If Lula wins in Brazil, he will face harsh economic headwinds
Lula would enter office with a progressive agenda. Will he be able to repeat the successes of his last presidency?
Brazilians will cast their votes this weekend to decide on two presidential candidates who embody sharply contrasting political ideologies.
The incumbent president, Jair Bolsonaro, is a far-Right populist and retired military officer. Former president Luis Inacio Lula da Silva (or Lula), meanwhile, is an icon of the Latin American Left and former head of Brazil’s metalworkers’ union.
According to the latest opinion polls, Lula holds a commanding 17-point lead over his rival. Although he looks set to fall short of the 50% voting share needed to avoid a second-round vote, which would take place on 30 October, he remains odds-on to win the run-off. For his part, Bolsonaro has suggested he may not accept that result, casting doubt on Brazil’s electoral process and, by extension, its democracy.
Lula’s Workers’ Party (known by the Portuguese initials PT) has rallied around the current administration’s mishandling of COVID-19. Bolsonaro consistently downplayed the severity of the virus, initially calling it a “little flu”. He was accused of delaying vaccine purchases, promoting quack cures like hydroxychloroquine and displaying insufficient sympathy for the nearly 700,000 Brazilians who died of COVID.
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Voters have also expressed concern about Brazil’s high rate of inflation, currently hovering at around 9%. Consumer prices have soared in recent years. Pandemic-induced fiscal spending, supply chain bottlenecks linked to China’s ‘zero-COVID’ strategy and (most crucially) the Russia-Ukraine conflict have conspired to raise consumer prices by 7% in the 18 months from January 2021 to June 2022.
In August, Brazil’s central bank raised its benchmark interest rate to 13.75%, continuing a tightening cycle that has increased borrowing costs by 11.75% since March of last year. In addition, Bolsonaro recently deployed an extra 41.3bn reais (£7.2bn) to help combat the cost-of-living crisis. In a last-gasp effort to woo voters, the package includes a cap on petrol taxes and handouts to low-income families.
Since 2021, Bolsonaro’s Auxílio Brasil programme (a revamp of the Bolsa Família scheme, in which low-income households received monthly state grants) has added to Brazil’s already considerable public debt. At 90%, the country’s gross debt-to-GDP ratio is one third higher than when Lula left office in 2010. And austerity will be a major challenge for Brazil’s next president: typically, appetite to cut public spending is subdued during periods of low growth.
If Lula were to secure victory next month, he would thus face considerable economic headwinds. He’s already hinted that he would maintain the recently approved boost to social welfare. He also says he would do away with a cap on public expenditure, which limits growth of the federal budget to the pace of inflation. In addition, Lula has publicly stated his desire to implement a more progressive tax regime.
Clearly, these measures would help to redress Brazil’s high levels of income inequality and provide a shot in the arm for the country’s vast informal sector (made up of tens of millions of citizens not registered in official employment data). Lula is also keen to tackle aspects of social injustice which lie beyond the scope of fiscal discipline. He is seen as a champion of Brazil’s indigenous population and of LGBTQ+ rights, having called homophobia a “perverse disease”. (Editor’s note: for more on the shortcomings of GDP as a measure of the success or failure of a policy or leader, see this article from our archive.)
All the same, these policy positions are not likely to generate significant economic returns. By contrast, Lula’s first two terms as president, from 2003 to 2010, coincided with a long rally in global commodity markets. Along with other resource-rich countries in the region, Brazil’s GDP soared.
Budget windfalls during this period facilitated large-scale public investment projects. Social assistance programmes were also expanded. A hallmark of Lula’s presidency, PT launched Bolsa Familia in 2003. The scheme is thought to have lifted 20 million people out of extreme poverty during his tenure. Unemployment had also hit record lows by the time he left office.
This time round, however, he won’t be able to rely on commodity gains. The price of Brazil’s key exports – soybeans, oil and iron ore – are all expected to edge down as the global economy creeps towards recession. At the same time, Lula is facing growing environmental pressure to decouple Brazil’s growth model from natural resource exploitation.
So far, he’s called for a radical overhaul of Bolsonaro’s policies. Under the current administration, Brazil’s main environmental agencies – Ibama and ICMbio – were weakened. At the same time, illegal mining and deforestation surged across the Amazon. Environmental activists have routinely criticised Bolsonaro for undermining biodiversity protection. Lula, on the other hand, is keen to restore the country’s eco-friendly image.
While specific proposals will only be made public one day before the election, when candidates must submit their plans for office, Lula’s submission is expected to follow PT’s ‘Rebuild and Transform Brazil’ plan. Originally drafted in 2020, it stressed the need for an “ecological transition to a low carbon economy”, and supported a “Green New Deal”. So policies will probably include public works projects like reforesting parts of the Amazon.
Advisers to Lula have also endorsed state-backed rural loan programmes. Here, development banks would provide credit at subsidised rates for sustainable agricultural practices. These include pasture-to-cropland conversion schemes, particularly for plants that absorb large amounts of carbon dioxide. According to sources close to the Lula campaign, other policies include “rebuilding Brazil’s cities through green infrastructure investment”.
Nevertheless, faced with mounting constraints both at home and abroad, forecasters are predicting modest GDP growth over the 2023-to-2026 period (averaging 1.4% per year, according to the Economist Intelligence Unit). What’s more, the inevitable horse-trading needed to secure a majority in Brazil’s fragmented congress will likely hamper an economically progressive agenda.
Meanwhile, Bolsonaro has cast aspersions on the legitimacy of Sunday’s election. Many pundits fear he may even try to stage an insurrection – so a smooth transition of power is the immediate priority. The overarching legacy of a Lula re-election, according to Brazil’s former finance minister Nelson Barbosa, would be “to consolidate democracy in Brazil”.
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