WSJ on Lula's focus
- (Despite what cranky leftist and ultra-
leftists have to say against Lula, the
Wall Street Journal knows that Lula's
installation represents something quite
different in Latin America, and that is
something NOT to its liking. In its first
days, and prior to coming to power the
July 26th movement had moderate rhetoric
as well, which was appropriate for the
building of the broad allances needed to
remove the Batista dictatorship. Coming
to elections via the electoral road, not
the armed route [blocked by Batista's
1952] Lula's route forward and the whole
political context today is different in
innumerable ways. We will all be looking
forward to seeing how Lula and his new
government meet the challenges ahead.)
Da Silva Pledges That Economy,
Not Social Policy, Will Be Focus
By JONATHAN KARP
Staff Reporter of THE WALL STREET JOURNAL
SAO PAULO, Brazil --
What a difference political power can make.
Meeting in December 2001 to plot election-year strategy,
Brazil's left-wing opposition Workers Party produced a
policy paper that made foreign investors shudder. It railed
against the International Monetary Fund, proposed controls
on foreign capital and called for a "rupture with the
current economic model, which is based on the radical
opening and deregulation of the economy."
A year -- and a watershed victory -- later, the Workers
Party is a grudging convert to continuity. In a document
handed to bankers Dec. 10 at the New York Federal Reserve,
Finance Minister-designate Antonio Palocci pledged to
maintain monetary and fiscal stability and to "fight
inflation relentlessly." He noted that "there will be no
solutions that are tentative, strange or heterodox. There is
no room for experimentation in this field."
Former metalworker Luiz Inacio Lula da Silva campaigned to
change Brazil, but when he enters office Wednesday, what
will be most evident is how much he himself has changed.
Despite his landslide election, he takes charge of Latin
America's biggest economy wearing a straitjacket, in need of
credibility with foreign investors to avoid a financial
crisis and local allies to build majority support in
Congress. Mr. da Silva is vowing to complete the unfinished
agenda of economic reforms that he bitterly opposed for
eight years under President Fernando Henrique Cardoso, a
fellow leftist who moved to the political center.
The new cabinet has a left-of-center tilt, with Workers
Party members controlling the most berths and the
social-services portfolios. But the economic team preaches a
cautious, conservative line on spending. To the surprise of
skeptics and dismay of some longtime supporters, Mr. da
Silva has tapped non-party professionals and entrepreneurs
for key government positions.
In naming former FleetBoston Finance Corp. executive
Henrique Meirelles as Central Bank governor, he embraced two
Workers Party demons at once: an international banker and
member of the outgoing ruling Social Democratic Party. The
nomination outraged one Workers Party senator, Heloísa
Helena, and the party barred her from the confirmation
hearing and vote to avoid embarrassment.
Yet the moves have eased some investor fears that Mr. da
Silva, widely known as Lula, would abandon free-market
policies or simply bungle economic management and trigger a
debt default. UBS Warburg even noted in a recent report, "So
far, we view Lula as an 'improved clone' of President
The first tests of Mr. da Silva's mettle for reform will
come soon, when the government presents bills to reform
Brazil's social-security and tax systems. Already, some
Workers Party stalwarts grumble that the new government is
pandering to the market at the expense of social-justice
initiatives such as land reform. But the militants are a
minority; most da Silva backers welcome his pragmatism in
the face of severe constraints.
"If you inherit a company that's in Chapter 11, there's only
so much you can do," says Lawrence Pih, a flour-mill owner
who has supported the Workers Party for 17 years. "We have
to clean house first."
Though healthier than its neighbors and buttressed by a
$30.7 billion IMF loan, Brazil faces anemic economic growth,
resurgent inflation, declining foreign investment and a $240
billion net public debt that is difficult to service in
these risk-averse times.
Mr. da Silva also faces political hurdles: His predecessor's
coalition had three main parties with a large congressional
majority, but still couldn't muster the required 60%
threshold for key constitutional amendments. Mr. da Silva's
coalition is more fractured and less potent. After failing
to clinch an alliance with the large Democratic Movement
Party, the governing bloc will control just 43% of the lower
house, or Chamber of Deputies, and 38% of the Senate. What's
more, recent legislation limits executive decrees, which Mr.
Cardoso used to bypass Congress to jumpstart virtually every
reform. Mr. da Silva, by contrast, will have to haggle on
every issue. Though he starts out with personal leverage;
his popularity has risen beyond the 62% of the national vote
he won in October.
Cesar Borges, a senator from the right-wing opposition
Liberal Front Party, says that the last president to have
such a strong personal mandate was Tancredo Neves, who was
elected in 1985 to restore democracy but died before taking
Businesspeople and scholars say they are impressed with the
realism that Mr. da Silva is showing in placating diverse
constituencies and managing expectations. Even still, "There
is a remarkable hopefulness in Brazil that in spite of all
the problems, something good is going to come out of this
government," says Margaret Keck, a political science
professor at Johns Hopkins University who has studied the
Workers Party since its creation in 1980.
The irony is that after 22 years of building a grassroots
movement dedicated to social, labor and antipoverty
programs, Mr. da Silva will have to make his mark first with
investors, risking a confrontation with his traditional
political base. "Basic economic issues, not social issues,
will determine the success of the Lula government," says
Christopher Garman, a political scientist at Tendencias
consulting group in Sao Paulo. "Getting the economy moving
again depends on market confidence."
Wall Street has moved from pessimism to skepticism about Mr.
da Silva, says Arturo Porzecanski, head of emerging market
debt research at ABN-Amro in New York. To deliver the
"confidence shock" that the Workers Party has promised, the
government must take two immediate steps to signal investors
that it is serious about monetary and fiscal austerity, he
and other economists say.
First, with annual inflation breaching double digits for the
first time since 1995, and wholesale prices rising by 25% a
year, the Central Bank should raise interest rates in
January. Under departing Governor Arminio Fraga, the Central
Bank boosted rates to 25% from 18% between October and
December because of inflation expectations from a weakened
The second step is for Mr. Palocci, the future finance
minister, to raise the government's primary budget surplus,
which excludes debt payments, from the current target of
3.75% of gross domestic product. That is needed to stabilize
Brazil's debt-to-GDP ratio, now close to 60%. The move could
help reduce Brazil's sovereign risk, or the premium it must
pay over U.S. Treasurys to borrow money, and in turn, ease
pressure on the currency, improve the inflation outlook and
create space for Brazil to gradually lower interest rates.
Mr. Palocci predicts a tough year ahead, but has been
evasive on whether he will raise the budget surplus. Still,
the former Trotskyite has absorbed a crucial economic
lesson: markets anticipate. That justifies his desire to
move quickly on the thorny issue of social-security reform,
to demonstrate to investors that Brazil has the will to plug
this fiscal leak. While in opposition, the Workers Party
thwarted attempts to reform the public-sector pension
system, whose deficit will be about 3% of GDP this year.
To make meaningful changes, the Workers Party will have to
confront public-sector unions that support it and probably
betray a campaign promise to "respect constitutional
guarantees" to pensioners, code words for the generous
payment terms that have produced the unsustainable deficit.
That phrase may prove the Brazilian equivalent of the first
President Bush's "read my lips" pledge not to raise taxes.
Write to Jonathan Karp at jonathan.karp@...
Updated December 31, 2002