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CounterPunch
October
25, 2002
Lula on the
Verge:
Brazil Prepares to Elect Lula da Silva
by NORMAN MADARASZ
For the first time in decades a country on the
American continent is set to elect a progressive president,
granting him the mandate to form an executive government and
lead the country for four years. That this country is Brazil,
the continent's second largest after the US, with a population
of 175 million covering an area larger than the US without
Alaska, will make Sunday's results --- if favorable to the Workers'
Party (PT) --- nothing less than a historical event. The world's
financial press has stamped the shift in Latin American politics,
and in Brazil in particular, as one toward populism. What the
PT has proposed to Brazilians, however, is a political, social
and economic vision that is all but populist. As we await Sunday's
results, we would all be better off knowing more about the progressive
principles of governance it plans to run.
The most recent opinion poll, published
on October 23, shows the Brazilian Workers's party (PT), headed
by Lula, as winning the second round of the presidential elections
on Sunday with 66% of voter intention, discounting blank and
cancelled ballots. Jose Serra of the Social-Democratic Party
(PSDB) has lost ground, now sitting at 34%. The Brazilian system
is a presidential parliamentary democracy, with the president
assuming both prime ministerial and presidential functions.
Due namely to the large number of political parties, the 1988
Constitution established the two-round system to prevent the
election of minory governments. As Lula failed to reach the
50% margin upon the first round, a runoff was set.
This means that alliances are a fundamental
part of the Brazilian election process. A proportional imbalance
in Congress favors the large landowners from the Northeast -
represented by the PFL, and to a lesser extent the PMDB - over
the urban masses of the South and Center East, i.e. Rio de Janeiro,
Minas Gerais and Sao Paulo states especially. Given the ultra-conservative
nature of the northern parties, notwithstanding former-candidate
Ciro Gomes' populist tendencies, political alliances have bred
compromises since the first round, held on October 6.
This history of alliances is a factor
that may account for the transformation of the PT from a trade
union motivated working-class party critical of Brazil's economic
organization and administration to a social-democratic one
striving for economic stability through national unity. Also
accountable are the mutations that have affected international
progressive parties. Now alone among them, the changes in PT
economic policies, namely those in favor of a more subdued state
economic administration, have attracted large sectors of Brazilian
industry. Still, several leftwing candidates have been elected
to the lower house who will be fighting to keep the party's
essence active.
Currently then, the PT is a social-democratic
party, whose economic principles are not significantly different
to those first proned by out-going President Fernando Henrique
Cardoso. Apart from the motivations behind the Plano Real,
which pegged the local currency to the US Dollar on roughly
a 1:1 ratio, on the social front Cardoso was compelled to form
an alliance with the PFL, led by Antonio Carlos Magalaes. Once
a leftwing sociologist, Cardoso's reformist dreams were shot
down at that time. But the political astuteness of this president
managed to have his partners discredited in a series of corruption
scandals.
His social agenda has generated many
positive results. There have been net increases in literacy
rates and school attendance, as well as in the university research
budget allocations despite being centralized in the Sao Paulo
area. Health care has also seen net progress with the primary
sources of death and life expectancy beginning to approach
G7 standards. This also means infant mortality rates have dropped
significantly during the nineties and the efficiency of treatment
has boomed --- as have its costs.
The Plano Real was in fact the brainchild
of former president Itamar Franco, in whose government Cardoso
was finance minister. Through Cardoso's first term, the Plan
contributed to briefly raising the standard of living of the
Brazilian people. Close to a half of them live below the poverty
line, and many in African fifth-world <conditions.The>
Plan led to a significant rise in the purchasing of household
appliances. Still, the cost of the Plano Real has been extremely
high. And the wisdom of the IMF guidelines for its implementation
have now fallen under great scrutiny. The very poor have suffered
and keep suffering. The bottom ten percentile control only 1%
of the nation's wealth as opposed to the top 10 owing 50%.
This is, in a nutshell, the national
scenario the PT will be inheriting as they take power. Despite
attempts made to the contrary, it will be assuming power cleansed
of the responsibility for the recent economic turbulence linked
to the speculation on Brazil's currency. Yet with 95% of next
year's budget already alloted, which is binding for the federal
government as entailed by the recently passed Fiscal Responsibility
Law, it remains in a stranglehold.
The attack on the Real, coupled with
the irresponsible statements made last summer by the US Treasury
Secretary Paul O'Neill, forced Brazil's central bank to seek
a bailout package from the IMF. It was the second in four months,
the first being June's US $ 10.7 bn loan. Given the share of
Brazil's external public debt denominated in dollars, as the
Real lost roughly a third of its worth since the beginning
of the year, Brazil's ability to service its debt was jeopardized.
The size of the bailout surprised everyone. Economic observers
have tied its value to the amount Fleet Boston and Citibank
have invested in the country (roughly equivalent to $ 20 bn)
either as direct investment or in bonds.
There is no strong consensus on the problem
Brazil will face in servicing the debts. Separating the external
from the internal debt, and the external public debt from the
external private debt is a measure that Brazilian financial
professionals from the governor of the Central Bank, Arminio
Fraga, to the Forbes Brazil columnist Gustavo Loyalo spare
no time in doing. Indeed, their general objection to Anglo-American
financial consultants and bond rating agencies is that they
commit the major mistake of lumping all the debts together.
As a result the evaluation cast onto
Brazil is not only unstable. What it reflects is primarily the
mood of investors more than the real state of the economy.
Separating the debts and calculating appropriately by emphasizing
the shifting nature of only one part of the total debt due to
its denomination in American currency must be done continually.
It is Brazil's strongest card against the pseudo-scientific
rating scale drummed up by Moody's and JP Morgan. And it completely
overlooks the fact that president Cardoso's team have cut the
current account deficit in half from US$ 33 bn in 1998 to US$
17 bn, financed by direct investment and an astonishing US$
7 bn trade surplus.
The public sector's liquid debt is roughly
US$ 255 bn, of which roughly 20% is denominated in American
currency, and a US$ 95 bn portion of the external public debt
is payable over a long term. In terms of total external private
debt, there is great disparity between numbers: Gustavo Loyola
claims it to be US $70 bn accounting for roughly 120% of annual
exports of goods and services, as opposed to Edwin M. Truman's
citing of 310 percent. In addition, compounding the debt to
figures such as 310-326 percent of exports matched with the
55 percent ratio of public-sector debt to GDP, assumes that
the private debt will be honored by the public sector.
As Brazilian companies have a very low
level of domestic debt, there does not seem to be a problem
with solvency as long as the currency doesn't crash. But with
the Real under attack, there is little chance for the GDP to
rise to its 2000 level. Despite the fact that in 2000 the world
economy was in the first dip of its recession and Argentina
was approaching meltdown, Brazil had glided through smoothly
with 4.4% growth. Underlying the current government's economic
strategy is the central bank governo's belief that the Real
is vastly underrated, with an appreciation to 2.5-2.9 in relation
to the dollar being its appropriate exchange rate.
Indeed, one gets the impression that
the more Brazilian economists insist on this method of portraying
the country's obligations, the more they see the North as involved
either directly or indirectly in a measure to destabilize the
country's money markets due to the rise of the PT. Much of
standard liberal market analysis in Brazil would be deemed leftwing
were it formulated in North America. The fact of the matter
remains that the IMF seems to be playing a double game. It is
both the guide of emerging markets and the harbor of institutional
speculators, i.e the major investment banks themselves. Its
measures have been severely criticized as punishing the local
goods and services production sector by preventing a larger
margin of public expenditure.
There are of course Brazilians benefitting
greatly from this. Unfortunately, wise men such George Soros,
again speaking of the global risk posed by Lula in "El
Pais" last weekend, spent no time pointed out this dimension
to the problem. They spend no time either mentioning that many
of the wealthiest spend much of their year living abroad, especially
around Miami, where they fail to pay appropriate taxes while
shifting their capital around according to what the 'market'
dictates. Nor do their accuse the power of the banking sector,
and of their support for tax havens, largely responsible for
capital flight.
The Cardoso government slapped a tax
on the use of cheques, which should allow greater transparency
in the flow of funds. In so doing, it has attempted to fight
this behavior pattern among the rich who run to the US for (tax)
shelter. On the other hand, no one is fooled by the collution
lying between his government and Brazil's banks. What the PT
must enstore is a massive overhaul of the taxation system diplomatically
implemented but done so at all cos ---notwithstanding Mr Soros'
forewarning: "were the PT to impose restrictions on capital
transactions in order to protect itself, it would trigger the
disintegration of the globalized system as we know it."
And apparently nothing less, for so high is the innovation margin
the system affords. Having said all that, Mr Soros concluded
his interview on a positive note: "Brazil is able to pay
off [its debt] without causing excessive damage [to its economy]."
Once the IMF granted the loan in August,
all candidates, including the PT, pledged their intention to
honor the IMF conditions for receiving the loan programme, parcelled
into three separate instalments, two of which fall after the
elections. This means keeping a primary fiscal surplus of 3.75%
of GDP. Such calculation ensures a declining debt to GDP ratio
as long as the inflation-adjusted interest rate paid by the
government on its publicly traded debt does not exceed GDP growth
by more than 7 percentage points.
For the PT this would apparently compromise
their commitment to increasing the minimum wage to R$ 300 over
three years, and orienting investment toward a social agenda.
Yet according to the PT chief economic advisor, Guido Manteiga,
reaching that objective is possible, but conditional on the
GDP reaching its projected capacity of 4% growth with inflation
held at 3%. Boosting purchasing power should not be a contradiction
to either maintaining the primary fiscal surplus nor to keeping
inflation in check.
The increase in minimum wage would be
financed through the taxes collected on Brazilian exports, a
sector that should be freshly stimulated by the resumption of
trade credit lines. Overhauling the taxation system, a desperately
needed act of political will, will be the other source of financing
purchasing power. In other words, the PT has set its priority
on economic growth as conditional for government social spending,
and resourcing the productive sector of the economy through
government planning to raise the standard of living. Tigher
fiscal policy is what the PT is aiming for as a means to lower
real interest rates and attract direct investment.
In many ways, the PT has no choice over
these market economy principles. Given the intermeshed structure
of the global economy, and first world investment in the money
markets of emerging countries, a decision to break with the
IMF by defaulting on loan servicing would condemn Brazil, just
as it would wreak havoc on international money markets.
Allow me here to make a first observation.
Despite the amount of money investors and creditors have in
Brazil, it is absurd to claim that the PT has any intention
to economically administer the country in a way that would put
the country at risk.
One of the key elements to raising growth
are exports. The economic community Brazil belongs to, the Mercosul
(in Portuguese, Mercosur in Castilian) is in tatters. Brazil
needs to export to wealthier markets, like China, India, and,
especially, the NAFTA and EU zones.
Second observation: It is completely
inaccurate, indeed a matter of disinformation, to claim that
the PT is against free trade. Its political and economic leaders
see free trade as instrumental and vital for Brazil's economic
well-being into the future.
The question is: Who's willing to trade,
and on what terms?
Regarding Canada, during a short period
in the late 1990's the Federal Liberal party was able to wean
itself from the direct influence of Bombardier. This corresponded
to a time when the Brazilian company Embraer, managed a series
of successful deals making it the only regional jet manufacturer
from an emerging market to penetrate the American field. Canada
took Embraer to the WTO on grounds of illegal government subsidies.
After winning the first round of the trade dispute, the Canadian
government was compelled to grant low-interest loans, through
Export and Development Canada to not one, but two, American
airlines in exchange for purchasing Bombardier RJs. This allowed
Brazil to seek litigation against Canada at the WTO and win.
(In a recent report, EDC is gravely concerned about the capacity
of Bombardier and Nortel to repay handouts totalling CDN$ 10
bn. So Canada's attempt to block Embraer's entry will have a
lasting legacy, perhaps trickeling down all the way to the
taxpayer. The latter would then be liable to shed even more
doubt on a country home to a respected singer-songwriter called
Lenin.)
What this case exposed in the questionable
posture of Minister Pierre Pettigrew in Seattle back in November
1999, was that for all its talk of free-trade North America
is quite unwilling to open its commercial zone to foreign industry.
Moreover, it expects foreign countries to open their commercial
space to North American exports prior to settling the issues
at home.
In addition, since the Bush administration
took power, it has hiked tariffs on steel imports and has passed
billions in agricultural and military-industrial subsidies.
These two unilateral gestures, in addition to already existing
tariffs on fruit imports, make the USA anything but a free-trader.
To be sure, it is free-trade's leading advocate. Although it
is hardly free-trade's most earnest player, its importance
as a power is trivial. Brazil is a very strong exporter of iron
ore, soja, orange juice, though with the current protectionist
measures of NAFTA and the EU, its export potential is limited
to a dreadfully low 13% of GDP.
It is therefor fantasy to believe that
the incumbent PT government is against free trade. On the other
hand, it has spoken critically of the FTAA, indicating that
under current conditions it will refuse to sign. It has gone
as far as to assert that under current conditions the FTAA would
mark the end of Brazilian sovereignty. Despite the drama, and
given the south-to-north motion of capital over the past 10
years, this is not contradicted by reality. Moreover, Joseph
Stiglitz has recently positioned himself strongly against the
IMF's guidelines, seeing them especially as a means to further
indebt developing nations and to stiffle growth and innovation.
Regarding FTAA, Lula's eyes sparkle with
his trade unionist's enthusiasm when speaking of how hard Brazil
will fight at the negotiating table. This may tickle Brazilian
nationalism, but with the US refusing to budge and creating
bilateral agreements behind the scenes, the situation does
not look positive for Brazil. Still, the twain shall meet when
assuming co-presidency of the FTAA negotiations next month.
This trade-union spirit is not a position
unique to the PT. Visibly moved by Lula, Fernando Henrique Cardoso
wants to leave behind a fighting-man's legacy. A month ago,
his government took the EU to the WTO on litigation regarding
sugar subsidies. Showing its good faith on free trade and globalization,
the EU trade officer accused Brazil of wanting to destroy poor
countries who are receivers of French aid, which La Republique
claims as justifying its agricultural susidies at home. And
a week later, Brazil mustered up its courage to take the USA
to the WTO on orange juice subsidies, a long pending source
of contention.
Third observation: North American neo-liberal
conservatives are much more concerned about Brazilian free trade
potential, then in winding up with a socialist-run country
in Latin America. Of course, they won't state this outright.
Using the socialist-calling card, neo-cons and Democrats alike
will try to discredit Brazil ideologically in order to weaken
its clout at the FTAA negoating table. Indeed, the US has been
active in trying to isolate Brazil from entering the accord
as part of a larger trade group, such as the Mercosul.
But have a look, if you will, at the
state of the Mercosul: as long as the IMF and US Treasury refuse
to help Argentina out of its problems, Brazil will be fighting
mostly on its own. However, President Duhalde's visit in September
to Brazil took place to re-affirm Argentina's commitment to
the Mercosul and Brazil as its most important trading partner.
Various economists, including the governor
of the central bank and minister of the economy, have stressed
the importance of considering the various layers of debt, demonstrating
how each is solvent. The fact remains that no microeconomic
analysis can portray a way out while the Real continues to lose
value. This prompted the Central Bank to increase the prime
lending rate from 18% to 21% right in the middle of the election
rounds at a time when the government candidate was starting
to build up a counter-campaign. Needless to say, such interest
rates are crushing Brazilian entrepreneuship and have shifted
wealth to Brazilian banks. It has understandably sealed the
results of the runoff. On the day the Real was devaluated in
January 1999, Brazilian banks earned higher gross profit than
during the entire year of 1998. Until last week, Brazilian banks
stood firm in bond risk agency ratings. Now, even they have
come under Moody's scrutiny. That's because the PT's macroeconomic
principles will not allow it to stand by while the banks voraciously
swallow the fruits of growth and the GDP.
Many PT policies in this portrait highlight
what set apart progressive politics and policies from populism
and its artifices. In terms of upcoming macroeconomic policy,
namely on the nature of the transitional team and how it will
fight the slide of the Real, we'll just have to wait and see.
Given that Mr Stiglitz has estimated the cost of buoying up
the Real at US$ 50 bn, many are skeptical about the efficiency
of Mssrs Fraga and Malan's management of the currency. Brazilians
are looking to their political leaders and intellectuals with
a smart and critical optimism for the future. Now, it's time
for the overlords of the elite and the rich world, not forgetting
their protege Mr Otto Reich, to come around to showing their
good will. Gentlemen...
Norman Madarasz
is a Canadian philosopher. He lives in Rio de Janeiro and welcomes
comments at: normanmadarasz2@hotmail.com
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