The inauguration of Luiz Inácio Lula da Silva as President of Brazil on January 1st was an important historical milestone. For the first time, a man of working class origins and leftist politics is leading Latin America's largest nation. His election and the smooth transition of power validate Brazil's democratic system and give the long frustrated Brazilian Left a chance to put its ideas into practice. In the campaign, Lula's Workers Party promised to break with the "neoliberal, Washington Consensus" policies that have predominated in Latin America for at least a decade. If they succeed in implementing a new economic model, it will be an important precedent for Latin America and the developing world.
But political and economic constraints do not allow much room for maneuver. Even before assuming office Lula was warning Brazilians that the first year would be one of austerity. He blamed the preceding administration for leaving the country burdened with debt and other problems. But blaming past leaders can only go so far. Lula and the Workers Party have promised Brazilians that they can change the country's economic model so as to accelerate economic growth, lessen inequality and improve the quality of life. What are they likely to do, and how likely are they to succeed?
Although the Workers Party has a reputation as a critic of free market economics, this is largely a matter of its past. The party was able to win the 2002 presidential election because it put aside its radical past and adopted political views much like those of the preceding administration. Lula had lost presidential races in 1990, 1994 and 1998, largely because he was too radical for most Brazilian voters. The winner in 1990 was Fernando Collor, a telegenic young governor of the small northeastern state of Alagoas. Collor seduced the electorate with smoothly delivered promises to wipe the slate clean of inflation and corruption. But his anti-inflation policy collapsed and he was impeached for corruption.
Power then fell to the vice president, Itamar Franco, a traditional politician who had no understanding of the inflation problem. Surprisingly, the Workers Party also had no plan for ending inflation, despite the scores of brilliant economists and intellectuals in its ranks. It was too focused on labor struggles and just advocated raising wages more rapidly to keep up with the rise in prices. In desperation, Franco asked São Paulo sociologist Fernando Henrique Cardoso, then foreign minister, to take over the finance ministry.
To everyone's astonishment, Cardoso put together a plan that actually solved the hyperinflation. This feat made him a shoo-in for the presidency in 1994, once again frustrating Lula and the left. By 1998, Cardoso's anti-inflation plan was in crisis and the left thought that his policies had failed just as Collor's had. But the voters were too frightened to change captains in the midst of a storm and Cardoso surprised everyone again by pulling the country through.
By 2002, Lula and the Workers Party had to admit that many of Cardoso's policies were working better than they had expected. They were sick and tired of losing, so they decided to bite the bullet and make the changes needed to win. They purged the Trotskyists from the party and adopted a platform that was close to that of Cardoso's Social Democratic Party.
Lula dressed in tailored suits and spoke reassuringly about shared visions. Most importantly, he promised to honor the commitments Brazil had made to the International Monetary fund, including maintaining limits on government spending and keeping up the payments on Brazil's debts. He held endless meetings with business leaders, assuring them that he could run Brazil's capitalist economy better than the capitalists had done.
With these changes, the Workers Party moved into the same political space as Cardoso's Social Democratic Party. But Lula's history as a labor leader, and the party's roots in the Catholic and socialist left, gave it greater credibility. Workers Party activists have a remarkable tradition of commitment to the party as an organization. The other Brazilian political parties are largely shifting alliances of independent politicians. Once the party shed its radical rhetoric, voters were happy to welcome it to the mainstream.
At the same time as Lula reassured the businessmen and middle classes of his responsibility, he appealed to populist impulses with promises to change the country's "economic model," lower inflation and interest rates, cut unemployment, and stimulate economic growth. He promised to end hunger, stating that his life's aspiration would be achieved when every Brazilian had three meals every day. He promised to step up the agrarian reform, distributing even more land than Cardoso had done, all the while protecting the environment and guaranteeing the rights of Brazil's indigenous peoples.
Lula's main opponent, José Serra, of Cardoso's Social Democratic Party, tried to point out the vagueness of Lula's promises and to provide more specific plans of his own. But the voters did not want to hear about difficulties. They were looking for inspiration, for empathy, for someone with a positive vision of the future. They preferred to suspend doubt, hoping that somehow Lula would find a way to deliver on his promises, confident that he would try his best.
The Workers Party's electoral strategy was a resounding success. In the run-off on October 27, Lula won 61 percent of the vote to Serra's 39 percent. His supporters danced in the streets of São Paulo. Much more significant, however, was the general enthusiasm throughout the society. Everyone wished Lula the best of luck. Outgoing President Fernando Henrique Cardoso, who had refrained from attacking Lula during the campaign, stated that he was emotionally stirred by the election of a working class leader to the nation's presidency.
The jubilation in São Paulo was reminiscent of Caracas in 1998 and Lima in 2001 when similarly overwhelming majorities elected populist Hugo Chavez and social democrat Alejandro Toledo. These leaders promised more than they could deliver, as if all that was needed was good intentions. Now Chavez is fighting off coup attempts and general strikes, while Toledo's ratings in the public opinion polls have fallen to the 30 percent's from the 60 percent's a year ago. Lula knows that he faces a similar risk. Late in the campaign, when mass enthusiasm was at its peak, he began warning audiences that he could not perform miracles and that it would take time for his policies to bear fruit.
Brazilians will give Lula time, but eventually he will have to deliver on his promises of increased prosperity, especially for those in most need. Fortunately, there are several things working in his favor. His political party is more sophisticated and better organized than any other in Latin America and he has highly competent advisors.
Although Brazil has large social and racial inequalities, politics has not polarized along those lines to the extent that it has in many other Latin American countries. The international financial community is eager for Brazil to succeed, and the IMF has extended a generous credit line.
Although Lula does not have a majority in Congress, the opposition is responsible and willing to cooperate, even though the Workers Party was less much less cooperative when it was in opposition. Perhaps most important, Brazil has already completed important structural reforms that are essential to Lula's success but that could never have been completed by a Workers Party president.
Lula has his political rival, Fernando Henrique Cardoso, to thank for many difficult and essential reforms that give him the ability to govern effectively. In addition to ending hyperinflation and maintaining monetary and fiscal discipline through some very difficult international crises, Cardoso got the Congress to pass a fiscal responsibility law that strongly controls federal, state and local government spending, in striking contrast to neighboring Argentina.
In assuming state debts and protecting the currency, however, he ran up internal debt and raised interest rates to levels that limit the country's options. Inefficient state industries have been privatized, including the state banks that fueled inflation with irresponsible loans to state governments. The Brazilian monetary and banking systems are reasonably sound. The civil service has been cut back, reformed and modernized. Non-governmental organizations have played a new and creative role in education and social programs.
The Workers Party bitterly contested most of these reforms during the eight years of Cardoso's administration. They attacked Cardoso as a "neoliberal" and insisted that they could do better with an economic model that "took the social as its axis" and gave more weight to human needs than to bankers and corporations. They argued that Brazil could have grown more rapidly during the Cardoso years if government planners had exerted more control over business interests. The Workers Party platform optimistically asserts that Brazil has a "vocation" to grow at a rate of 7 percent of year, and blames the "neoliberals" for not letting it do so.
Brazilians would like to believe that a change in economic policy could bring back the rapid growth the country experienced during the days of the "Brazilian Miracle" in the 1960s and 1970s. Those were years of military dictatorship and the Brazilian military then believed in strong state guidance of the economy, just as the Workers Party does now. Indeed, the Workers Party platform expresses remarkable nostalgia for the economic policies of the military dictatorship.
But there are no miracles in economics. The "Brazilian Miracle" was fueled by excessive borrowing of petrodollars and inflationary government spending. This led to hyperinflation and the "lost decade" of the 1980s. Brazil does not generate the domestic savings needed to sustain 7 percent economic growth. The only way to generate sustained rapid growth is with a massive flow of foreign investment, which is what the Workers Party bitterly criticized Cardoso for trying to do.
Brazil has tried government planning before with unfortunate results. The electricity failures in 2001 were largely due to faulty planning by government energy planners who relied too much on hydroelectric power. In the 1970s, the government decided to switch much of Brazil's automotive fleet to ethanol in anticipation of a world oil crisis. But oil prices went down and ethanol prices went up, causing a collapse in the market for ethanol powered cars. In the 1980s, Brazil protected its domestic computer market from foreign competition. As a result, the country missed the chance to become a major player in the global computer industry.
Of course, businessmen also make mistakes. But switching to government planning is risky and adds the cost of state employees to administer the plans. A system that gives increased powers to government officials also creates more opportunities for corruption. Corruption was rampant under the military, despite their supposed organizational discipline and patriotism. The Workers Party believes that it can control corruption, and it has a good record in that regard in the states and municipalities where it has held power. But increasing the economic powers of government officials in a country with Brazil's culture and history is risky.
Cardoso brought down inflation and modernized the economy by forcing Brazilian companies to compete with foreign imports and by selling inefficient state enterprises. This had an unavoidable cost in unemployment as employers downsized their work forces. But it was necessary to make the Brazilian economy competitive and the Workers Party leaders understand that, even though they opposed it at the time.
The Workers Party does not want to go back to protectionism. It proposes to increase employment by reviving Brazil's consumer goods industries with cheaper credit and other incentives. But the resources needed to do this will be available only if the economy is growing rapidly. With everything so dependent on economic growth, the Workers Party simply cannot do anything to alienate either the Brazilian or the international business community.
In the campaign, Lula blamed Cardoso for making the country too vulnerable to speculative capital, much of which left as abruptly as it came in response to global crises. Lula promised to impose increased controls on speculative capital. This is the conventional wisdom today, advocated by Chile and Singapore and even by the IMF, as well as by Brazil, so some controls may be instituted on paper. But they will be largely symbolic because domestic capital markets cannot provide nearly enough resources for the greatly increased growth the country needs and expects. If Lula is to fulfill his promises he will need to attract significant foreign investment, just as Cardoso did. He cannot afford the luxury of turning investment away simply because it might leave when conditions change.
If Lula is unable to cut unemployment quickly enough through economic growth, there will be strong political pressure to save jobs by protecting Brazilian markets from foreign competition and by hiring more workers in state enterprises. This would appeal to nationalist sentiments, and it could easily be justified as retaliation for American protection of its markets for steel, orange juice and other commodities. But it would be a setback in Brazil's efforts to become a highly productive, internationally competitive economy.
An early example of the kinds of pressure Lula faces came from Itamar Franco, the former president who appointed Fernando Henrique Cardoso as finance minister in 1963. After Franco's presidential term ended, he was elected governor of the state of Minas Gerais. As governor, he decided it was simply too burdensome to make payments on the state's debts. The bankers could wait. He would pay the policemen and schoolteachers. He proudly announced his refusal to pay his bills to the federal government, touching off Brazil's 1999 financial crisis.
Cardoso stood up to Franco, enforced the fiscal responsibility laws, and brought the country through the crisis. In doing so, Cardoso squashed Franco's hopes of running for President in 2002, so Franco supported Lula in the 2002 elections. As soon as Lula was elected, Franco asked him to declare that the states would not have to pay their debts to the federal government.
Brazilian states have a long history of running up debts and then expecting the federal government to print money to pay them off. This enables them to pay state employees, but it creates inflation that eats away at the living standards of the poor and politically unconnected. Lula wisely refused to make any such promises.
The better way to create employment is to develop new, internationally competitive, export-oriented industries. Under the economic theory espoused by the Workers Party platform, the state should be able to select the most promising industries and use its resources to promote them. But the state has few resources to spare, and many political demands to meet. What industry would the planners favor? The only suggestion in the Workers Party platform is computer technology.
This is an obvious choice to spearhead development in the 21st century, and the Brazilians are impressed by the success of countries such as China, Korea, and India in exporting computer hardware and software. But Brazil has still not recovered from the Brazilian state's last attempt to regulate the computer industry. The legacy of that failed policy hangs on in the form of high prices for computers assembled in the country from imported components. These prices make it difficult for Brazilians of limited means to purchase home computers, strengthening the digital divide.
Brazil has world-class university computer science departments and programs to help high-tech entrepreneurs get around the high costs of doing business in Brazil. But protection for intellectual property is ineffective, so it is difficult to make money writing software for the Brazilian market.
Microsoft Windows and Word have a market dominance that is perhaps even greater than in the United States because the general public uses pirated software while corporations and government agencies pay for it. There is a movement in the high-tech community to replace Windows and Word with Linux and Star Office and other open source software. But consumers are resistant. They would rather use Microsoft software that they can get for next to nothing on the black market.
Many government offices are changing to Linux, and Workers Party activists would love to take on the Microsoft monopoly. But this is probably not the best way to build a world-class software industry in Brazil. For that, the country needs lower business costs, cheaper hardware and better protection for intellectual property.
It needs to work closely with international software companies and in harmony with international trends. Going off on an anti-Microsoft crusade might be self-defeating. The Brazilian high-tech industry might do best if the government limits itself to funding education and research and enforcing its intellectual property laws instead of trying to impose development guidelines.
While high technology is more important to the country's future, the Workers Party would rather talk about land reform. The driving force here is the Landless Farmer's Movement, a militant group organized by Catholic leftists. The Movement has been effective in promoting its cause, both in Brazil and abroad, but its fundamental economic strategy is flawed.
The problem is that it simply costs a great deal to subsidize small farms. The real struggle is not for land, which is plentiful, but for subsidies. Without subsidies, land reform just creates shantytowns in the countryside. Wealthy countries in Europe and North America can afford to subsidize small farmers, but Brazil's resources are much more limited.
The larger commercial farms are much more productive, but the anti-capitalist left attacks them as exploiters. There have been many bitter struggles between landowners and landless workers who believe they should be given land and the subsidies needed to live on it. The Cardoso administration modernized the agrarian reform bureaucracy and greatly accelerated the settlement of families, at considerable cost. But the Landless Farmer's Movement expects Lula to do more. They want to move from export-oriented commercial agriculture to small farms and sustainable domestic-oriented production. But Brazil simply cannot afford to cut its highly profitable agricultural exports.
Another issue that must be confronted quickly is social security reform, a problem that Cardoso was politically unable to solve. This is a difficult issue for the Workers Party because the conflict is not between capitalists and proletariat but between taxpayers and civil servants. Brazilian social security benefits are very modest for the general public, but very generous for public employees. Brazil spends more on retired civil servants than on health, education and public security combined. Female civil servants retire as young as 48, males at 53, and they receive 100 percent of their last salary. Opposition from public employee unions stymied Cardoso's efforts at reform.
Lula has made social security reform one of his first priorities and his background gives him the credibility to do it if anyone can. But the civil servants are a main bulwark of the Workers Party, and they expect Lula to make up for the losses they experienced under Cardoso. Lula has promised to protect the "acquired rights" of current government employees. This means that for the next decade or two much of Brazil's desperately needed resources will be eaten up by civil servants that retire at full pay at the peak of their productive years.
Tax reform is another major issue confronting Lula, although the Fernando Henrique Cardoso government did make significant progress in modernizing Brazil's tax structure. Tax collection is largely centralized in the federal government and resources are distributed according to strict formulas. The federal government collects 67 percent of the taxes, but keeps only 57 percent, of which 43 percent goes to social security programs.
The states and municipalities control 40 percent of total government revenue, and federal tax sharing provides a higher share of revenue to the poorer regions of the country. But the tax system is regressive and income taxes account for too small a share of government revenue. The problem is simply that no one wants to pay more taxes, so reforms come only when a crisis brings a sense of urgency.
On Cardoso's Steps
The Workers Party naturally hopes to expand and improve needed social programs. Their plans are sensible and quite similar to the programs Brazil has been following for the last eight years. This is not a bad thing since Brazil made impressive progress on social indicators during the Cardoso administration. Poverty, hunger and inequality declined.
The nation's score on the United Nations Human Development Index improved. Enrollment in all levels of education increased, life expectancy increased, and mortality from AIDS declined. Agricultural production increased sharply. Land reform was accelerated, with many more families settled than in any previous administration. Compensation was paid to families whose children "disappeared" during the military dictatorship. Programs to protect indigenous Brazilians and the Amazon environment were greatly expanded.
But violent crime is getting worse, and the public will insist that it be given priority over other social issues. Drug wars are rampant, and drug gangs are out of control. The problem is not confined to ghetto neighborhoods. Drug kingpins were able to shut down retail business in Rio de Janeiro for a day to protest having their prison cell phone privileges cut off. Kidnapping has become commonplace, afflicting working and middle class communities as well as the wealthy.
The Workers Party has excellent criminologists and understands that not all crime can be attributed to poverty and inequality. It wants to modernize and improve the law enforcement agencies. But the left has no unique insights in this area. Police officers are woefully underpaid, which makes corruption difficult to suppress. Again, progress depends on finances that can only come from economic growth.
It is easy to make promises in a campaign, especially when one assumes that 7 percent annual economic growth will generate the revenue to pay for them. Making hard choices about priorities within realistic fiscal restraints is much harder. When pushed for specifics in the campaign debates, Lula usually responded that he would call together all the interested parties and get them to agree on a solution.
He is labor leader who knows how to conduct negotiations, not a lawyer accustomed to writing legislation, and this change in style may be helpful. The Workers Party has always stressed active citizen participation in public decision making. In cities and states where the Workers Party has held office, many decisions are made through "participatory budgeting" where each item is subjected to lengthy discussion in open public meetings.
But people get tired of going to meetings. Arguments between factions can get tiresome. These problems contributed to the surprising defeat of the Workers Party in its most prized stronghold, the southernmost state of Rio Grande do Sul. The loss of the election for governor was particularly embarrassing because Porto Alegre, the state capital, is famous as the meeting place of the World Social Forum, a group that advocates anti-globalization ideas. The gubernatorial election was lost because of factional splits within the Workers Party, because many citizens became tired of endless meetings and ideological posturing, and because the state lost a new Ford plant to the northeastern state of Bahia.
Leftists within the Workers Party were proud of standing up to Ford's demands, but the reality is that, despite its anti-globalization rhetoric, the Rio Grande do Sul Workers Party government relied on multinational corporations to fuel economic growth in the state. Brazil simply cannot afford to alienate multinational corporations that are considering making substantial investments in the country.
The left of the Workers Party was disciplined enough not to draw attention to contradictions between Lula's nationalist rhetoric and his economic commitments during the election campaign. Many key issues were papered over with terminology that can be given either a socialist or a social democratic interpretation. But as soon as the election was over, Lula had to start committing himself, most explicitly in his choices for key Cabinet positions.
One of his first announcements was the appointment of the former head of BankBoston, Henrique Meirelles, as president of the Central Bank. This made it crystal clear that he was committed to responsible financial management as defined by the IMF, the World Bank and other global entities. The objections of the left wing of the Workers Party were noted, but overruled. Lula's other appointments were balanced and well received, with the left receiving recognition in areas such as culture and environmental defense, but kept away from the crucial finance and economic ministries.
Everything Lula has done confirms his intention to live with the free market reforms Brazil has made over the last fifteen years. He has built a center-left political coalition, sharing power with other parties. He plans to follow Cardoso's example by maintaining a dialog with civil society and modernizing social programs and welcoming productive foreign investment. He is even open to negotiating a free trade agreement with the United States, a policy he denounced during the campaign.
Brazil's situation today is similar to Chile's in the 1980s when an economic downturn caused many to feel that the "neoliberal" model had failed. But Chile decided to stick with its model and make it work. It is both South America's most "neoliberal" economy and its most successful one in terms of both economic and social indicators. This example is not lost on Lula and the Workers Party leaders, especially when contrasted to the problems in the rest of South America.
Change and Continuity
Lula's government will be one of continuity, with modest and carefully considered changes. He will easily manage the disappointment of the ideological leftists remaining within his party, some of whom may split off to join one of the radical left parties, or to form a new one. The more serious threat comes from traditional businessmen, government functionaries and civil servants.
They will use nationalist and socialist rhetoric to advocate a return to the statist and protectionist policies of the past, policies that benefit them at the expense of inflation and lower living standards for the poor. If the country goes into an economic downturn, which might happen for reasons out of Lula's control, their pressures could be difficult to resist.
In opposition, the Workers Party helped to maintain the myth that "neoliberalism" was responsible for the country's problems and that a nationalist industrial policy would be preferable. Now that they are in power, they have faced up to the fact that the country needs resources that can only come from integration in the global economy. The important thing is to use those resources well and here the Workers Party has an important advantage.
Workers Party activists have an admirable record of dedication to the national interest. They may be able to inspire a new ethos that values contributing to the country more than seeking personal benefits. Perhaps some civil servants will volunteer to give the country the full benefit of their expertise, instead of retiring early to take second jobs. Perhaps some women will feel ethically obligated to work an equal number of years for equal benefits.
Perhaps there will be less tax evasion, fewer attempts to bribe public officials, more willingness to accept flexibility in work rules, and a greater appreciation of entrepreneurs. The most important outcome of the 2002 elections will not be radical change. It may be a new sense of dedication to making the system work.
A translation of this article, entitled "O Legado de FHC e o Brasil de Lula," was published in the daily Folha de S. Paulo, on January 5, 2003.
Ted Goertzel, Ph.D. is Professor of Sociology at Rutgers University in Camden, NJ. He is the author of a biography of Fernando Henrique Cardoso, available in English and in Portuguese. He can be contacted at email@example.com and his WEB page can be found at http://goertzel.org/ted