Brazil's presidential election

From pauper to president: now Lula's struggle really begins
Oct 31st 2002 | SAO PAULO
From The Economist print edition

Lula and his Workers' Party have learned to win power. Now they must learn to govern, and quickly

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AFTER his sweeping victory in October 27th's run-off vote, there are plans to make a film about the life of Luiz Inacio Lula da Silva, Brazil's president-elect. It will be quite a tear-jerker: Lula (as Brazilians know him) was born in the dirt-poor north-eastern backlands, one of 22 children of an illiterate farm worker, who beat them and sent them to work instead of to school. Aged seven, he made a gruelling, 13-day journey on the back of a truck with his mother and seven siblings, to join his father and his mistress and their children in a coastal town near Sao Paulo. He rose from shoe-shine boy to mechanic to leader of the Sao Paulo car workers' union, organising strikes that, in the late 1970s, undermined Brazil's military dictatorship.

Out of those strikes emerged the Workers' Party (PT), now Latin America's biggest left-wing party. After three failed presidential bids, last Sunday, his 57th birthday, Lula finally became the first working-class leader of the world's fourth-biggest democracy (and its ninth-largest economy), pledging to overcome, as he put it, Brazil's “historical legacy of inequality and social exclusion”.

A great story, so far. But how will it end? Lula's victory comes with Brazil's finances teetering on the brink of disaster. Fears that Brazil might follow Argentina's debt default, plus the uncertainty as to who would succeed President Fernando Henrique Cardoso, and mistrust of Lula himself, have all combined to trigger an investor panic that threatens to become self-fulfilling. The real, Brazil's currency, has lost 40% of its value this year, sending the public debt—much of which is linked to the exchange rate—spiralling (see chart 1). Since most of the public debt is held by local banks and pension funds, a default risks wrecking Brazil's financial system.

So the first question for Lula is whether he can restore financial confidence, and quickly establish trust in himself and his ability to govern. The signs are mixed. On the one hand, in this year's campaign, he put on a suit and tie, abandoned his old socialist rhetoric and presented himself as “Lula: Love and Peace”. He pledged to control the government's finances and honour its heavy debts—instead of reneging on them as he once proposed. In August, when the IMF stepped in with a $30 billion loan package, he backed it. On the other hand, he continued making big spending promises: an end to hunger and homelessness; better pay for state workers; more aid to industry and to farmers big and small; more education and health care. He has aroused enormous expectations, and will struggle to meet them.

Still, in finally reaching the presidency, Lula has defied many forecasts of failure: many pundits argued that a former metalworker, lacking secondary schooling let alone a university degree, was unelectable in a basically conservative country. Although the economy has been weak for much of Mr Cardoso's second term, the president remained popular, for having tamed Brazil's chronic inflation and for bringing stability to its democracy. But in the event, Mr da Silva beat Jose Serra, Mr Cardoso's capable health minister, by an ample margin, of 53m to 33m votes. (Lula's total was just shy of Ronald Reagan's 1984 total of 54.5m, the largest-ever vote for a presidential candidate.)

Like other left-wing parties elsewhere (in Britain, Germany and Spain, for example), the PT set out on the road to electability when its moderate leaders plucked up the courage to curb its radicals. In March last year, Mr da Silva and his allies pushed through a change in the party's rules, so that the executive committee would be chosen by all members rather than by activists. The moderates duly strengthened their grip on the party machine, with Jose Dirceu, Lula's closest lieutenant, easily re-elected as party president.

His base secured, to the chagrin of the radicals, in June Mr da Silva struck an electoral alliance with the small, centre-right Liberal Party; one of its congressmen, Jose Alencar, a textiles tycoon (also born in poverty, like Mr da Silva) became his vice-presidential running mate. The more Lula incensed the PT's hard left, the more he reassured the voters. But their socialist pedigree gives Mr da Silva and his aides unchallenged authority over the party: during the dictatorship, Mr Dirceu was training in a Cuban guerrilla camp; in government, he is likely to be at Lula's side, perhaps as chief of staff. Another ex-guerrilla turned moderate, Jose Genoino, lost the election for governor of Sao Paulo state but is tipped for defence minister.

But Lula's only immediate appointment was to put Antonio Palocci in charge of his transition team. Mr Palocci was the campaign's rising star: he wrote the manifesto, and along with Mr Dirceu, acted as emergency spin-doctor whenever Mr da Silva, whose tongue sometimes has a life of its own, went “off message”. As mayor of Ribeirao Preto, a city of 500,000 in Sao Paulo state, Mr Palocci privatised some municipal services and brought businessmen into his administration. He is being tipped to control the federal budget as head of a beefed-up planning ministry.

Fiscal realism

This week, Lula was quick to strike a note of economic realism. Warning that “there is no miraculous solution for such a huge social debt”, he said Brazil's dire straits demand “austerity in the use of public money”. As candidate, he assented to a tightening of Brazil's fiscal policy, as a condition of the IMF's loan. At present, this involves a primary fiscal surplus (ie, before interest payments) of 3¾% of GDP next year. In June, Mr da Silva said his government would be prepared to tighten further if necessary. This week Mr Palocci repeated that pledge.

To convince the markets of his determination to stabilise the public debt and avoid a default, Mr da Silva may have to deliver on this promise as soon as this month, when Brazil and the IMF hold their first review of the fiscal target. Raising it to 5% or even 6% of GDP may be the only way to inspire confidence. Then there is inflation: next year's target of 6.5% already looks hard, given the real's plunge. Guido Mantega, Mr da Silva's economic adviser, has proposed raising it by one or two percentage points. But this week, Mr Palocci insisted there were no plans to do so.

Besides economic targets, investors are anxious for names—those of the new economic team. Lula's failure to provide them caused markets to stutter again this week. But it may be several weeks before Mr da Silva, who does not take over the presidency until January 1st, announces his cabinet. That is because he must also try to put together a governing alliance.

Here, the omens are not promising. The election increased the fragmentation of Brazil's Congress (see chart 2). In his victory speech on Sunday, Lula admitted he and his party would need help to govern Brazil and promised to build a broad alliance of “all the good men and women of this country”. His best option would be to clinch a centrist coalition with his main adversaries in the election, Mr Cardoso's Social Democrats (PSDB) and their partners, the catch-all Brazilian Democratic Movement (PMDB). This is not unthinkable: both parties, like the PT, had their roots in the opposition to the dictatorship.

But the PSDB and PMDB have both said that they are preparing for opposition, not government. They promised not to be reckless opponents, however. For much of the past eight years, the PT irresponsibly attacked Mr Cardoso's efforts at fiscal reforms, demanding more spending, regardless of affordability. Lula must hope the tables will not now be turned.

Despite the defeat of its presidential candidate, Mr Cardoso's alliance held on to many seats in Congress, and won most of the important state governorships. The PSDB alone will run seven states (out of 27), containing almost half of Brazil's 175m people, including the two largest, Sao Paulo and Minas Gerais. The PMDB's five states include Rio Grande do Sul, the fourth in importance, wrested from the PT after a governor from the party's radical wing ran a mediocre administration. The PT itself ended up with only three small states. Not only are governors powerful figures in their own right, but they often have sway over their states' congressmen.

Mongrel coalition

In the absence of a formal coalition with Mr Cardoso's support base, Mr da Silva has two options, neither especially palatable. One would be to seek a mongrel coalition spanning the left, assorted populists and bits of the conservative Liberal Front Party. The other, and most probable, would be to seek a looser “governability pact” between governors and president, an idea floated by Aecio Neves, the PSDB governor-elect of Minas Gerais.

Mr da Silva said this week that he would seek a consensus of this kind to press the outgoing Congress to approve much-needed tax reforms, plus a measure paving the way for central-bank independence. Congress is crucial, too, for efforts to stabilise the public finances. This requires spending cuts, especially in over-generous civil-service pensions. Mr Cardoso, despite a much stronger coalition, failed to gain approval for these (or at least, not enough of them).

Such cuts are all the more necessary since Mr da Silva says that he will start straightaway to fulfil his promises to fight poverty. He will seek to trim 6 billion reais ($1.6 billion) from existing spending programmes next year, in order to launch “Zero Hunger”, an American-style food-stamps programme. But even if he achieves this, other promises, such as big rises in the minimum wage and in public servants' pay, will go unkept. Mr Dirceu admitted that the new government expects to face strikes and protests as a result.

To contain frustration at his inability to fulfil his promises in the short term, while pushing through difficult reforms to make them affordable in the future, Mr da Silva will need to show the great negotiating powers he boasted of in his campaign. At least, says Gaudencio Torquato, a political scientist at Sao Paulo University, he starts with the moral authority that his 53m votes bring: in his first few months, few politicians, from the PT radicals on his left to conservative parties on his right, will risk public censure by obstructing him. If he uses this opportunity well, the final reel of “Lula, the Movie” may yet have a happy ending. Otherwise, a horror film lies ahead for Brazil.