January 05, 2003
Brazil's Situation...

The Economist has a good piece on just how difficult Brazil's new president's job is going to be:


Economist.com:
Lula's balancing act

Jan 2nd 2003
From The Economist Global Agenda


Brazil’s new president has stirred up enormous expectations. Can he deliver?
AFP
AFP

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.


Posted by DeLong at January 05, 2003 11:04 AM | Trackback

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January 4, 2003

Brazil's President Picks Butter Over Guns
By LARRY ROHTER - NYT

BRASÍLIA — Brazil's new leftist government today suspended a $760 million purchase of a dozen new jet fighter planes for its air force, saying the money could be better used to relieve hunger.

The announcement was made after President Luiz Inácio Lula da Silva, a former factory worker and labor union leader who took office on Wednesday, met officially with his cabinet for the first time.

Defense Minister José Viegas said that the plane purchase, one of the biggest military expenditures in Latin America in the last quarter-century, would be postponed at least a year and that he had begun looking for cheaper alternatives, like renting, or buying used aircraft.

Mr. da Silva's decision "reflects the urgency of this country focusing its efforts on the question of hunger" and should not be seen as a rejection of the military, the new president's spokesman, André Singer, said.

Mr. da Silva is unwilling to "create a new hole" in the budget now, Mr. Singer added, but "the entire equipment refurbishment project remains on the cards" for the future.

The military did not dissent — at least publicly — with a president who had just taken office. During the right-wing military dictatorship that ruled Brazil from 1964 to 1985, Mr. da Silva, then a leader of the metalworkers union, was ordered jailed by officers who considered him a dangerous radical. But he and other leaders of his Workers' Party have cultivated ties with the military in recent years, even as their party has moderated its platform....

Posted by: on January 5, 2003 01:48 PM

In a country where even people at the IMF suggest the gap between incomes is too great why do the same people want to argue for the status quo? This is the problem with the IMF they want to make their money the priority, or the money of the other Bankers the priority, if you prefer, and as much as they may moan they really don't care about the, not the poor but the middle class. Would you prefer I speak about middle income? LuLu was elected not by the poor he was elected by the middle class. His mandate is to do something about the ridiculous incomes of the Elites.

All the time I hear people make the mistake of thinking that the rich pay all the taxes. Well that is simply because they make most of the money. If I make like 84,000 and am self employed I actually pay more Taxes on a percent basis than Bill Gates. The whole argument is always framed in terms of the most talented getting the most and thereby improving the "society." Well about 100 years ago they called those people Robber Barrons and now we call them Crooks. If you don't want to make this an argument about class that's fine. Then just explain to me why we have more than enough food to feed the world but it is not done. And when you are done please a justification of Saudi, Elites. You can finish up with a quick explanation of why Iraq is not about oil.

The FED doesn't manage the economy. The economy manages the FED.

Go Lulu Go.

Posted by: Bruce Ferguson on January 5, 2003 04:19 PM

Once again we have the situation where people and institutions that lent money to a country until it was an impossible 60% of GDP don't have to face any consequences for their irresponsible lending activities. The IMF steps in to demand that the poor people of that country take responsibility in order to appease investors. Why should a janitor in Rio or a farmer outside of Salvador be able to simply go on with his marginal existence and purchase food when he can assist the purchasers of bonds mitigate risks?
Brazil should grade prior debt by the return on that particular investment and simply discard investments that turned out badly. Want to lend a government of a poor country money to purchase weapons while basic ecoonomic structure collapses? Then face the consequences when the voters dump that government.

Posted by: citizen k on January 6, 2003 04:25 AM

I have a request for this site, because I need some help.
I would like to know Brazil's point of view, thoughts, and feelings about the Situation in Iraq right now. The Rebilding in Iraq. It would be better if it is recent. Please give me a hand.
Thank you for your cooperation.

Posted by: Erica on May 8, 2003 07:06 PM

I have a request for this site, because I need some help.
I would like to know Brazil's point of view, thoughts, and feelings about the Situation in Iraq right now. The Rebilding in Iraq. It would be better if it is recent. Please give me a hand.
Thank you for your cooperation.

Posted by: Erica on May 8, 2003 07:06 PM
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