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WSJ on Lula's focus

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  • Walter Lippmann <walterlx@earthlink.net>
    (Despite what cranky leftist and ultra- leftists have to say against Lula, the Wall Street Journal knows that Lula s installation represents something quite
    Message 1 of 1 , Jan 3, 2003
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      (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
      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, HeloĆ­sa
      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
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