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The challenges to Lula's revolution

Camilla Bustani
16 January 2003

A dark horse parading in gilded brocade trips and falls in front of the Rolls-Royce driving the new president to his inauguration ceremony. A young schoolteacher breaches security, leaps out of the crowd and hugs the new president. As the ceremonial presidential sash is passed from the old to the new, the outgoing president’s glasses get caught in the melée of arms and fall to the floor. The crowd sings ‘Olê, Olê, Olê Olá!’, commonly chanted at football matches, and the hippy campaign slogan, ‘Little Lula, peace and love’, as the new members of the government file into the hall. Those distracted by the presence of Fidel Castro yell his name instead, only to be directed by the bearded legend’s fingers, forming the letter ‘L’, to focus on the main event. The protocol is in tatters. An Ealing comedy? Or the start of a new political era?

Lula addressing a crowd in 1979

On 1 January 2003 Luiz Inácio ‘Lula’ da Silva of the Workers’ Party – the Partido dos Trabalhadores (PT) – became Brazil’s first directly elected president since 1961 to inherit the presidential office from another directly elected president. Over 52 million voters, representing 61% of the vote (22.5% more votes than his opponent) brought Lula to power, making Lula the second most voted for candidate in the world closely behind Ronald Reagan in 1984.

Lula won on an ambitious platform of agrarian reform, job creation and workers’ rights (in a country where only 50% of workers have employment contracts). He promised economic growth, as the Brazilian economy has not enjoyed significant growth for twenty years. Lula pledged to address Brazil’s staggering income inequality, virtually unchanged from its 1970 level and reportedly the third worst in the world after Sierra Leone and the Central African Republic. The latest figures show that 54 million people (or one third of the population) live in poverty and the top 10% holds 65% of the wealth. The centrepiece of Lula’s manifesto, however, was ‘Zero Hunger’, a campaign to end hunger in a country where 46 million Brazilians (one quarter of the population) have less than two meals a day.

Voices of fear and threat

Much has been written about the symbolism and significance of Lula’s victory, particularly after three previous unsuccessful attempts at reaching the highest political office. Indeed, many are still buoyed by the sense that Lula’s victory represents a revolution in the democratic process, bringing to power a former shoeshine-boy turned union leader who is the voice of a large segment of the Brazilian population, which has hitherto been excluded both economically and politically. Across the board, Brazilians have great expectations, dwarfed only by their hope that these will be fulfilled.

This is the case despite the campaign of fear that was waged against Lula in the run-up to the elections in October 2002. At home, the campaign of Lula’s opponent, José Serra, discreetly warned that Lula would abandon the neo-liberal economic orthodoxy and send the country into a socialist freefall. Television advertisements for the Serra campaign included the tuneful refrain, ‘Brazil is green and yellow, not red!’, and an appearance by well-known soap star Regina Duarte expressing her fear of life under Lula.

Lula at the inauguration of the Porto Alegre WSF summit

Abroad, the response in some quarters to Lula’s impending victory was rather more disturbing. Henry J. Hyde, chairman of the US House International Relations Committee, wrote to President Bush describing Lula as a ‘pro-Castro radical who for electoral purposes had posed as a moderate’, and warning of a Latin American ‘axis of evil’ between Lula, Fidel Castro of Cuba and Hugo Chávez of Venezuela, with enough nuclear and ballistic capabilities to threaten US national security and that of the entire western hemisphere.

Constantine Menges, a Senior Fellow of the Hudson Institute and formerly in the National Security Council under Ronald Reagan, warns that this ‘axis of evil’ is ‘capable of pushing other South American countries to the left and establishing a dangerous alliance with communist China, as well as with Iran and Iraq, two terrorist countries.’ Meanwhile, Wall Street punished Brazil for Lula’s past anti-IMF statements (including calls for a moratorium on Brazil’s foreign debt), concerned that Lula would not attend to investors’ needs, and in June 2002 Brazil passed Ecuador to become third in the ranking of countries world investors fear the most. Goldman Sachs created a `Lula-meter’ to measure investment risk as Lula’s poll ratings rose. As the markets listened, the real lost one third of its value and dollar-linked public debt soared.

The elephant on Brazil’s back

Lula with the Brazilian actress Patricia Pillar after the election

While ‘hope defeated fear’ (as Lula reminded us in his speech), Lula has won a poisoned chalice and his prospects still hang on the ‘market’s’ mood. He has been left an ailing economy by his predecessor, Fernando Henrique Cardoso, the Brazilian father of ‘dependency theory’ who underwent a gradual but irreversible conversion from neo-marxist ideologue to neo-liberal darling of the IMF. Despite an unprecedented two-term mandate (made possible thanks to Cardoso’s own constitutional amendment), Cardoso was unable to correct structural problems in the tax and social security budgets, and social security now suffers a deficit of over US$20 billion. Domestic debt exceeds US$280 billion, approximately 58.5% of Brazilian GNP and the largest in Latin America. Public spending already represents 32% of GDP (38% including interest on public debt) and is growing. Between April and June 2003, US$24 billion of Brazil’s domestic debt will become due.

Crucially, an overwhelming concern with keeping the bankers and currency traders happy had led the Cardoso administration to introduce a series of financial liberalisation and capital account opening policies, effectively surrendering most capital control instruments for the sake of attracting (largely speculative) investments into Brazil. Cardoso linked the real to the US dollar through a ‘floating peg’, closely following the (now tragic) example of Argentina, though this was reluctantly abandoned in response to the 1999 currency crisis triggered by the state of Minas Gerais declaring a moratorium on its debts to the federal government. But to keep investors on board, interest rates went up, bolstering the value of the currency but making the public debt incredibly expensive to service. Interest rates stood as high as 25% in the fourth quarter of 2002. But the bankers were happy – Brazilian financial advisory firm, ABM Consulting, reports that in 2001 the ten largest banks in Brazil earned returns of 22% on their Brazilian holdings, compared to 12% returns globally.

Despite concessions made to Minas Gerais in 1999, another six out of the twenty-seven states together now owe over US$30 billion to the federal government and are already anticipating difficulties in servicing these debts. The state of Rio de Janeiro is taking the federal government to court, and the spectre of another currency crisis looms. If interest rates go much higher, the economy will be paralysed and public debt may become unaffordable. At the same time, should the real be allowed to fall again, the 42% of public debt that is now indexed to the US dollar will become crippling.

Most of the public debt in Brazil is indexed either to overnight interest rates or to exchange rates. Thanks to eight years of ‘investor-friendly’ orthodoxy, the Brazilian economy is now overexposed to, and thereby constrained in its chances of recovery by, the ‘sentiment of the market’, as former IMF Managing Director Michel Camdessus has quaintly described it. And as if this were not enough, the US-led war in Iraq will doubtless push up oil prices, producing inflationary pressures that may require interest rates to remain high, further increasing the cost of servicing public debt and yet again postponing economic growth.

It’s about a country, not just a president

Some observers suggest that Cardoso’s coalition (in cahoots with the Brazilian press) ‘let’ Lula win so that he could be blamed for the economic mess of his predecessor and be paralysed by it during his term. These cynics predict a Cardoso comeback in four years, perversely as a ‘saviour’. Whoever may be playing this game of political poker must not be helped or encouraged, and in any event, if Lula fails, Cardoso is unlikely to have any more room for manoeuvre should he return in four years. At stake is not simply the identity of the man in the sash in Brasilia, but potentially the fate of the 54 million people living in poverty, most of them hungry. Against the cynical ‘plotters’ Lula wields an unprecedented democratic mandate and the heavy (but empowering) sense of hope and expectation invested in him by the population.

However, experience from the election campaign shows us that Lula is vulnerable to the ill-informed, market-influencing perceptions from those in Wall Street and Washington DC with little knowledge and lots of power. Although the symbolism of Lula’s victory has galvanised Brazilian society, images of Castro and Chávez or of the sea of red PT flags waving in Brasilia, and the press shorthand identifier of Lula as the ‘newly-elected left-wing president of Brazil’ cannot be allowed to cement the prejudices witnessed during the electoral campaign. Shortly after the inauguration, Paul O’Neill, now ex-US Treasury Secretary, challenged Lula to ‘assure [the markets] he is not a crazy person’, while the director of the US State Department’s division dealing with Brazil has described Lula as a ‘(democratic) headache’. The ‘market’ appears to have given Lula the benefit of the doubt (though only following sympathetic appointments to the Ministry of Finance and the Central Bank), with stock market indices and the persecuted real getting a breather, though the Financial Times has already decided that Brazil’s debt-to-GDP ratio means that a ‘debt moratorium…is only a question of time.’

Lula is the first to admit that ‘what we have done up to now is much easier than what we all have to do going forward’, and from every perspective, whatever one’s economic dogma of choice, Lula’s task is undeniably mammoth. Fighting hunger, creating jobs and reinvigorating the economy all cost money and rely on lower interest rates, and Lula is saddled with a very sick economy (indeed, this is why, Lula joked, he appointed a trained doctor as finance minister). In the words of George Soros, ‘in modern global capitalism, only Americans vote, Brazilians do not.’ The ‘market’ is based on investors’ perceptions and Brazil’s chances rely on their patience. But unlike his predecessor, who served the interests of the bankers, Lula will govern for Brazilians, and to permit otherwise would be profoundly undemocratic.

Happy ending? The 2002 film Cidade de Deus in tracing the lives of young slum dwellers, graphically depicts some of the problems facing Lula's presidency.

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