When Lula swept to power in last year’s presidential elections it was seen as a vote for change. But, asks Jonathan Wheatley, has he lived up to the public’s expectations – and his own election promises?When Luiz Inácio Lula da Silva of Brazil’s leftwing Workers’ Party (PT) won last October’s presidential election, it was clear that Brazilians were voting for change. They had had enough of former president Fernando Henrique Cardoso’s apparent obsession with low inflation. With unemployment and crime on a steady rise, with schools and hospitals at times literally crumbling away for lack of resources, it was time to forget the IMF and its demands for austerity. Brazilians wanted urgent action on the social issues that Mr Cardoso seemed to have pushed into second place.
Which is why Lula – as he is known by all – won. He is now three-quarters of the way into his first year in office. How much difference is there between the Lula and Cardoso administrations? Mr Cardoso and his team brought huge innovations in economic policy, at a national and international level. Not surprisingly, they made much media capital out of them. Meanwhile, social policies – some of them borrowed from the PT – made quiet progress. Award-winning programmes in health and education made great strides, and many social indicators moved quickly forward.
In contrast, the present government has made much of its social policies and been almost embarrassed in some quarters by its fiscal austerity. Yet it is Lula’s fiscal achievements that have made headlines – at the expense of social issues. Unemployment reached a record 13% in August, while the income of those in work fell sharply by 16.4% in the year to July.
Has Lula, too, put Brazil’s social well-being in second place to its economic well-being?
“Very little has been done on the social side except a lot of propaganda,” says Alberto Alves Sobrinho, president of Fair Corretora, a Săo Paulo brokerage. “There are a lot of TV stars and NGOs involved, but we need concrete programmes and real spending, on education, health, infrastructure.”
Others say it is too early to judge, and the government should be given more time to put its social programmes into action. And they point out that Lula never promised to reverse the previous administration’s priorities, but rather to achieve a balance between macroeconomic and social concerns.
“Macro reforms and social reforms are two wheels on the same cart for this administration,” says Vinod Thomas, the World Bank’s country director in Brasília. “The strategy we would like to have and this government would like to have is to run stabilisation in tandem with efforts on the social front, in contrast to the Washington consensus which would put one before the other.”
Brasília consensus
Mr Thomas says Lula is following a “Brasília consensus” under which macro and micro reforms run together. “The big question is how to revitalise growth and encourage income distribution, not through massive investment but through productivity gains, efficiency in the financial sector, access to credit and a level playing field for small producers.”
It was on precisely this agenda that Lula managed to win over Brazilian voters. It was his fourth bash at the presidency. At his first attempt, in 1989, he had been an unelectable, extreme leftwinger. In 1993 and 1997, he made the unpardonable mistake (apart from still being too far to the left) of opposing the Real Plan, the hugely successful stabilisation programme devised by Mr Cardoso while finance minister in 1993. But by 2002, Lula had shed much of his leftwing rhetoric and launched himself on a modern, Third Way, Tony Blair-ish platform of caring capitalism. He would not, he promised, rock the boat. Contracts would be honoured. Inflation would remain under control. But, at the same time, social problems would be given the attention they deserved. Brazilians voted for him because he was the only candidate that seemed to have the political will to make the “Brasília consensus” work.
On the economic front, he has been true to his word. Brazil’s currency, bonds and stocks went into freefall last year as investors feared Lula would overspend the country into debt default. But since they took office on January 1, Lula, his finance minister Antônio Palocci and central bank chief Henrique Meirelles have kept fiscal and monetary policies on the straight and narrow. Assets have recovered accordingly.
In fact, Lula has scored macroeconomic successes where the previous administration failed. The most notable single achievement of his first eight months in office has been to push through Congress a long-awaited reform of Brazil’s deficit-ridden pensions systems.
Pensions problems
The pensions systems are not only a massive drain on public accounts – the combined deficits of the systems for public sector and private sector workers will reach R$60bn (about $20bn) this year. This is also one of the main reasons why investors fear the government may not, in the end, be able to balance its books. The systems therefore contribute greatly to perceived risk in Brazil, preventing the Central Bank from bringing interest rates down quicker to promote faster economic growth.
Modernising the systems will also be a big incentive to expansion and greater efficiency in the financial sector. As workers begin to worry that they will no longer be able to rely on the state for the pensions they want, many are taking out private plans. The amount of money going into private pensions increased by 72% in the first quarter of this year compared with the same period last year. By putting an end to the worst excesses of the public sector system, under which many civil servants enjoy extremely generous benefits such as early retirement on full pay, the reform is also a big factor in promoting more equitable income distribution.
The irony is that the previous administration failed to pass the pensions reform it wanted despite eight years of trying, largely because of opposition from Lula’s PT. And Lula’s new-found commitment to the reform has caused unease among his traditional supporters. Three PT deputies voted against the reform and are likely to be expelled from the party. Several branches of the civil service went on strike for weeks in protest at the proposals; magistrates threatened to join them.
Public popularity
The majority of the population, however, remains firmly behind Lula. And not all his initiatives have been borrowed from Mr Cardoso. In July, the government announced measures to oblige banks to lend 2% of sight deposits to small enterprises at interest rates of about 2% a month – high by international standards but about half the going rate in Brazil. It also allowed banks to open special accounts for low-income consumers without the usual requirements of proof of income or residency, and in September it announced measures to allow credit repayments to be deducted from salaries, helping to reduce the risk of delinquency.
“This is important,” says Gabriel Jorge Ferreira, president of Febraban, the banking industry association. “I’m not sure that it’s the best method – it would be better to let the market set the rules. But this government is committed to the democratisation of credit. And it’s credit for the productive sector, which is what matters.”
Yet there is growing impatience in some quarters that Lula’s promised social transformation, along with his promised “spectacle of growth”, is slow to materialise. Programmes such as Fome Zero (Zero Hunger) and Primeiro Emprego (First Job) were substantial planks of his electoral platform. In a media blitz early this year, Lula took a bus-load of ministers to remote parts to see poverty at first hand and launched Fome Zero with much fanfare. Since then, it has all gone rather quiet.
“The social programmes face two big adversaries,” says Walder da Goes, a political scientist in Brasília. “One is lack of money. The social areas have been decapitalised. The other is an absolute lack of coordination. Benedita da Silva [the minister for social assistance, responsible for coordinating social programmes] is not working out. She will probably leave and a stronger minister take over.”
Both factors have resulted in a piecemeal approach to social policy. Many programmes have depended on the private sector and non-government organisations to carry them forward, in terms of both money and organisation. Money – already tight thanks to the government’s concern to meet fiscal targets agreed with the IMF – became scarcer early this year when the government froze a large part of planned capital expenditure. This may be unfrozen later if circumstances permit. Organisational problems, not unusual in a fledgling government, may be sorted out at a ministerial shuffle in December, if not before. But a grand plan to unify six poverty relief programmes under one banner was delayed in September when it transpired the government had neglected to get the support of the states and municipalities, essential partners in implementation. There was growing concern that the government’s social programme was losing direction.
But it may be that the government is holding spending in check. Dany Rappaport, an economist and partner at Tática Asset Management in Săo Paulo, says the government’s strategy is cyclical. “The government is easily surpassing its fiscal targets,” he says. “If they wanted to spend more money on social programmes, they could. It means they have a line: economise to the maximum now and spend later, probably in line with the electoral cycle.”
Winning over markets
That’s not as cynical as it sounds. The government has fought hard to win the confidence of financial markets, a crucial exercise if stability is to be preserved. Its big fiscal concern – the high debt to GDP ratio – will be solved if interest rates continue to fall, as lower rates boost economic growth. The trend is certainly downwards: the Central Bank’s base rate was 20% in mid-September, down from 26.5% in June.
So far at least, the government does seem to be following something closer to the Washington consensus than a Brasília consensus. But Mr Thomas has a point. There is little doubt that those who really drive policy – not least the president – spend more time thinking about and planning social policies than the previous administration. The political will to solve Brazil’s giant social injustices has never been stronger. That the PT government gives equal concern to preserving hard-won economic stability can only be cause for celebration.
