Brazil’s new left-wing President Luiz Inacio Lula da Silva begins his term not in the most auspicious of circumstances. Brazil is both the world’s sixth largest economy and also its potentially biggest economic basket case with an international debt of some $260 billion on which many economists believe it is doomed to default, despite an IMF bailout of $30 billion.
Conservative free-market policies espoused by Brazil’s outgoing President Fernando Henrique Cardosa failed to bring Brazil out of its spiraling economic dive, even though many of those policies reflected the wishes of the hard-nosed bankers at the IMF. Unemployment almost doubled to 8.2 percent under Cardosa’s administration. Industry, which had expected to benefit from free-market policies, found itself caught by soaring interest rates making even medium-term investment an economic impossibility. Short-termism was no cure for an economy needing stability and long-term commitment from entrepreneurs confident in the future.
Lula’s convincing second-round victory was based on populist promises which hardly chime with the strict economic diet prescribed by the IMF. At various times, Lula has said that he is going to create jobs, appropriate land for the poor, support ailing industries, pour money into welfare and health and education and cut taxes. On the face of it, all of this will cost money that Brazil simply does not have. Much of the August $30-billion bail out has yet to be disbursed and is conditional upon Brazil running a budget surplus, less debt repayments, for the next year at least. Lula seems doomed very early in his administration, either to crush the hopes of his supporters or run foul of the IMF and international investors.
At the root of Brazil’s economic problems lies a substantial inequity in wealth distribution. Brazil’s small rich elite are very rich indeed and the vast majority of Brazilians is very poor. If Lula can find a way to break the power of Brazil’s traditional masters while maintaining the support of the educated middle classes and honoring some, at least, of his campaign promises to his millions of poor supporters, he could find that he could still deal with the IMF and outside investors. The strongest argument that he has is that the all the policies of the old guard, both of protectionism and its free-market successor, have failed to turn Brazil’s economy around.
Lula’s biggest danger lies in the Bush White House, which is unlikely to take kindly to socialist re-engineering from a former firebrand trade union leader. However, if he is able to portray a reform package as being both economically as well as socially desirable, Washington might just be wrong-footed. The problem will be if the new Brazilian administration uses targeted freezing of funds and expropriation of property. Not only will that cause foreign investors to recoil but may well produce the grounds under the Brazilian Constitution for impeachment.
Yet even if Lula’s presidency does turn out to be doomed and short-lived, the hard fact remains that Brazil simply has to change and its ultrarich must cede their economic dominance. A succession of establishment presidents has failed to carry the argument. Maybe only a left-wing firebrand like Lula can. But time is not on his side. He must move fast and cleverly.
