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May 2003

Fast Times in Lula's Brazil

The sudden resurgence of the real has scared some people,
including President Lula. In another front, by appointing three
new judges to the Supreme Court, so early in his administration,
the Brazilian president has an excellent chance of influencing
the way Brazilian society is shaped in coming years.

John Fitzpatrick

Congress is in full swing for a change and a lot is happening at the moment, with the focus still on President Luiz Inácio Lula da Silva's ambitious aim to get his pension and tax reforms proposals passed within a few months. So, rather than concentrate on a single issue, here's a look at a few points of interest that cropped up in recent days.

Dollar Diplomacy & Phony War

A touchstone to Brazil's standing in the world is the exchange rate. By letting the real float freely, this government is putting its—or rather our—money where its mouth is.

This has been a rocky ride since the "band" system—in which the currency was allowed to float only between pre-established maximum and minimum levels—was scrapped in early 2001. The immediate result, at that time, was a fall of almost 40 percent in the value of the real against the U.S. dollar.

Although the economy accepted this blow much better than expected, there was a further blow last year when the real plunged once again, reaching a rate of R$4 per U.S. dollar at one point.

One of the reasons for last year's fall was the uncertainty about what would happen after the presidential election. However, Lula's cautious handling of the economy since reaching office has allowed the real to regain some strength. It is currently trading at around R$3 per U.S. dollar, and could go even lower.

The resurgence of the real has been so sudden and sharp that some people, including Lula, have expressed concern that any further gains against the U.S. dollar could harm Brazil's booming exports. Lula's concern has been shared by the Development Minister, Luiz Fernando Furlan, and leading PT Senator, Aloizio Mercadante. Despite this, Finance Minister, Antonio Palocci, has ruled out any government intervention.

Some major media outlets jumped on Lula and the others for making this discussion so public, claiming their comments could backfire and any doubts they have about the currency should be kept to themselves. The media has also been creating a phony war scenario between Palocci and Mercadante. These attempts to muzzle Lula, in particular, are absurd, anti-democratic and devious. They imply that Brazil is a country that has to put its future in the hands of currency speculators. Lula has kept quiet since, but a diplomatic silence on something as important as the exchange rate is not the way to create a strong economy or a strong country.  

New Faces on Supreme Court  

Three new judges have been nominated by President Lula to the Supreme Court, one of whom is black. By so doing, Lula has met one of his campaign pledges and taken a step forward. The fact that newly appointed judge Joaquim Benedito Barbosa Gomes is only the third black or mixed race member of the Supreme Court in its 174-year history, is an indictment of Brazil's history.

Gomes has written a book on the need for affirmative action to help Brazil's black and mixed race population, which, according to the latest census figures, accounts for just over half the population. This shows where his sympathies lie. However, one man will not be able to overturn centuries of neglect and oppression.

At the same time, the two other nominees are a former Worker's Party candidate and a more conservative appeal court judge. All three are reported to be in favor of the government's controversial proposals to alter the public pension system. Since this issue is likely to be a battle royal, chances are that it will end up being dealt with by the Supreme Court and the government wants to make sure it comes before sympathetic eyes.

By appointing three new judges so early in his administration, Lula has an excellent chance of influencing the way Brazilian society is shaped in coming years, since Supreme Court judges keep their seats until they reach the age of 70.

Max Tax

A reader contacted me recently and complained that Brazil's problems were the fault of the International Monetary Fund, the United States and other usual suspects, and that Lula was betraying the people. The reader added the government should be increasing taxes and using the proceeds to build hospitals, schools, roads and so on.

This is a familiar argument, and all of us would like to have better hospitals, schools and roads. I assume this reader does not actually live in Brazil, otherwise he would know the government is increasing taxes and will continue to do so. A study by the Federal Revenue Department published last week showed that taxes in 2002 amounted to 35.86 percent of GDP. In 1998, the amount was 29.74 percent, a rise of 6 percent in just five years.

There is no way this tax burden will fall. The tax reform proposal the government recently sent to Congress has nothing to do with cutting taxes. All it hopes to do is make the current confused situation somewhat more efficient.

What my correspondent does not seem to appreciate is that the tax base in Brazil is much less numerous than in Europe or North America. Most Brazilians do not actually pay any income tax since they earn so little or work in the unofficial economy. The government relies on registered workers and companies for its tax collection.

The valued-added tax, known as the ICMS, provided the biggest revenues last year—R$104 billion (about US$37 billion) or 22 percent of all taxes. Income tax came second, amounting to only 18 percent of all revenues collected. At the same time, the government adds to its revenues through indirect taxes, such as the tax on financial transactions, introduced years ago as a temporary measure to raise funds for health care—in its tax reform package sent to Congress two weeks ago, the government is now proposing to make this a permanent tax.

There are countless other ways in which the government gets money out of your pocket and into its coffers. My latest telephone bill, for example, comes to R$180, of which R$45 is pure tax.

PMDB on the way back?  

It looks as though those empty chairs around the federal cabinet vacated by the PMDB (Partido do Movimento Democrático Brasileiro—Brazilian Democratic Movement Party) may be filled in the near future, and again by the PMDB. President Lula's Chief of Staff, José Dirceu, has just made a deal in which a PMDB congressman will become government leader in the Lower House, and a Senator will become deputy leader in the Senate. PMDB members will also get some juicy positions in various government bodies, such as the Social and Economic Development Council. So far no top positions—read cabinet—are on offer, but this could change.

The PMDB is the third-largest party in Congress, behind the PT and PFL, and the government wants it on board for the pension and tax reform votes. As usual, with the disparate interests that make up this so-called party, the deal has led to an internal row in the PMDB. Party President, Michel Temer, has criticized the move and said the PMDB would not be satisfied with the donation of little jobs.

This is a familiar script but with the roles reversed. During the administrations of Fernando Henrique Cardoso, it was usually Temer who was fending off his opponents within the party, who did not approve of the cozy relations he maintained with the Cardoso government.  

PFL still out in the cold...  

As for the second largest party in Congress, the PFL, it is still out in the cold and attacking the government. It has chosen taxation as its weapon. Party President, Jorge Bornhausen, had the gall to say the following at the party's national convention early May: "Brazil cannot be choked. Ten million new jobs will not be created if companies continue to be suffocated."

This is rich coming from a party that supported the Cardoso administrations until last year, when it withdrew its support not over rising taxes, but because its potential presidential candidate, Roseanna Sarney, became involved in a financial scandal. The PFL was as responsible as any other party for the increase in taxes in recent years.

Still, what can one expect from a party which retains as one of its leading members the notorious Senator Antonio Carlos Magalhães? He has just escaped yet another congressional investigation, this one into allegations that he illegally tapped the telephones of dozens of political and personal opponents in his home state, Bahia. A picture in O Estado de S. Paulo daily shows Bornhausen making his comments, flanked by Magalhães.

Let us hope that, for the moment, the PFL remains in the cold.   

Itamar's road finally leads to Rome

Finally, we can say goodbye to the bumbling former President Itamar Franco, who has grudgingly accepted the position of Brazilian Ambassador to Italy—a position he initially turned down, because he felt the Senate vote in favor of his appointment was by too narrow a margin.

Brazil must be the only country in the world to appoint a defaulter to such a prestigious post. While Governor of Minas Gerais, Franco defaulted on his state's debt to the federal government for purely spiteful reasons, and in doing so, damaged not only his state but the entire country. One of the results of Franco's incompetence and childish defiance of the Cardoso government at the end of 2000 was the massive devaluation of the real in January 2001.

Arrivederci, Itamar. You will not be missed.

John Fitzpatrick is a Scottish journalist who first visited Brazil in 1987 and has lived in São Paulo since 1995. He writes on politics and finance and runs his own company, Celtic Comunicações—  www.celt.com.br, which specializes in editorial and translation services for Brazilian and foreign clients. You can reach him at jf@celt.com.br  

© John Fitzpatrick 2003

This article appeared originally in Infobrazil, at www.infobrazil.com  




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