg, an economist at the University of California, San Diego, and the former president of the Inter-American Dialogue, agrees that high interest rates are needed to battle inflation, but called them a double-edged sword.

The level of interest rates are "brutal," Feinberg said. "They've got to get them down -- that's very critical."

But with 12-month inflation sitting at 14.5 percent in January -- the highest level in six years -- other economists argue that bringing prices down has to be the first priority.

The fallout over Lula's initial economic moves may simply be a signal of healthy and vigorous debate within a party that finds itself in charge of the country for the first time, analysts say.

Or it may be indicative that Lula's base support will leave him, resulting in gridlock and little headway being made in the next four years.

The history of the Workers' Party, though, does tend to point to the sunnier scenario.

Since its founding in February 1980, the party -- made up of far-flung elements of the left and center, each with their own political axes to grind -- has encountered moments of paralyzing internal debate.

The Workers' Party was founded with the notion that democracy should be practiced in the most direct manner possible, with a plethora of voices equaling more political freedom.

The party is structured with several different levels that begin at the grass-roots in nearly every community and lead vertically up to Lula himself. The party hopes this makes it more democratic and responsive.

This at times has led to what is more cacophony than symphony, but as the party's undisputed leader since its inception, Lula has managed to stay mostly above the fray and eventually to push the party in a common direction.

Yet now that the Workers' Party finds itself at the pinnacle of Brazilian politics, many wonder whether the stakes are too high for certain sectors of the organization to acquiesce for the sake of the greater good.