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Brazil's debt burden expanded dramatically in terms of the
national currency due to a significant
drop in the international
value of the Real before Lula took office. The impending
U.S. war with Iraq will
only deepen these problems.
It has already upset Brazil's financial markets.
By
Roger Burbach
As Luiz Inácio Lula da Silva enters his third month as president of Brazil he enjoys popular approval ratings
approaching eighty percent. His "Zero Hunger" program has begun with pilot projects around the country, and as promised in his
electoral campaign, he has set up councils comprised of members of civil society to make recommendations on key policy issues.
But as Reinaldo Gonçalves of the Economic Institute of the Federal University of Rio de Janeiro notes, "Lula faces a
financial time bomb that could explode at any time." While Lula is moving forward full throttle to change the country's social
policies, he is already confronting serious economic problems that could undermine and even destroy his government.
The first crisis he faces is an essentially bankrupt social security system because of the policies of the previous
government. According to Cesar Benjamin, a social policy analyst who is a leader of the Popular Consultative Movement,
"Former president Fernando Henrique Cardoso's neo liberal free market policies undermined the country's stable work force,
greatly expanded the informal sector, thereby curtailing the number of contributors to social security." The number of retired
beneficiaries in major states like Rio de Janeiro now significantly exceeds the number of people who are paying into the
system. And like the United States, there is no reserve because the social security payments that came in during the Cardoso
years went out to cover other government expenditures, including the foreign debt.
Regarding the debt, Gonçalves states, "The government is facing a major fiscal crisis because of the skyrocketing
debt, both internally and internationally. In the medium or long term it is unpayable." The debt burden expanded dramatically
in terms of the national currency due to a significant drop in the international value of the Real before Lula took office.
Now the debt is equal to 56 percent of the country's gross domestic product.
To the dismay of many leading figures in Lula's Workers Party, the new government up until now has adopted fairly
traditional measures to deal with the fiscal crisis. To help meet payments on the debt, the Minister of Economy has ordered the
government to cut expenditures and to raise the expected budgetary surplus, excluding debt payments, from 3.75 percent to 4.25
percent. And to stop capital flight due to the country's financial woes the Central Bank has raised interest rates from an already
astounding 25.5 percent to 26.5 percent.
Senator Heloísa Helena from Alagoas, an impoverished state in northeastern Brazil declares, "The policies of the
economic advisors will not work." The leadership of the party tried to discipline her, but it was forced to back off when many
others in the party supported her statements and her right to speak out.
Lula enjoys the full support of the more progressive sectors of the Workers Party for one major financial reform he
is proposing—a restructuring of the country's tax system. At present tax revenues come overwhelmingly from a value
added tax. This means that approximately 24 percent of the income of the poorest fifth of the population goes to pay taxes
while the upper fifth pays only 12 percent.
Lula is calling for a progressive income tax that would shift the burden away from the poor. But Congressional
approval is needed to change the tax code. While some changes may be implemented, the fact that the Workers Party does not
command a majority in either chamber of Congress means that there will not be a radical shift in the tax burden from the poor to the
rich in a country with one of the greatest extremes of wealth and poverty in the world.
While criticizing the government's financial measures, the more militant sectors of the Workers Party remain
fervently committed to Lula's social policies. Francisco Menezes, who is a member of the newly formed Council on Food Security
that represents the interests of civil society, states, "Lula is aggressively dedicated to fundamental changes in Brazil's food
and agricultural policies." The council decided to double the amount of food distributed to the poorer families in the
country's schools in its first meeting on January 30th. Then in a meeting on February 27 the council agreed to direct the Ministry
of Agriculture to transform its historic policy of supporting agribusiness interests. "The new objective is to support
cooperatives, small scale agricultural producers, and to help people attain food self sufficiency at the local level," states Menezes.
The agricultural and anti-hunger policies will not face the immediate budgetary squeeze of other government
programs because the UN Food and Agricultural Organization along with the World Bank see Lula's "Zero Hunger" program as a
global model and are pumping around five billion dollars into Brazil to support the plan. But as Gonçalves notes, "This is only
a temporary fix. These are almost exclusively loans that will add to Brazil's already enormous international debt."
The impending U.S. war with Iraq will only deepen these problems. It has already upset Brazil's financial markets.
Even Lula's orthodox economic advisers recognize that the war will have a shock effect on the Brazilian economy, causing a
drop in exports and adversely affecting the country's ability to deal with its debt and capital flows.
Lula has been outspoken in opposing the U.S. war. In a recent phone conversation with Chancellor Gerhard
Schröder of Germany, Lula declared he would weigh in with Mexico, Chile and Angola—three members of UN Security Council
with which Brazil has historic ties—to vote against the new U.S. resolution for an Iraqi war.
In Brazil, as elsewhere, the war clearly hangs as an albatross over the country's future. Marcos Arruda of PACS,
an independent research center, notes, "We have no idea what the war will mean. We could be thrown back to a period like
the 1930s when all of Latin America was in a depression. It will minimally create new difficulties making it virtually
impossible to continue paying the country's enormous debt."
As Francisco Menezes states, "Sooner rather than later Lula and his economic advisers will have to break with the
past. They have no choice but to come up with new strategies and alternatives. This may lead Lula to call for popular
mobilization, and the formation of participatory councils at the grass roots community level to challenge the strangle hold of the
domestic and the international elites over the Brazilian economy."
Roger Burbach is director of the Center for the Study of the Americas (CENSA) and has written extensively on Latin
America and globalization. His next book, The Pinochet Affair: State Terrorism and Global
Justice, will be released by Zed Books in the fall. He can be contacted at
censa@igc.org
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