Brazil's President, Once a Dark Horse, Describes a Bright Present: President Luiz Inacio Lula da Silva, defending the unpopular pro-market policies he once demonized but which have marked his first year in office, said on Thursday that the sacrifices Brazilians had made this year would be repaid with sustained economic growth. Summing up his first 12 months as president, Mr. da Silva, the first working-class Brazilian to win the office, said his government had been forced to resort to old-fashioned fiscal discipline to stave off the economic collapse that loomed at the start of his administration.
Panicked by Mr. da Silva's past as a fiery labor leader, traders sent Brazilian bonds and the currency tumbling last fall. Banks shut off credit lines to companies, leaving the country all but dependent on support from the International Monetary Fund. When Mr. da Silva took office Jan. 1, he surprised many by choosing a market-friendly economic team that promptly reined in galloping inflation by raising interest rates and cutting more than $4 billion from the government budget. "Many believed, and with reason, that Brazil would not survive the crisis," Mr. da Silva told government ministers, lawmakers, generals and labor leaders gathered at Planalto, the presidential palace.
But now, Mr. da Silva said, listing his government's achievements -- falling interest rates, booming exports, a stable currency -- "the time of uncertainty has passed." He added: "We have reversed the worst expectations. We have won back confidence in our economy and in the capacity of this country to grow."
Mr. da Silva's most immediate problem is that his initial squeeze on inflation has left the economy winded. Inflation dropped to single digits but retail sales have stalled, industrial output has slowed and the jobless rate has soared to over 20 percent in Sao Paulo, the economic capital. Not even the seven reductions in interest rates since June have managed to revive activity.... Nevertheless, and with a fair amount of pragmatic, political horse-trading, Mr. da Silva has managed to push overhauls of the country's bankrupt social security system and the complex tax structure through Congress.
He has always tried to explain to ordinary Brazilians in speeches and in public appearances why their economic sacrifices were needed. As he said Thursday: "The bitter decisions were taken consciously and with an eye on the future." In terms of his popularity, his up-front approach seems to have worked: a poll this week showed Mr. da Silva's approval rate buoyant at 66 percent, just three percentage points lower than three months ago.
"They've kept to the fiscal straight and narrow, they've pushed some key reforms through," said John Welch, chief Latin American economist at WestLB bank in New York. "I think it's been a very successful first year, especially compared to what people were expecting."...
But things have to go much, much better over the next several years if Brazil is going to do well in the long run. Cardoso did a lot of heavy lifting. Now Lula da Silva is doing his share. But will it be rewarded by rapid economic growth?
Posted by DeLong at December 19, 2003 05:38 PM | TrackBack
"... things have to go much, much better over the next several years if Brazil is going to do well in the long run. Cardoso did a lot of heavy lifting. Now Lula da Silva is doing his share. But will it be rewarded by rapid economic growth?"
What is the significance of the answer to this question?
We've seen a trend lately with a rise in dour, tight-fisted leftists who preach balanced budgets and low inflation and extravagant rightists who are carefree about such things. Do financial markets take this into account when they consider bond ratings?
I'm rather naive about the horrible non-linear, cause and effect mixing, non-Euclidian, Lovecraftian world of international finance, but journals like The Economist leaned toward Bush. Is it just momentum-based sympathy among the business class for the right?
Thanks.
Posted by: Julian Elson on December 19, 2003 11:38 PMThis from one, yours truly, who likes to think he is about 10 percent of a good economist:
Keep an eye on "the City", London, that is. And keep an eye on history:
1- 1950-1970; infrastructure investments, manuf boom, New Deal/Social Democracy; income distribution improves. Inflation up, deficit budget, public borrowing, Keynesian economics.
2- 1980; Supply Side Economics; Glasnost-Perestroika; Yuppies everywhere -- even in Russia!
3- 1990; New Economy in US, West Europe; democratization-liberalization in Central Eastern Europe. Productivity up, budget surplus. Many requirements for transition to direct democracy and some sort of democratic socialism / communism is there. Era of fiscally responsible left wingers.
4- 2000; Alarm Alam Alarm! Stop productivity! Evaporate that budget surplus!! (And how do we retain ownership of the produce of the knowledge worker!? Knowledge Management? Nah. We need something better! Until we do, stop productivity. Spend that surplus! But not on social programs! Start a war or something!) And that's the era of extravagant right wingers.
Posted by: Bulent Sayin on December 20, 2003 12:12 AMI would like to point out that Da Silva initiated his pro market policies in March, 2003, just as the Iraq war was beginning. Let's give credit where credit is due.
Posted by: George Bush on December 20, 2003 09:17 AMSomehow I'm kind of guardedly optimistic about Brazil; if this is how a leftist ends up governing it means that we're out of the cycle of reckless populism / military reaction that tends to plague Latin America. Even Argentina seems to have missed a military coup and has had a bit of a recovery lately.
When the right (Cardoso) is successful at reducing poverty and the left (Lula) is concerned about responsibility, that's a sign that things seem to be working. Incidentally, Bush and Lula seem to have a decent working relationship despite their differences. Much better than Bush and Fox (of Mexico) despite their similarities. Odd. I just don't get it.
Posted by: Chris on December 20, 2003 10:24 AMColumbia is in shambles, however. They have been keeping hostage a woman presidential candidate -- Madame Ingrid Betancourt, if I have it right, for over a year now and nobody seems to be able to do any thing about it.
The French special forces, if I got it right with my much less than half-baked French from TV5, undertook a rescue mission but somehow failed and aborted. US did not even try. In fact, I didn't even see much in Anglophone media either about kidnapping or aborted rescue attempt of the French, which I find strange.
I mean kidnapping a presidential candidate is a direct attack on democracy and it should be taken as a terrorist act and should be kept in spotlight till kidnapping ends. But no. Anglophone media, tsssssss. That's strange.
And I haven't heard a word from Mr. Bush about this matter: Are you with us, or are you with the terrorists?
Totlally OT, but what's going on with blogmatrix.com?
Posted by: spud on December 20, 2003 11:45 AMRemarkable that there is no mentioning of Lula's role in the preparation and the meeting of Cancun. This will have contributed greatly to his popularity at home. And deservedly.
I share Bulent's curiosity. Or to put it in other terms: WHO is going to reward Brazil with rapid economic growth?
The traders that sent Brazilian bonds and the currency tumbling last fall ?
I'm afraid that is the implicit answer.
Much of the potential of Brazil lies in continued trade expansion with China. Also, Brazil is going to have to get tougher on foreign investment as China has been. The price of investment in brazil has to be technology transfer as it is in China.
Posted by: anne on December 21, 2003 09:48 AMAnne is right that tech trade to Brazil will help; but what they need is more support for property rights of poor folk, and small businesses. Which I understood Lula is working on. His opposition to US and EU farm subsidies was excellent -- a good stand, and against the rich (doing bad).
Because folk trust him that his heart is with the people, they can more easily accept tighter measures -- will the owners of small businesses be expanding production? Nobody knows.
Posted by: Tom Grey on December 22, 2003 09:33 AM
Brazil's main economic problem is the cumulative heritage from poor economic policy: large external and internal debt of the public sector.
Because the public sector has to service its debt, taxation has to be high. Because governance is not perfect, taxes are also inefficiently collected.
That in a nutshell, Brazil's problems
Posted by: econBras on December 22, 2003 03:42 PM