The Economist has a good piece on just how difficult Brazil's new president's job is going to be:
Posted by DeLong at January 05, 2003 11:04 AM | Trackback
Lula's balancing act
Jan 2nd 2003
From The Economist Global Agenda
Brazil’s new president has stirred up enormous expectations. Can he deliver?
Brazil expects, Lula
EXTRAVAGANT celebrations, in the best Brazilian tradition, accompanied the inauguration on January 1st of Luiz Inácio Lula da Silva as Brazil’s president—its first working-class leader, and the first from a left-wing party. A 200,000-strong crowd packed the lawns around the presidential palace in Brasilia as their new leader arrived to receive the sash of office from his predecessor, Fernando Henrique Cardoso. Fans burst through the security cordon to try to touch their hero and have photographs taken with him, as though he were a glamorous young pop star rather than a grizzled veteran politician and trade unionist.
In his inaugural address to Congress, the new president, known to Brazilians simply as Lula, continued the theme that dominated his election campaign: that it was time for change, to create a more socially just Brazil that offered prosperity to all its 175m citizens—“the nation we have always dreamed of”. He repeated his pledge to seek a new “social pact” to bring about such a change. And he expressed his confidence that he had the will of the entire nation on his side.
He will certainly need it. Only by making rapid progress on some tough economic reforms will Lula’s government be able to continue bearing the huge debt burden it has inherited—about $250 billion, or almost 60% of Brazil’s GDP. Since this debt is mostly short-term, and much of it is linked either to interest rates or the real’s exchange rate, the government is exceptionally dependent on the markets’ mood. The more investors worry about Brazil’s ability to go on financing itself, the more they will mark down the real and push up interest rates, thereby making it yet more of a struggle for the government to continue rolling over its debts. High interest rates inhibit Brazil’s economic growth, and the government’s high financing costs limit its ability to spend on welfare, education, health, policing and all the other public services Lula has promised to improve.
In the run-up to October’s election, the growing certainty that Lula would win caused the real to slump and the spreads on Brazil’s bonds (ie, the interest rate investors demand on them, above that paid by America’s government) to soar. The past radicalism of Lula and his Workers’ Party (PT), and the new president’s lack of any administrative experience, made investors fear that Brazil could follow its big neighbour Argentina into bankruptcy. In recent weeks, however, even cynical market players have become infected by ordinary Brazilians’ wild optimism that their country will prosper under Lula. The real and Brazilian bonds have recovered, though they are still at levels that would make the government’s debt hard to sustain in the longer term.
Mr Cardoso’s government raised taxes repeatedly to achieve ever larger primary surpluses (ie, surpluses before interest payments). It was hoped that investors would reward this by letting interest rates fall and the real rise, thereby making the government’s financing costs more bearable. In February, the International Monetary Fund will review a $30 billion rescue loan extended to Brazil last year. The Fund is expected to ask the new government to raise its current target, of a primary surplus of 3.75% of GDP, to perhaps 4.5%. Brazil’s taxes are already high at 35% of GDP, a similar level to that in many richer countries. So it is going to be extremely tough for President Lula to achieve a further fiscal tightening while fulfilling his many election promises for extra social spending, such as a bold pledge to ensure that every poor Brazilian gets three square meals a day.
His main hope is to pass a number of reforms which would put Brazil’s public finances on a firmer footing. A partial revamp of Brazil’s complex and growth-stifling tax code was passed in December, but a fuller reform is still needed. Something must be done soon to restrain the burgeoning deficits in the state pension systems, especially the over-generous retirement schemes for public-sector workers. Inefficiency and corruption in the justice system must be tackled urgently, not least because huge and often unjustified claims for damages are an enormous drain on the public purse. And the burdensome labour laws must be hacked back, because Brazil’s excessive “workers’ rights” in practice discourage the creation of formal jobs (ie, ones where workers and employers pay their taxes).
Pessimists note that Mr Cardoso failed to pass many of these reforms in spite of having a big majority in Congress, and that Lula’s parliamentary alliance, a collection of leftist and populist groups, will be in a minority. Furthermore, some of the reforms—especially those of pensions and labour law—may put the new government in conflict with its core constituencies, such as public servants and trade-union members. Lula and his party opposed most of these reforms when Mr Cardoso proposed them; are they really going to push them through, now they are in government? On the other hand, optimists argue that Lula’s strong mandate, and the trust he enjoys among those from whom he must seek concessions, will give him the force he needs to make progress.
Lula aims to reach the consensus needed to pass such tough reforms by setting up various national negotiating forums, whose membership will be drawn from all sectors of society. He has argued, with some justification, that Mr Cardoso failed to mobilise popular support for his policies. But given the gravity of Brazil’s financial problems, and the exaggerated expectations that have built up among its people, these new talking-shops will have to reach agreement uncharacteristically quickly. Otherwise the crucial early months of the presidency may be squandered. If a lack of progress causes investors in Brazil’s debt to lose their patience and the country’s financial crisis worsens, the joyous public mood could quickly turn sour.