July 2004

Brazil: The End of a Honeymoon By Mark Falcoff

When Luiz Inácio “Lula” da Silva was elected congress. Since no party dominates that body, president of in October 2002, popular any administration must engage in complicated expectations nearly across the political spectrum horse-trading to get its legislation enacted. were so enormous that he was bound to disap- Many bills that seemingly have nothing to do point someone. Indeed, what is remarkable about with the economy nonetheless can have an the present situation in Brazil is just how popular important bearing on financial outcomes. A Lula remains (60 percent approval rating) in case in point is the fate of a recent legislative spite of a conservative fiscal policy, a modest project—supported by the government—that uptick in the unemployment figures, a willing- would have allowed presidents of the senate and ness to expend valuable political capital on chamber of deputies to stand for reelection. Its pension and tax reforms, a financial scandal defeat in early May of this year might well cost involving his chief of staff, and an embarrassing Lula the backing of legislators from the Brazilian threat to expel a New York Times journalist. Democratic Movement (PMDB), whose leader, Some of Lula’s problems have arisen out of former president José Sarney, presides over the developments endemic to any young democracy. . This shift in party alignments Barely twenty years have passed since the coun- could not come at a worse time. Congress is try emerged from more than two decades of mili- presently contemplating an increase in the tary rule, and bottled-up demands from the less income tax exemption and a bigger increase privileged sectors of the population were bound in the national minimum wage than President to explode sooner or later. But the context in da Silva wants.

which President da Silva was elected—a cam- Meanwhile, the Brazilian Latin American Outlook paign whose centerpiece was to create 10 million is reviewing the legality of last year’s pension new jobs and lift vast numbers of out reform, which would have taxed the social of poverty—does not make his task any easier. security payments of some of the country’s more affluent citizens. If this legislation were nullified, Lula’s Economic Agenda it would wipe out the huge cost savings of the plan and immediately decrease the value of the One of the peculiar characteristics of the Brazil- C-bond (the widely held dollar-denominated ian economy—the world’s tenth largest—is that government issue). If yields jumped sufficiently, it seems perpetually poised on a razor’s edge: on the government might well find itself struggling one side, chaos and collapse, on the other, take- to pay off its dollar debt with a fast-weakening off to superpower status. Economic policy itself currency. As it is, in June it had to cancel its is often mortgaged to the capacity of any govern- monthly bond auction because interest rates ment to reach agreement with the Brazilian demanded by lenders were 100 basis points higher than the central bank felt comfortable Mark Falcoff is a resident scholar at AEI. paying. Most financial analysts think the

1150 Seventeenth Street, N.W., Washington, D.C. 20036 202.862.5800 www.aei.org - 2 - government has enough cash on hand to operate 100 tracts in the last few weeks in fourteen of Brazil’s without difficulty until September, but after that it twenty-seven territorial divisions—one of its largest must recur to international borrowing. and most widespread actions in recent years. The Since taking office President da Silva has—perhaps stated reason for this action was frustration with Presi- surprisingly in view of his radical past—pursued a thor- dent da Silva, who is seen as having backed down from oughly orthodox fiscal policy. At the time of his inau- earlier commitments to land reform. Last November guration, the dollar-denominated C-bonds had an the president had publicly promised to settle some utterly unsustainable spread of 24.4 percentage points. 355,000 families on the land by the end of his term in The choice was either self-discipline or the Argentine 2006, and in March of this year, hoping to stem the route of default. By choosing the former, the primary tide of invasions, he released a half million dollars to fiscal surplus of the consolidated sector grew to 4.3 per- the MST to purchase land for 115 member families. cent, and the favorable effect was felt almost immedi- Stedile called the president’s proposals “ridiculous” ately in interest and exchange rates. and “insufficient” and demanded one million families Unfortunately, the rewards of this bold policy have to be settled over the next four years. President da not yet been fully felt. In the short run the economy Silva reiterated his commitment to land reform but shrank last year by 0.2 percent and unemployment told Stedile publicly that it will not be achieved by stood at slightly more than 13.1 percent in April “shouting . . . but in the calmest, most peaceful way.” (although the trade surplus last year amounted to Local authorities have responded more astringently. $25 billion). The indicators for this year are most Agriculture minister Roberto Rodrigues and some of favorable; economic growth in the first quarter of 2004 the state governors have publicly complained about (on an annualized basis) was 6.4 percent—a figure that the land seizures (as well as road blockages, another probably cannot be sustained to the end of the year form of protest). Governor Ronaldo Lessa of the north- given a likely rise in U.S. interest rates and an expected eastern state of Alogoas insisted that “any foreign slowing of the Chinese economy. But as the Financial investor is going to be frightened off by what is happen- Times (June 1, 2004) puts it, “a low-saving country ing,” and elsewhere thirteen members of the MST were such as Brazil can achieve faster growth only if it is arrested for stealing cattle from the farm they occupied. fiscally disciplined and attracts large-scale inward direct The land issue is one area where the old Lula and investment.” the new are in evident opposition. The president has tried to reconcile the two in his monthly radio broad- Restive Social Movements cast. “I’ve already been a union leader. I have seen a radical and have used good sense. Each time I used President da Silva’s success or failure depends not only good sense, I won,” he reminded his listeners. “When on macroeconomic performance but on his capacity to radicalism won out, I lost. If I can give some advice to integrate elements of society—many of whom he has my comrades in the social movements, it’s this: act with cultivated for political support in the past—into his as much responsibility as possible, because otherwise larger design. A case in point is the semi-Marxist, we’ll all be victims.”1 semi-anarchist Landless Movement (MST), one of the Another constituency long loyal to President da largest land-reform advocacy groups in the world. Its Silva—the environmental movement—now finds members typically invade private or unused tracts to itself in opposition to him. At issue is the building of bring attention to their quest for greater equality in a gas pipeline linking the country’s massive under- land distribution. They typically arrive with tents and ground resources with isolated cities of the Brazilian cooking equipment and settle in for months at a time. interior. The purpose of this project is not merely to Though not usually armed (except for scythes and create infrastructure and jobs in a neglected and machetes), they nonetheless can represent a menacing remote region but to cut its reliance on expensive specter to landowners and small farmers, and last year and environmentally undesirable diesel and fuel oil. there were several deaths due to clashes. Concretely, Brazil’s state oil company, Petrobras, In early April the leader of the MST, João Pedro has plans to spend $420 million building a pipeline Stedile, promised to “set Brazil ablaze” with occupation from Coari to , the center of a free trade zone protests, and in fact his organization seized more than of a million people. The line itself will run through - 3 - nearly a thousand miles of Amazon jungle, skirting Brazil (as indeed in many other democracies, includ- many indigenous reservations, to link up with another ing our own), the president’s carefully cultivated completed in 1999 originating in the Urucu gas fields. image—and to some extent, that of his party—as Environmentalists complain that the project involves above such peculations has up till now been one of extensive deforestation and will open a hitherto inac- his (and its) greatest and most enduring strengths with cessible area to settlers, gold miners, soy farmers, and the electorate. cattle ranchers, not to mention expose Indians to The other scandal involves New York Times corre- disease or loss of food and clean water if construction spondent Larry Roehter, who claimed in an article projects cause erosion or silt rivers. (They point out published on May 9, 2004,3 that among other things that an area roughly the size of Belgium was deforested the president’s aides were concerned that his supposed last year alone.) The president’s proposals to build addiction to alcohol was affecting his ability to govern. huge hydroelectric projects in the northern Amazon The president’s strong reaction—threatening to revoke have likewise drawn vociferous criticism from Roehter’s visa—while ill-advised from both the stand- environmentalists. point of civil liberties and public relations, is perhaps understandable. All too many Brazilians (indeed, all Other Headaches for Lula too many Latin Americans) labor under the miscon- ception that the New York Times is something Brazil’s typically contentious civil society has also approaching the voice of God, and worse still, seem presented problems for the president. The federal to be blissfully unaware of the fact that its reputation police have gone on strike for higher pay, joined by for veracity, in the United States at least, has been government workers in other agencies. There has been deeply and perhaps irrevocably damaged in recent turmoil on two Indian reservations. Although social times. Although President da Silva was finally per- spending has increased on health and education, many suaded to withdraw his threat, it was too late to of the president’s former supporters are disappointed minimize the damage.4 that his “Zero Hunger” program has so far failed to get While the opposition in Brazil is too diverse and off the ground. fractured to pose a serious unified alternative to the The president’s evident frustration with many government, it is sufficiently broad to prevent Presi- of his followers (or former followers) was evident in a dent da Silva from pursuing other items on his legisla- speech he made last year at the General Motors factory tive agenda. To put it crudely, many opposition parties in Sao Paulo, where he urged his listeners not to smell blood in the water and are not inclined to pro- “expect me to be more than a president. I don’t have vide the government with more traction as the country the power of God to perform miracles that some people heads for legislative elections this fall. Thus, not sur- think I should have.”2 In an effort to appease con- prisingly, the president has decided to shelve any fur- stituents like these, the president has announced a ther progress on labor reform or legislation that would program to create 40,000 more government jobs—a grant full autonomy to the central bank. His hopes are move former president Fernando Henrique Cardoso mortgaged to an upturn in the economy, which would calls “stupefying”—and suggested that he may yet be translated into stronger support in the congress and create another 100,000 more, partly by expanding the among the state governorships. armed forces and mandating new infrastructure pro- jects. He has also announced a new social housing A Balancing Act program and plans to create a chain of cheap pharma- cies in poor neighborhoods. When President da Silva met with President George As if the darkening public mood were not enough, W. Bush shortly after his election he explained that two minor scandals have besmirched the president’s his victory was extraordinarily significant because it image. One is the revelation that his chief of staff, José represented the possibility of incorporating millions of Dirceu, was accepting payoffs from local mafia chiefs to poor Brazilians into a modern political and economic finance the campaign of Workers Party candidates in system—in other words, to show that democratic capi- the upcoming November elections. While such prac- talism with a human face could work in a Third World tices have, unfortunately, been all too common in country. The argument is all the more compelling - 4 - coming as it does from a former radical who still Notes considers himself something of a socialist. The big question is whether Brazil’s political system, an odd 1. Alex Bello, “Lula Throws the Brazilians More Promises As mixture of nineteenth and twenty-first century concep- Problems Mount,” The Guardian (London), April 28, 2004. tions, will lend itself to the immense social tasks before 2. Andrew Downie, “Lula Faces First Big Crisis as Nation’s it. President da Silva must balance his needs for votes Problems Grow,” Miami Herald, April 23, 2004. with the demands for economic stability and interna- 3. “Brazilian Leader’s Tippling Becomes National Concern.” tional confidence—not an enviable task. We will know 4. Even so, it is possible that the incident may have caused a whether this is possible within a relatively short period backlash in his favor among ordinary Brazilians, many of whom of time. The future of more than just Brazil depends on probably see the New York Times as somehow representing the the outcome. United States, a country not well-loved by most of them.

#16953