May 16, 2003

Still Optimistic About Brazil

The Economist is still optimistic about Brazilian President Lula's chances for pushing through his planned reforms of pensions and taxes... | Reforms in Brazil: ...What matters now is how many votes Lula can muster in Congress. Neither proposal is likely to pass unscathed. Both involve constitutional amendments, which must pass twice by three-fifths majorities in both the Chamber of Deputies and the Senate.

A lot can happen on the way. To mild surprise, Lula included a contentious clause to reduce the pensions of existing retirees, a measure demanded by the states to shore up their finances. This may be watered down--perhaps by raising the portion exempted from the new charge--or eliminated. Although that would denude the pension reform of much of its immediate fiscal impact, it would not trouble the financial markets much. "If they keep the rest, it's still meaningful," says Carlos Kawall, chief economist at Citibank in Sao Paulo.

The tax bill is a hotch-potch, rather than a thorough overhaul. It would unify 27 different state value-added taxes and convert a separate tax on company turnover into a proper VAT. Though less controversial than the pension plan, the tax bill benefits some sectors at the expense of others, and may also be vulnerable to tampering.

The parliamentary line-up favours the reforms. Most of the opposition, though reluctant to give Lula an easy ride, will go along. Many of Lula's allies and part of his own Workers' Party (PT) are against, but they can be disciplined. This week, party leaders suspended three PT dissidents from lower-house committees vetting the pension reform. The congressional marathon will last the rest of the year, but should end in victory for Lula...

Posted by DeLong at May 16, 2003 08:53 PM | TrackBack

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