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When Luiz Inácio “Lula” da Silva was elected president of Brazil in October 2002, popular expectations nearly across the political spectrum were so enormous that he was bound to disappoint someone. Indeed, what is remarkable about the present situation in Brazil is just how popular Lula remains (60 percent approval rating) in spite of a conservative fiscal policy, a modest uptick in the unemployment figures, a willingness to expend valuable political capital on pension and tax reforms, a financial scandal involving his chief of staff, and an embarrassing threat to expel a New York Times journalist.

Some of Lula’s problems have arisen out of developments endemic to any young democracy. Barely twenty years have passed since the country emerged from more than two decades of military rule, and bottled-up demands from the less privileged sectors of the population were bound to explode sooner or later. But the context in which President da Silva was elected--a campaign whose centerpiece was to create 10 million new jobs and lift vast numbers of Brazilians out of poverty--does not make his task any easier.

Lula’s Economic Agenda

One of the peculiar characteristics of the Brazilian economy--the world’s tenth largest--is that it seems perpetually poised on a razor’s edge: on one side, chaos and collapse, on the other, takeoff to superpower status. Economic policy itself is often mortgaged to the capacity of any government to reach agreement with the Brazilian congress. Since no party dominates that body, any administration must engage in complicated horse-trading to get its legislation enacted.

Many bills that seemingly have nothing to do with the economy nonetheless can have an important bearing on financial outcomes. A case in point is the fate of a recent legislative project--supported by the government--that would have allowed presidents of the senate and chamber of deputies to stand for reelection. Its defeat in early May of this year might well cost Lula the backing of legislators from the Brazilian Democratic Movement (PMDB), whose leader, former president José Sarney, presides over the Brazilian senate. This shift in party alignments could not come at a worse time. Congress is presently contemplating an increase in the income tax exemption and a bigger increase in the national minimum wage than President da Silva wants.

Meanwhile, the Brazilian supreme court is reviewing the legality of last year’s pension reform, which would have taxed the social security payments of some of the country’s more affluent citizens. If this legislation were nullified, it would wipe out the huge cost savings of the plan and immediately decrease the value of the C-bond (the widely held dollar-denominated government issue). If yields jumped sufficiently, the government might well find itself struggling to pay off its dollar debt with a fast-weakening currency. As it is, in June it had to cancel its monthly bond auction because interest rates demanded by lenders were 100 basis points higher than the central bank felt comfortable paying. Most financial analysts think the government has enough cash on hand to operate without difficulty until September, but after that it must recur to international borrowing.

Since taking office President da Silva has--perhaps surprisingly in view of his radical past--pursued a thoroughly orthodox fiscal policy. At the time of his inauguration, the dollar-denominated C-bonds had an utterly unsustainable spread of 24.4 percentage points. The choice was either self-discipline or the Argentine route of default. By choosing the former, the primary fiscal surplus of the consolidated sector grew to 4.3 percent, and the favorable effect was felt almost immediately in interest and exchange rates.

Unfortunately, the rewards of this bold policy have not yet been fully felt. In the short run the economy shrank last year by 0.2 percent and unemployment stood at slightly more than 13.1 percent in April (although the trade surplus last year amounted to $25 billion). The indicators for this year are most favorable; economic growth in the first quarter of 2004 (on an annualized basis) was 6.4 percent--a figure that probably cannot be sustained to the end of the year given a likely rise in U.S. interest rates and an expected slowing of the Chinese economy. But as the Financial Times (June 1, 2004) puts it, “a low-saving country such as Brazil can achieve faster growth only if it is fiscally disciplined and attracts large-scale inward direct investment.”

Restive Social Movements

President da Silva’s success or failure depends not only on macroeconomic performance but on his capacity to integrate elements of society--many of whom he has cultivated for political support in the past--into his larger design. A case in point is the semi-Marxist, semi-anarchist Landless Movement (MST), one of the largest land-reform advocacy groups in the world. Its members typically invade private or unused tracts to bring attention to their quest for greater equality in land distribution. They typically arrive with tents and cooking equipment and settle in for months at a time. Though not usually armed (except for scythes and machetes), they nonetheless can represent a menacing specter to landowners and small farmers, and last year there were several deaths due to clashes.

In early April the leader of the MST, João Pedro Stedile, promised to “set Brazil ablaze” with occupation protests, and in fact his organization seized more than 100 tracts in the last few weeks in fourteen of Brazil’s twenty-seven territorial divisions--one of its largest and most widespread actions in recent years. The stated reason for this action was frustration with President da Silva, who is seen as having backed down from earlier commitments to land reform. Last November the president had publicly promised to settle some 355,000 families on the land by the end of his term in 2006, and in March of this year, hoping to stem the tide of invasions, he released a half million dollars to the MST to purchase land for 115 member families.

Stedile called the president’s proposals “ridiculous” and “insufficient” and demanded one million families to be settled over the next four years. President da Silva reiterated his commitment to land reform but told Stedile publicly that it will not be achieved by “shouting . . . but in the calmest, most peaceful way.” Local authorities have responded more astringently. Agriculture minister Roberto Rodrigues and some of the state governors have publicly complained about
the land seizures (as well as road blockages, another form of protest). Governor Ronaldo Lessa of the northeastern state of Alogoas insisted that “any foreign investor is going to be frightened off by what is happening,” and elsewhere thirteen members of the MST were arrested for stealing cattle from the farm they occupied.

The land issue is one area where the old Lula and the new are in evident opposition. The president has tried to reconcile the two in his monthly radio broadcast. “I’ve already been a union leader. I have seen a radical and have used good sense. Each time I used good sense, I won,” he reminded his listeners. “When radicalism won out, I lost. If I can give some advice to my comrades in the social movements, it’s this: act with as much responsibility as possible, because otherwise we’ll all be victims.”[1]

Another constituency long loyal to President da Silva--the environmental movement--now finds itself in opposition to him. At issue is the building of a gas pipeline linking the country’s massive underground resources with isolated cities of the Brazilian interior. The purpose of this project is not merely to create infrastructure and jobs in a neglected and remote region but to cut its reliance on expensive and environmentally undesirable diesel and fuel oil.

Concretely, Brazil’s state oil company, Petrobras, has plans to spend $420 million building a pipeline from Coari to Manaus, the center of a free trade zone of a million people. The line itself will run through nearly a thousand miles of Amazon jungle, skirting many indigenous reservations, to link up with another completed in 1999 originating in the Urucu gas fields. Environmentalists complain that the project involves extensive deforestation and will open a hitherto inaccessible area to settlers, gold miners, soy farmers, and cattle ranchers, not to mention expose Indians to disease or loss of food and clean water if construction projects cause erosion or silt rivers. (They point out that an area roughly the size of Belgium was deforested last year alone.) The president’s proposals to build huge hydroelectric projects in the northern Amazon have likewise drawn vociferous criticism from environmentalists.

Other Headaches for Lula

Brazil’s typically contentious civil society has also presented problems for the president. The federal police have gone on strike for higher pay, joined by government workers in other agencies. There has been turmoil on two Indian reservations. Although social spending has increased on health and education, many of the president’s former supporters are disappointed that his “Zero Hunger” program has so far failed to get off the ground.

The president’s evident frustration with many of his followers (or former followers) was evident in a speech he made last year at the General Motors factory in Sao Paulo, where he urged his listeners not to “expect me to be more than a president. I don’t have the power of God to perform miracles that some people think I should have.”[2] In an effort to appease constituents like these, the president has announced a program to create 40,000 more government jobs--a move former president Fernando Henrique Cardoso calls “stupefying”--and suggested that he may yet create another 100,000 more, partly by expanding the armed forces and mandating new infrastructure projects. He has also announced a new social housing program and plans to create a chain of cheap pharmacies in poor neighborhoods.

As if the darkening public mood were not enough, two minor scandals have besmirched the president’s image. One is the revelation that his chief of staff, José Dirceu, was accepting payoffs from local mafia chiefs to finance the campaign of Workers Party candidates in the upcoming November elections. While such practices have, unfortunately, been all too common in Brazil (as indeed in many other democracies, including our own), the president’s carefully cultivated image--and to some extent, that of his party--as above such peculations has up till now been one of his (and its) greatest and most enduring strengths with the electorate.

The other scandal involves New York Times correspondent Larry Roehter, who claimed in an article published on May 9, 2004,[3] that among other things the president’s aides were concerned that his supposed addiction to alcohol was affecting his ability to govern. The president’s strong reaction--threatening to revoke Roehter’s visa--while ill-advised from both the standpoint of civil liberties and public relations, is perhaps understandable. All too many Brazilians (indeed, all too many Latin Americans) labor under the misconception that the New York Times is something approaching the voice of God, and worse still, seem to be blissfully unaware of the fact that its reputation for veracity, in the United States at least, has been deeply and perhaps irrevocably damaged in recent times. Although President da Silva was finally persuaded to withdraw his threat, it was too late to minimize the damage.[4]

While the opposition in Brazil is too diverse and fractured to pose a serious unified alternative to the government, it is sufficiently broad to prevent President da Silva from pursuing other items on his legislative agenda. To put it crudely, many opposition parties smell blood in the water and are not inclined to provide the government with more traction as the country heads for legislative elections this fall. Thus, not surprisingly, the president has decided to shelve any further progress on labor reform or legislation that would grant full autonomy to the central bank. His hopes are mortgaged to an upturn in the economy, which would be translated into stronger support in the congress and among the state governorships.

A Balancing Act

When President da Silva met with President George W. Bush shortly after his election he explained that his victory was extraordinarily significant because it represented the possibility of incorporating millions of poor Brazilians into a modern political and economic system--in other words, to show that democratic capitalism with a human face could work in a Third World country. The argument is all the more compelling coming as it does from a former radical who still considers himself something of a socialist. The big question is whether Brazil’s political system, an odd mixture of nineteenth and twenty-first century conceptions, will lend itself to the immense social tasks before it. President da Silva must balance his needs for votes with the demands for economic stability and international confidence--not an enviable task. We will know whether this is possible within a relatively short period of time. The future of more than just Brazil depends on the outcome.

Notes

1. Alex Bello, “Lula Throws the Brazilians More Promises As Problems Mount,” The Guardian (London), April 28, 2004.

2. Andrew Downie, “Lula Faces First Big Crisis as Nation’s Problems Grow,” Miami Herald, April 23, 2004.

3. “Brazilian Leader’s Tippling Becomes National Concern.”

4. Even so, it is possible that the incident may have caused a backlash in his favor among ordinary Brazilians, many of whom probably see the New York Times as somehow representing the United States, a country not well-loved by most of them.

Mark Falcoff is a resident scholar at AEI.