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.

www.forbes.com Reuters, 02.20.03, 9:18 AM ET BRASILIA, Brazil, Feb 20 (Reuters) - Brazil posted a current account surplus of $156 million in January, compared with a deficit of $1.17 billion in the same month of 2002, as a bulging trade surplus boosted the country's overall foreign accounts, the Central Bank said on Thursday. That helped shrink the current account gap -- a country's widest measure of foreign transactions -- to 1.41 percent of gross domestic product (GDP) in the 12 months through the end of January from 1.7 percent of GDP in the 12 months through December. Foreign direct investment (FDI) also continued to trickle into the country in President Luiz Inacio Lula da Silva's first month in office, despite growing aversion to emerging markets like Brazil sparked by the threat of war in Iraq. FDI in January totaled $905 million, down from $1.475 billion in the same month a year ago. In 2002, Brazil posted a current account gap of $7.76 billion, its best result in eight years, thanks to a booming trade surplus of $13.1 billion. A weak local currency continues to make Brazil's exports extremely competitive abroad. For 2003, the bank is forecasting a current account deficit of $6.56 billion.

news.ft.com By Raymond Colitt in São Paulo Published: February 20 2003 4:00 | Last Updated: February 20 2003 4:00

Brazil's central bank yes-terday raised interest rates for the second time in a month to curb what new President Luiz Inácio Lula da Silva described this week as the "virus of inflation".

While the move was applauded in the financial markets, industry leaders said high interest rates were choking the economy and failing to curb inflation.

The rise in the central bank's prime lending rate by 1 percentage point to 26.5 per cent underlines the challenges facing Mr Lula da Silva, whose economic policies have already come under attack from leftwingers in his Workers' party.

In a further tightening of monetary policy, the central bank also raised commercial banks' mandatory reserves on short-term deposits from 45 per cent to 60 per cent.

Earlier this week Mr Lula da Silva defended the government's fiscal and monetary austerity in light of the threat of war in Iraq. "We are facing difficult times ahead. The world has entered into a period of increased uncertainty."

The fear of higher oil prices and reduced lending to emerging markets as a result of a military conflict has already renewed pressure on the Brazilian currency and could bring more domestic fuel price rises.

The inflation bubble resulting from last year's 40 per cent currency depreciation has lasted longer than many analysts expected. Financial institutions expect it this year to reach 12 per cent, well above the government's target of 8.5 per cent.

"The currency's stability is threatened. The virus of inflation is again a real threat to Brazil's economy," Mr Lula da Silva said this week in a surprisingly blunt acknowledgement of the economic challenges he faces.

Unionists and leftwing radicals within the Workers' party criticised last month's interest rate rise as well as this month's big budget cuts, designed to guarantee debt payments. Rates have risen 8.5 points since October.

Most banks had expected an increase of 0.5-1.5 per cent. The announcement was delayed by several hours, which analysts interpreted as a sign of intense debate within the monetary policy committee.

The decision was closely watched as a test of the central bank's commitment to strict monetary policy as Mr Lula da Silva's economic austerity came under fire.

news.ft.com By John Authers, Raymond Colitt and Richard Lapper Published: February 20 2003 4:00 | Last Updated: February 20 2003 4:00

US President George W. Bush seems to be succeeding in forging Latin American unity of an unwelcome kind. Opposition to possible US and British military action against Iraq is growing across the region.

"There is not a lot of sympathy or support [for the US]," says Michael Shifter, director of the Washington-based Inter-American Dialogue policy forum. "Most Latin American governments are totally baffled by it. All the Latin Americans I know say 'are you guys really going to do this?'."

Of most concern to Washington is that the two Latin countries, Mexico and Chile, which are among 10 elected members of the United Nations Security Council are showing little enthusiasm for US and British efforts to win support for speedy military action against Iraq.

Mexico's President Vicente Fox has been actively pushing an independent position. An outspoken critic of war, he welcomed the peace protests that took place in a number of international capitals last weekend. "It is extraordinary that people have demonstrated like this. It is the way to stop the war," he said.

Brazil, which will replace Mexico on the Security Council next year, has also been engaged in diplomacy designed to give more time to the UN weapons inspections. It has aligned itself with proposals made by Germany, France and Russia that sought to increase time and resources for inspectors in Iraq.

President Luiz Inácio Lula da Silva has been seeking to stiffen the resolve of his Latin American counterparts. Brazil's foreign minister, Celso Amorim, has been in Moscow this week to underscore Brazil's support for diplomatic efforts to avoid war.

Several factors underpin the defiant mood. First, public opinion polls show that Latin Americans are overwhelmingly opposed to war.

According to recent research conducted by Latinobarómetro, a Santiago-based polling firm, 85 per cent of Chileans are opposed to war.

Similar polls by the same organisation showed that on average 57 per cent of Latin Americans opposed the invasion of Afghanistan, with that number rising to 80 per cent in Argentina.

Marta Lagos, the director of Latinobarómetro, notes a broader growth in anti-US sentiment across the region.

"You will find in most countries that many people have reasons to be anti-American," she says. "People like American culture and lifestyle but the US is perceived as not being helpful towards the region."

There are worries that a war, especially if it proves to be drawn out, will worsen financial and economic pressures and delay recovery. If war adds to, rather than reduces, uncertainty in the financial and commodity markets, investors could become even less enthusiastic than they are at present. The resulting rise in "risk aversion" could lead to weakness in currencies and may force governments to increase interest rates.

In the past few weeks, fears of war have set back the recovery in Brazil's financial markets.

"Brazil is concerned with the economic aspects of a possible war," says Mr Amorim. "We have to explore all solutions for Iraq. Brazil cannot watch passively, waiting to see what will happen. The consequences of war for emerging markets would be immediate."

Several countries, including Chile and the smaller Caribbean and Central American nations, would also be particularly vulnerable to the increase in oil prices that might result from damage to Iraqi fields. Mexico, Argentina and Venezuela are exporters, while Brazil produces about 80 per cent of its domestic oil requirements.

But all of this has to be offset against economic realities and, in particular, the enormous leverage that Washington has over many Latin American economies. The US is an important trading partner and a dominant influence in the International Monetary Fund and other multilaterals, on whose support much of the region depends.

Diplomats say efforts to develop a joint position through the Rio Group, which links 18 Latin American countries, have already stumbled against the extreme economic dependency of smaller Central American countries. Ultimately, economics could force some of the bigger players into the US camp.

Both Latin American Security Council members have close US ties. Chile recently agreed a free trade deal with the US that has still to be ratified by the US Congress. Mexico channels 90 per cent of its exports to the US and is keen to preserve intact its relationship with its neighbour and the benefits it has enjoyed through the North American Free Trade Agreement (Nafta).

Significantly, although Mexico and Chile favour more time for diplomatic actions, they are also reluctant to side openly with France and Germany and want to avoid confrontation with the US.

In Mexico City, some critics of the government see efforts to forge an independent position as flying in the face of political realities. Luis Rubio, a Mexico City-based political analyst, says that the government must recognise these strategic realities. "Obviously we could vote against but sooner or later the consequences would be brutal," he says. Additional reporting by John Authers in Mexico City and Raymond Colitt in Sa{~} o Paulo.

www.upi.com By Carmen Gentile UPI Latin America Correspondent From the International Desk Published 2/19/2003 7:02 PM

SAO PAULO, Brazil, Feb. 19 (UPI) -- Following Brazilian politics the last few days has been a lot like watching the nation's leader shoot himself in the foot ... repeatedly and in slow motion.

After a month-and-a-half of mostly prudent, well-thought governing, President Luiz Inacio Lula da Silva managed to muck up his administrative works last week by unleashing what amounts to another -- albeit unelected -- branch of government.

The Council of Economic and Social Development, known locally as the CDES, is a group of 82 non-elected business and labor leaders that will advise the administration on how to cure Brazil's various social and economic woes and assist in the development of a reform package that will be sent to Congress.

The idea to create a body of private citizens with the power to bend the Brazilian president's ear seems noble on paper: ordinary citizens given the opportunity to help plot the course of South America's largest country and economy.

What could be more democratic? It's practically a historical recreation of how the U.S. founding fathers -- private citizens themselves -- created a nation out of 13 British colonies. All that's missing are the knickers and powdered wigs.

Problem is: This isn't 1776.

In 21st century Brazil, private citizens were already given their opportunity to determine how the country should be run when they went to the polls and chose Lula to lead the nation for the next four years.

Now, instead of shouldering that responsibility, Lula has brought in some mercenaries that could help him push his widespread reform proposals through Congress in the coming months.

Earlier this week, the president addressed a joint session of the Brazilian Congress asking them for their help in revamping Brazil's bogged-down welfare and pension plans, political and economic policies, and support for new social initiatives like his effort to eradicate hunger nationwide.

Lula stressed the shared responsibility each branch of government had in passing reforms the president maintains would help Brazil avert a deepening social and economic crisis.

"It is with the feeling of an outstretched hand, of mutual responsibility among all officials, and above all, of national understanding, that I bring my message to his house," said Lula.

"They are reforms called for by the people," he said, adding "they should be made so that the country grows again, so that the country can travel the extensive highway of economic and social development again."

While some congressmen and senators lauded the speech for its integrity and altruistic message, grumblings from a large contingent of those present revealed that the honeymoon for the leader elected on Jan. 1 is officially over.

Some analysts are beginning to forecast the various pitfalls Lula is sure to encounter due to the involvement of the CDES in government decisions.

While the group's stamp of approval on reform proposals may help create consensus among voters, it "might create some tension" with Congress, where Lula's leftist Workers' Party does not hold a majority and depends on support from the left and right, said Christopher Garman, Tendencias Consulting Group analyst.

"The government will play it up as 'we are consulting society,' though Congress could end up regarding it as an unnecessary mechanism that could subvert its authority."

Too late it seems.

Immediately after the first meeting of the CDES, Jose Carlos Aleluia, a leader in Brazil's lower house and member of the right-leaning Liberal Front Party (PFL), said he didn't recognize "the party as a deliberative organ" and "guaranteed that Congress won't accept reform proposals" put forward by Lula's private citizen advisers.

Aleluia's prediction doesn't bode well for Lula, who was counting on some support from the PFL to make his reforms a reality.

As one of Brazil's leading political parties in terms of size and influence, PFL's opinions are a barometer for what many other officials are likely thinking, namely that a bunch of no-talent-for-politics nitwits are going to be undermining their authority.

In one fell swoop the Brazilian president managed to alienate a large portion of Brazilian officials with his ill-conceived effort to include more people in the decision-making process.

Instead of adding more chiefs to his tribe, Lula needs to do the job he was elected to do and not share the responsibility with those that were not.