Lula’s Road Is Paved with Good Intentions

Lula's Road Is Paved with Good Intentions

The action by Brazilian Finance Minister and Central Bank President
is about the only positive
thing that can be said about Lula’s
government so far. Joblessness increased, Zero Hunger is a farce,

tax receipts have fallen and the pension reform bill will soon
be mutilated. The populace is
becoming restless.


Richard Hayes


Each day that passes it become increasingly obvious that the government headed by President Lula is experiencing
extreme difficulties in accomplishing anything it has said it would do. Jobs have been lost rather than created. The "Zero
Hunger" program is a farce. The pension reform bill presented to congress will soon be mutilated beyond recognition resulting in
a continued government deficit and outlandish benefits to a few of the privileged cast of government workers, many of
whom were on strike this week in protest against such reforms. Tax receipts have fallen off with the economic slump lowering
funds available for social programs.

Lula is loosing political support not only from the radicals of his own party for being too sensible but from
moderates of the opposition and among the so-called governing coalition. He and his closest collaborators seem unable to take any
criticism as to the way that things are going. By showing favoritism to his old pals of the lawless MST and other would be saviors
of the landless, he has opened a chasm between his government and the strong rural block in congress, many of which had
been willing to lend their support to Lula in his effort to correct some of Brazil’s inequities.

Lula and his crowd always point to the previous government of Fernando Henrique Cardoso as being the cause for
present problems. What they fail to mention is that last year’s financial and confidence meltdown was due principally to rash
statements made by Lula during the presidential campaign. A certain degree of confidence has been restored as it appears
that Finance Minister, Antonio Palocci, and Central Bank President, Henrique Meirelles, are following the sound fiscal and
monetary policies of their predecessors. Their action is about the only positive thing that can be said about Lula’s government so far.

The government has announced several well-intentioned but thus far inoperative programs designed to stimulate
the economy. These include a dreamy microcredit scheme designed to put money in the hands of small entrepreneurs and a
plan to encourage juvenile employment. So far it is all talk as economic activity continues to lessen and unemployment
increases. With the drop in inflation, real interest rates are higher now than they were before the recent reduction in the base rate.
The tax reform program that in theory would simplify Brazil’s labyrinth of tax legislation is not moving well in Congress.
The final result will probably be more taxes for the population already one of the heaviest taxed in the world.

Investment both foreign and local is nearly at a standstill. Requests for financing at the BNDES (National
Development Bank) are off 30 percent from the first half of 2002. The current confusion over rate increases for the providers of fixed
line telephone service will do little to encourage foreign investment in Brazilian infrastructure. When the inefficient state
run telephone companies, which were riddled with incompetent political appointees, were privatized, a regulatory agency
called ANATEL was established. It is supposed to be an independent, objective agency charged with the responsibility to
insure good service for customers and a fair return on investment for the owners.

Lack of Confidence

Part of the agreement between the operators and ANATEL are periodic price adjustments based on a government
chosen inflation index. The operators and ANATEL, after lengthy negotiation, agreed to price increases for the various
categories of service that were actually less than those stipulated in the contracts. Soon after the announcement of price increases,
the Minister of Communications, Miro Teixeira, cried foul alleging that these price increases would contribute to inflation
and are unbearable for the public. He claimed to have the support of Lula, who later denied that he was in favor of breaking
contracts. Several judges around the country promulgated sentences suspending the increases, on what grounds I do not know.

The final result is that rates for July are still up in the air. While no one sheds a tear for companies such as Telemar
and Telefonica, it blemishes the nation’s image to have such a demonstration of juridical instability and wanton unilateral
abrogation of contractual agreements. This incident together with the plight of those foreign companies that have invested
in the electrical sector is apt to discourage further much- needed foreign investment in such vital sectors as
communications, energy, ports, highways, water and sewer services and railways.

The recent strengthening of the real has begun to have its anticipated negative effect on the trade balance. A cheaper
dollar has made exports of Brazilian manufactured products less competitive abroad and encourages importation of certain
products that are now more economical than Brazilian made similar goods. A reduction in the positive trade balance plus a
drop-off in foreign productive investment has caused the country to be extremely vulnerable and overly dependent upon
speculative short term capital inflows. So far this has caused no problems and the foreign debt is being serviced properly.
Announced new issues of over US$ 8 billion plus rollovers of maturing debt have kept Brazil’s head above water thus far during
2003. But as the reforms in congress stall or are drastically altered, the honeymoon with bankers could end.

This past week the Wall Street Journal ran an article, signed by Matt Moffet, about land reform, the MST and
violence in some regions. This is a sign that overseas observers are becoming cognizant of this volatile situation. Soon
headline-grabbing events may occur unless all parties involved are obliged to act within the law. Lula’s wearing of a MST baseball cap
during an audience with his old pals does not bode well for an impartial settlement of this question.

The real has begun to weaken, the BOVESPA (Stock Market-Bolsa de Valores de São Paulo) is down, the Brazil
risk as measured by JP Morgan’s emerging market index has risen to its May level and C-bonds have receded from their
recent $0.92 to the dollar level. So the tide may be turning. Not all of this can be blamed on Lula, who is sincerely trying to do
his best. However, his popularity is now lower as the responsible opposition has become more vocal and the populace
becomes less patient with his promises to better their lives.


São Paulo, July 14, 2003.

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 


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