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Brazzil - Economy - March 2004

Lula Can't Start Brazil's Economy

2003 was a lost year in Brazil as the country's Finance Minister and
Central Bank President struggled to gain the confidence of overseas
investors, lenders and speculators. President Lula may be
preparing to cast the IMF as a scapegoat to blame if the government's
many announced but not implemented measures fail to create jobs.

Richard Hayes

With 30 percent of Brazilian President Luiz Inácio Lula da Silva's four-year term finished, he has recently been hearing more vocal criticism, mainly about the economic policy of the PT government. The press and the opposition political parties have been pointing out the failure of Lula to accomplish much for some time. Last week, for the first time, businessmen have aggressively come out publicly.

The Brazilian Association of Infrastructure and Basic Industries (ABDIB) in quite objective terms made several positive suggestions as to how the government might encourage investment and create jobs. Armando Monteiro, president of the National Confederation of Industry, has pointed out that the government lacks coordination. There has been no response from Lula's people so far.

In spite of Lula's campaign promise to create 10 million new jobs during his mandate, unemployment is at record high levels. The only new jobs that are evident are those created by the government itself bestowed upon PT cronies and politicians who were defeated in the last elections.

Since the days immediately before Carnaval, the government has been paralyzed trying to bury the investigation of improprieties committed by Waldomiro Diniz, who, as a top aide to José Dirceu, Lula's Chief of Staff, had been the link between Congress and the PT run government. 81 percent of people polled by Datafolha feel that a congressional investigating board should dig into the matter.

The required number of congressional signatures has been obtained but the government coalition has found a way to block this and others investigations by not appointing members to the commission. This makes the government look very bad since if they have nothing to hide, why not let Congress investigate?

To divert attention from the Waldomiro Diniz case, Lula signed a decree banning bingo and slot machines in all of Brazil. This has put a number of people out of work, who have been staging protests in Rio de Janeiro, São Paulo and elsewhere. Eliminating this activity is probably a good idea since these establishments are notorious in tax evasion and provide an easy scheme for money laundering.

Within the PT and the government itself, there is far from unanimous backing for the economic policies that have helped Brazil gain credibility with the financial community. The two biggest labor unions, CUT (Central Única dos Trabalhadores—Unified Workers Federation) and Força Sindical (Union Force) are calling for an end to such high interest rates and the primary surplus of 4.5 percent, which is part of the agreement with the IMF.

At a meeting of top PT brass in São Paulo a week ago, several members of this party were very critical of the government's tight fiscal and monetary posture. They act as if they were still in the opposition rather than governing the country.

Lula is attempting to have the IMF change its method of calculation of governmental expenditures by counting as investments funds spent improving infrastructure by government owned companies. He has spoken to Bush, Chirac, Schröder, Aznar and Blair asking them to persuade the IMF to change. This may be counter productive since things move slowly in this organization and these heads of state are not apt to use what influence they may have to help Brazil's well meaning but sometimes unrealistic leader.

The fact that Horst Köhler diplomatically told Lula he would study the matter when they had lunch together in Brasília, February 29, may have given Lula the idea that this change in criteria would be easy. Less than a week after their encounter, Köhler resigned to run for President of Germany leaving the IMF temporarily in the hands of Anne Krueger, who usually speaks favorably about Brazil.

But since the IMF this week barely escaped a big default of Argentina and is being criticized as being too lenient with president Kirchner by some and having contributed to Argentina's problems by others, any quick decision about changing their accounting rules is out of the question. Lula may be preparing to cast the IMF as a scapegoat to blame if the government's many announced but not implemented measures fail to create jobs.

Lost Year

Exports and the agricultural sector continue to provide the economic activity that lessens the impact of high taxes and interest rates, poor infrastructure and a juridical system that is archaic. The lack of jobs and the public's reduced buying power make any growth in per capita GNP look difficult to attain without huge changes that this government seems incapable of accomplishing. 2003 was a lost year as the finance minister and central bank president struggled to gain the confidence of overseas investors, lenders and speculators.

Due to the government's predicament that the recent disclosures have aggravated, it is possible that less orthodox measures in the economic area may begin as Lula and his people struggle to make the PT look good in order to gain ground in the municipal elections in October. It is very difficult to predict the future at this point. Lula claims to give full support to Antonio Palocci, finance minister, but he may cede to pressure for less stringent fiscal and monetary policy should the government's popularity continue to erode.

Although Brazilians have traditionally distrusted public figures and politicians in general, a certain amount of faith that Lula would be different was evident 14 months ago. Even people, who did not vote for him and in fact would never vote for a PT candidate, were hopeful that he would do a good job. This illusion no longer exists.

If things do not improve for the great majority of have nots, then movements to undermine the state may take place. An institutional crisis could ensue. I have heard no mention of the military coming back. But one can be certain that they are carefully observing occurrences such as the strike of the Federal Police that is supposedly investigating the case of Waldomiro Diniz.

If law and order break down, the men in uniform may be asked to intervene as happened in 1964. The population has little respect for the three branches of government leaving only the fourth-silent force that periodically through history has taken charge when the civilian politicians prove themselves incapable of running this unruly country. At present, this seems like a remote possibility.

Hopefully none of this will happen and the country will soon begin the much talked about period of sustainable growth that will provide a decent living for the many people who are willing to work giving them the dignity of providing a better life for their families.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br
March 14, 2004

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