After Carnival, Brazil's Lula Faces Crucial Test - he says: a house is renovated not by destroying it, but by reconstructing it wall by wall

reuters.com Mon March 3, 2003 12:36 PM ET By Axel Bugge

BRASILIA, Brazil (Reuters) - The end of annual Carnival celebrations this week will mark an important testing period for Brazil's new President Luiz Inacio Lula da Silva.

The country traditionally comes back to life after slumbering between New Year's Day and the pre-Lenten festival, and Lula, who was inaugurated on Jan. 1 as the country's first elected working-class leader, will face his first real challenges as public attention refocuses on politics.

His government has sought to encourage Brazilians to be patient by running television advertisements that explain a house is renovated not by destroying it, but by reconstructing it wall by wall. Analysts say this campaign aims to make it easier for him to undertake unpopular measures.

"I think people are getting the notion that things are going to be harder than expected," said Christopher Garman, a political scientist at the Tendencias consultancy.

Political analysts estimate that Lula, who enjoys strong popularity, has six months to a year before his charm with voters fades. His first tasks are likely to be reforms of the country's antiquated pension and tax systems, a program that may be tough to sell to Brazilians.

Since taking over the helm of Latin America's largest country, the Workers' Party government has taken tough economic measures such as sharply cutting spending and hiking interest rates to contain rising inflation, which is subduing growth.

Those moves have won favor for the former metals worker among investors, but they have also irked some members of his party who accuse him of following the previous government's policies.

And the moves are probably not quite what Lula had in mind when he promised during his election campaign to create millions of jobs and fight one of the world's worst income distribution gaps.

But the former firebrand labor leader knows that steering of his party toward the center and embracing market-friendly policies not only ensured him electoral victory but also meant he would have to defend such policies in government.

GREATEST EXPERIMENT IN HISTORY?

Vinod Thomas, the Brazil country director of the World Bank, which has thrown its weight and millions of dollars behind Lula's "Zero Hunger" program to feed the country's estimated 40 million poor, summed up the test Lula faces.

"Brazil is carrying out one of the greatest experiments in history of pursuing a bold social program with fiscal responsibility in an unusually tough external environment," he said.

Lula is spending Carnival on a farm with his family, and after festivities wind midweek, the time to deliver on the "experiment" will come.

According to Carlos Lopes, a political scientist at the Santa Fe Ideias consultancy in Brasilia, the Lula government appears to still be testing the waters. "This government has shown a certain worry about concretely doing things," he said.

In a traditional switch of many "new left" governments around the world, Lula has pledged to overhaul the debt-ridden public pension and cumbersome tax systems, reforms his Workers' Party opposed for years.

As public pensions sap $15 billion a year from government coffers, any reduction in costs would send a powerful signal to markets that Brazil's $250 billion debt burden -- which has been a persistent concern for investors -- can be contained.

Lula dedicated much time to the reforms during his first weeks in power, including establishing a special council of business, labor and social leaders to advise him and held a meeting with Brazil's powerful governors, who backed his push.

But despite his success in turning around strong popular opposition to these reforms dating from the center-right government of former President Fernando Henrique Cardoso, Lula has been slow off the starting blocks with concrete proposals.

Garman points out that Cardoso had legislative proposals on key issues ready in the second month of his rule.

Many observers agree that a quick success on these reforms could give him the space to turn to his social agenda.

HUGE POPULARITY

Still, despite high interest rates, high inflation, high unemployment and low growth, Brazilians adore him.

A poll at the end of January showed 78 percent of respondents expected Lula to do a good or great job, up from 71 percent in November. Nearly 70 percent in the same poll saw him living up to his campaign promises.

"He'll have a significant amount of time, this popularity won't evaporate this year," predicted Garman.

Carlos Pio, a politics professor at the University of Brasilia and partner at the Augurium consultancy, said Lula will probably decide to push votes in Congress "straight after Carnival," paving the way for the key reforms.

Even if all the largest centrist parties in Congress support reforms -- as they did when they were in power for eight years -- Lula should seize the moment to move quickly as waiting carries risks, analysts say.

For one, Brazil's Congress is infamous for moving at a snail's pace, meaning full passage of pension and tax reforms may not happen until well into the second half of the year.

"I am optimistic on the politics but pessimistic on the timing of reforms," says Garman.

One way to speed up the reform process would be to bring the largest centrist party in Cardoso's coalition into the government through talks which are intensifying. Inclusion of the Brazilian Democratic Party in the government would give it a healthy congressional majority which it now lacks.

The success of such talks, in turn, could depend on the extent to which Lula's government can escape being perceived as just continuing the tough economic measures of Cardoso's reformist, free-market administration.

"To what extent does this government have the force to carry out the policies of Fernando Henrique Cardoso?" asked Pio. "In six months that could become a risk. High expectations can fall rapidly."