Lula's successful reforms clear a path for a radical successor in Brasilia
June 4, 2009
By Joshua Goodman
The last time Brazil elected a president with a radical past, investors panicked and started bailing out of markets. The year was 2002; the nation's currency plummeted 60 percent, and its borrowing costs tripled to 24 percent.
Next year, Brazilians face a presidential election in which the two frontrunners include a one-time Marxist guerilla fighter and a career politician who gained fame by threatening global drug firms with breaking their HIV/Aids drug patents.
So is Brazil girding for another round of capital flight? "This is going to be the most uneventful election in decades," says Gustavo Franco, former president of Brazil's central bank. Franco says that is because whoever wins, no one is likely to meddle with the centrist policies of Luiz Inacio Lula da Silva, the 2002 winner.
Lula ran for president criticising the market-friendly reforms of the then incumbent, Fernando Henrique Cardoso. At one point, Lula hinted he would default on Brazil's debt. He then moved quickly to embrace many of those reforms while balancing them with an expansion of spending on Brazil's poor.
So popular has the former labour organiser's stewardship been that he swept to a re-election landslide in 2006, winning a run-off with a 60 percent majority. In March, Lula's approval rating stood at 78 percent, according to the Brazilian Institute of Public Opinion and Statistics. That rating was 84 percent until Brazil's economy began to lose steam in the fourth quarter of last year.
Lula's popularity helps explain why the two leading contenders to replace him, São Paulo state governor Jose Serra, who ran and lost against Lula in the 2002 campaign, and Dilma Rousseff, Lula's cabinet chief, have thus far proposed no policies that deviate much from Lula's playbook.
Instead, they have sworn loyalty to what has emerged as the holy trinity of Brazilian politics: fiscal discipline, inflation targeting and a free-floating exchange rate. Serra and Rousseff both refused requests to be interviewed for this story.
Domestic popularity
"Whoever wins will continue on the same path because that path has been delivering," says Mohamed El-Erian, the chief executive of Pacific Investment Management.
When Lula took office in 2003, gross domestic product (GDP) growth averaged only 2.31 percent a year; the poverty rate as measured in per capita income was about 29 percent; and the country was counting on a $30 billion (about R240bn) International Monetary Fund (IMF) loan to stave off a looming financial crisis.
A 2008 World Bank report credited Brazil with achieving "stable macroeconomic management with well-directed social policies" that had resulted in "significant reductions in poverty and income inequality".
By World Bank estimates, those policies lifted more than 17 million people - 9 percent of the population - out of poverty from 2003 to 2007.
Even after the improvement Lula has wrought, his successor will have plenty to do amid worries that lingering global recession may hamper a continuation of Lula's reforms. About 18 percent of Brazil's 190 million people still live in poverty, and the World Bank estimated that 10.4 percent of its population aged 15 and older remained illiterate as of 2007.
The murder rate is four times the US rate, according to 2009 US State Department data.
Brazil is still behind some of its emerging-market peers in some vital economic barometers. IMF data from 2003 to last year pegged Brazil's annual growth rate at 4.1 percent, lower than Peru's rate of 7 percent and Chile's 4.6 percent.
Lula's rise from street urchin to the helm of the world's 10th-biggest economy was a watershed event, marking the first time a leader was not chosen from the land's elites. His poverty-reducing Bolsa Familia programme is so popular, even allies in Serra's PSDB say they will expand it if Serra is elected.
"Lula didn't embrace the status quo, he changed it," says Paulo Vieira da Cunha, a former Brazilian central bank board member who is now a fund manager at Tandem Global Partners. "Being such a transformative figure makes it hard to go against his policies, even if they're flawed."
Voice for the poor
"Lula is proof that politicians who preserve stability are rewarded," says Joaquim Levy, his former head of the treasury.
Whether it is fighting protectionism by rich nations or calling on US President Barack Obama to end the US embargo on Cuba, Lula is an assertive voice for the developing world.
At an April summit of the Group of 20, Lula reminded the heads of rich nations that he was the only one there to have personally experienced hunger. Afterwards, Obama praised Lula as "my man" and the "most popular politician on Earth".
In some ways, Lula has been emboldened by the economic crisis. Barely a day goes by when he doesn't criticise rich countries for ignoring the Washington Consensus policies - reducing debt, liberalising trade and privatising industries - that the IMF and US Treasury have prescribed to stabilise Latin American economies.
"This is a crisis caused and fuelled by the irrational behaviour of white-skinned, blue-eyed people that before the crisis acted as if they knew everything and now have been shown to know nothing," Lula said when UK Prime Minister Gordon Brown visited in March.
Lula has also taken some licks. GDP plunged 3.6 percent in the fourth quarter of last year, the most since at least 1996. The economy has shown tentative signs of recovery. Industrial production grew for the third consecutive month in March, as firms resumed hiring after a record 655 000 job cuts in December. Still, even optimistic analysts forecast zero growth this year at best.
"Dilma's candidacy hinges on how well Brazil weathers the crisis," says Roberto Teixeira da Costa, the former president of Brazilian securities regulator CVM. "For now, things appear to be holding steady, but there's a long way to go yet."
One dark cloud is profligate spending on what Brazilians call the "state machine", much of it to win over civil servants. Under Lula, federal government hiring has leapt 25 percent, pushing up public spending, including debt service, to 46 percent of GDP compared with 28 percent in 1998, says Vieira Da Cunha.
Spending spree
The spending spree went largely unnoticed because of a thirst for Brazilian commodities, especially from China, which this year replaced the US as Brazil's biggest trading partner.
Since Lula took office, exports have tripled, reaching a record $198bn last year. Tax receipts have soared, letting the state exceed its budget target last year and salt away into a new sovereign wealth fund 14.2bn reais (R57bn) in extra savings.
This year, as the economy faces its first recession since 1992, the dynamics have reversed. If the global recovery is slow, the next government may be forced into tough choices: raising taxes, slashing spending or unleashing inflation by expanding the money supply.
That could make it more difficult to vigorously attack the lingering poverty and education rates holding back the country.
"The next guy won't have it as lucky," says Greg Lesko of Deltec Asset Management. "The tailwinds are gone, and a lot of the reform that Lula kicked down the road will need to be addressed."
Still, even Lula thinks Brazil's prospects post-election will be bright, no matter who wins. "I am optimistic about the future, including (the) presidential elections," he said recently.
"I'm happy for a country whose presidency in 2010 will be disputed between Serra and Dilma. There are no right-wing troglodytes competing." - Bloomberg
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