Fast Times in Lula’s Brazil

        Times in Lula's Brazil

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

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

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

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

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

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—,
which specializes in editorial and translation services for Brazilian
and foreign clients. You can reach him at

© John Fitzpatrick

This article appeared
originally in Infobrazil, at




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