The War On Poverty - In office just two months, President Lula da Silva and his team have begun to tackle inequality in Brazil

www.time.com March 10, 2003 | Vol. 161, No. 10 BY TIM PADGETT AND ANDREW DOWNIE | BRASILIA

The carnival celebration that sambas through the streets of Rio de Janeiro this week is traditionally a showcase of coordinated public spirit. Class divisions give way to elaborate, egalitarian parades involving millions of people and months of preparation. But this year even Carnival became a reminder of Brazil's poverty-driven violent crime, as drug gangs spread terror through Rio's streets last week on the eve of the big party, killing at least 10. It was one more loud warning that to maintain order over the long term, Brazil has little choice but to tackle its epic social inequality, which is the worst in Latin America, if not the world.

Brazil's fractious and venal political system is usually the last place to look for real leadership on this or any other issue. But these days, alongside images of the Rio bloodshed, there's an uncommon sight that even Brazilian politicians apparently can't ignore: the nation's World Cup-champion football team Sporting Fome Zero (Zero Hunger) T shirts in support of leftist President Luiz In á cio Lula da Silva's ambitious antipoverty program. The team's gesture reflects, for the moment anyway, a rare sense of unified national purpose in Brazil. Last week's headlines also included all 27 of the country's state governors pledging to help Lula and his Workers' Party (PT) achieve crucial tax and pension reforms that will make it easier to fund his social projects — and even Brazil's dysfunctional Congress looks poised to cooperate. "I have to prove I'm capable of doing what previous Brazilian Presidents couldn't," said Lula, who took office Jan. 1. Lula's challenge is to make Brazilian government — which oversees Latin America's largest economy and the world's tenth-largest — work. If he can make that happen, he'll achieve something even more remarkable: a leftist Latin American government that works.

Lula, 57, is pursuing his own, more poverty-focused version of the Third Way, the socialist-capitalist hybrid once touted by European leaders like British Prime Minister Tony Blair. His ultimate goal is to improve the lives of the poor as well as the rich — something the free-market reforms that swept Latin America in the 1990s failed to do — and he's betting that fiscal responsibility will yield more wherewithal to fund a Brazilian "New Deal" that includes everything from hunger eradication to land titles for squatters. This mix of ideologies is also evident in Lula's cabinet. The President himself is a high school dropout, former metalworker and labor union leader, but his handpicked Central Bank president, Henrique Meirelles, is a Harvard graduate and former president of BankBoston. Welfare Minister Benedita da Silva rose from a squalid Rio de Janeiro favela, or slum, and was Brazil's first black female Senator, while Vice President José Alencar is a textile multimillionaire from the right-wing Liberal Party. Culture Minister Gilberto Gil, a pop music star, sports dreadlocks; Chief of Staff José Dirceu wears power suits and helped guide Lula from labor socialist to the more centrist "Brazilian Blair," as Brazilian and Wall Street pundits have taken to calling him.

So far the mix of social crusade and fiscal discipline has won Lula an 84% approval rating — even though he has yet to score a real achievement — and unexpected applause from Wall Street, where frantic fear of him during last year's election campaign helped push Brazil's currency, the real, down by more than 50% against the U.S. dollar. "The left in Brazil has learned the hard way," says Meirelles, referring to decades of populist economic catastrophes that were finally halted by Lula's predecessor, Fernando Henrique Cardoso.

While the markets are now more cheerful about Lula, the PT's radical wing (more than a quarter of the party) seems devastated by his move to the center. They've groused especially loudly about Meirelles and Finance Minister Antonio Palocci, a physician who, as a PT mayor in the '90s, engineered a very unsocialist privatization of local utilities. Both men have pledged to adhere to strict economic targets that the International Monetary Fund set last year in return for a $30 billion loan to Brazil. Senator Heloísa Helena, part of a PT group that wants Brazil to default on its $208 billion foreign debt, says she is "sad and disillusioned" by the government. "Did we win," she asks, "just to be the good little boy for international bankers?"

But Chief of Staff and former PT president Dirceu — who as a radical student leader was exiled to Cuba from 1969 to 1974 by Brazil's military rulers before slipping back into the country with a surgically altered face — has made it clear, with a somewhat high hand, that party discipline now means not criticizing Lula directly. Because it took Lula and the PT 22 years and four elections to win the presidency, says one Lula friend, "he's more cautious about not flaming out and screwing up" like so many Latin lefties before him. In a closed-door meeting last month, Lula warned regional PT leaders, "We can't fail in this economic situation."

Dream Team Lula hopes his diverse cabinet will get the right mix of policiesHenrique Meirelles The Harvard-educated Central Bank president hopes to get inflation down to single digits Jose Dirceu An ex-radical, Lula's chief of staff has guided the President from the far left to a more centrist position Antonio Palocci A former mayor, the Finance Minister has pledged to keep to strict IMF targets Jose Graziano Da Silva As Food Security Minister, the former economist will run Lula's Zero Hunger project Benedita Da Silva Born in a Rio slum, Da Silva is set to help Brazil's poor as the new Welfare Minister

Lula realizes that an erstwhile socialist has to work that much harder to prove he's a market-friendly President. Revenue gaps recently forced Palocci to slash $4 billion from the $75 billion budget (Brazil's most austere in a decade), while Meirelles raised interest rates 4.5 points to 26.5% in hopes of keeping 2003 inflation to single digits. Lula won praise across the political spectrum when, instead of trying to please everyone, he postponed the purchase of fighter jets in order to boost funding for Zero Hunger.

Perhaps the most important — and most immediate — steps that Lula needs to take are pension and tax reform. Brazil has a millstone public bureaucracy: its salaries and pensions take more than 8% of the nation's $1 trillion gross domestic product. Reining in the corrupt pension system, simplifying Brazil's baroque tax code and combatting massive tax evasion could help Lula drop interest rates and free up at least $5 billion — more than half of Brazil's entire education budget — for projects like Zero Hunger. "This government's macroeconomic approach has been impeccable," says Paulo Leme, head of emerging market analysis at Goldman Sachs in New York, noting wryly that the PT used to oppose pension reform. "They understand now that what causes poverty in Brazil is the excessive size of the state."

Will Brazil's Congress understand that too? Lula's bond with the governors, who wield considerable influence over their congressmen, was a critical stroke. But the PT holds only 14 of Brazil's 81 Senate seats and 91 of the lower chamber's 513. In a bid for the support necessary to pass the reforms more quickly, Lula took the risky decision to back former President José Sarney for president of the Senate. Many in the PT view Sarney as a crony of the oligarchs who control the country's impoverished northeast. But the votes to be mined inside the progressive wing of Sarney's Brazilian Democratic Movement Party were too much to resist. Either way, Lula insists that what also leaves a third of Brazilians in poverty, and an estimated 46 million hungry, is gross inequality: 20% of the population receive 70% of the nation's income, while 3% hold almost two-thirds of its almost half a billion hectares of arable land. Lula is careful not to declare a soak-the-rich crusade, and his hesitancy to come out for stiff progressive taxation makes his party's left wing crazy. And it's too soon to tell whether his four-year, $1.5 billion Zero Hunger program will be enough to make good on his promise to the poor. It is his presidency's one indulged, untouchable priority. He has made it a special umbrella ministry, coordinating 60 programs, that is not unlike the new U.S. Homeland Security Department. "This is like war mobilization for us," says special Food Security Minister José Graziano da Silva, an economist and longtime Lula adviser. In addition to food relief, the ministry is charged with attacking the causes of Brazil's malnutrition, such as laughable rural infrastructure and the nation's paltry $60 monthly minimum wage, which Lula hopes to double by the end of his term in 2006.

More important, Graziano and ministers like Benedita da Silva say they're kiboshing the waste, inefficiency and indifference of Brazil's social-welfare programs, converting them from political patronage rackets to engines of economic growth.

Zero Hunger, says Graziano, "is meant most to raise the productive capacity of poor Brazilians." It includes churches, NGOs and, significantly, the private sector: Nestlé of Brazil, for example, will donate 1 million kg of food and 248 small homes to the program this year.

Graziano concedes that Lula will stand or fall on this issue when he faces re-election in 2006; but he declined to pinpoint a gauge for success. Still, says Walder de Goes, a prominent political analyst in Brasília, "If Lula achieves most of the goal of Zero Hunger his presidency will be a success — it will have changed the culture of inequality here. There's no example of change like this in our history."

But De Goes fears economic factors beyond Lula's control — global recession, war in Iraq — could keep him too cash-strapped to succeed. "This year all he can do is muddle through, but starting next year he has to produce real results," says De Goes, who wonders if Lula and his inexperienced team can manage that kind of pressure, especially when so many other Brazilian crises — like violent crime — can't wait either.

Financial analysts like Leme also worry that Meirelles, despite the rate hikes, isn't taking the perennial Brazilian threat of inflation seriously enough. But Meirelles argues that "we're not in recession, growth should be above 2% this year and we've lowered the current account deficit from 4.6% to 1.7% of GDP. We can handle the shocks." At the Davos Forum in January, Meirelles, a dancing enthusiast, slipped on the ice and broke his ankle. He can't samba this week — but if that's the only setback the government has suffered so far, Lula might be able to enjoy his Carnival after all.

With reporting by Sol Biderman/São Paulo