Globalaffairs

Issue 20/April-June 2010
By Guy Burton

If economic development under the Lula administration can be likened to a football match, it may be seen as a case of two distinct halves - and which may be heading for extra time. That it does so will be regardless of whoever follows him in the presidency, whether it remains in the hands of his Workers Party (PT) or the opposition.

Lula’s successor will undoubtedly use the same strategy, the primary focus of which has been inflation control and which enabled him to introduce two key state-led programs in each half of his presidency: redistribution through the ‘family grant’ (bolsa familia) system in his first term and a package of infrastructure investment through the Accelerated Growth Program (PAC) during his second.

The government’s economic and social actions are credited with not only raising Brazil’s global status alongside that of other developing BRIC economies and G20, but also in helping insulate Brazil’s economy and society from the worst effects of the 2008 financial crisis. Lula will leave office at the end of 2010 with Brazil in a strong position, but much of that achievement may also be attributable to his commitment to maintain the economic policy of his predecessor.

In the beginning…

While the 2000s has undoubtedly been Lula’s, the 1990s belonged to the sociologist and former finance minister, Fernando Henrique Cardoso. In 1993-94 he introduced the anti-inflationary Real Plan which brought in a new currency, the real, which was pegged to the dollar. Cardoso aimed to put end to the ‘Lost Decade’ of the 1980s, when high input costs and low productivity resulted in economic decline and pressure for structural adjustment across the region.

The fall in inflation was almost immediate and delivered electoral success to Cardoso’s alliance between the centre-left Brazilian Social Democrat Party (PSDB) and centre-right Liberal Front Party (PFL, now Democrats) in the presidential election in 1994. In the years that followed, low inflation ensured a more stable business environment which along with various neoliberal measures such as privatizations and financial and trade liberalization led to a surge of foreign investment. Imports rose from US$27.8bn in 1992 to US$75.7bn in 1998 while the economy expanded by 4.2% of GDP in 1995, followed by 2.2% in 1996 and 3.4% in 1997.

Fernando Henrique Cardoso , former President of Brazil, Chairman of the Panel of Eminent Persons on United Nations-Civil Society Relations, addresses a press conference at headquarters. UN Photo/Mark Garten

However, Brazil’s economic growth during the 1990s was modest, even superficial. In order to pay for imports the country required greater levels of foreign resources. The downside was that this contributed both to growing public debt and the risk of capital flight. The latter was realized in the wake of the 1997-98 Russian and East Asian financial crises when investor confidence in developing countries such as Brazil was weakened. Following his successful re-election in 1998 Cardoso was obliged to loosen his economic policy, by devaluing the real and loosening the inflation target.

This was the economic model that Lula inherited after winning the 2002 election. But rather than change it, he embraced it. That he did so was due to both short- and long-term factors. First, the PT underwent a policy re-evaluation during the 1990s. At Lula’s first presidential contest in 1989 he failed to win over both the public and the media. He and the PT were seen as dangerous socialists who were swimming against the tide of history, especially following the fall of the Berlin Wall and the collapse of state socialism in Eastern Europe. During the following contest in 1994 Lula and the PT opposed the Real Plan, assuming that it would fail like previous anti-inflation programs. The party’s mistaken position election results highlighted the need to adopt a more pragmatic approach and support for more monetarist policies.

Second, Lula and his close associates in the PT leadership had become detached from the wider party. The 1989 and 1994 contests the party’s presence had been largely collective affairs that involved a wide range of party activists and social movements, including human rights activists, intellectuals and new independent trade unions. These groups had formed the basis of the party since its foundation in 1980. However, following his second presidential election defeat Lula demanded more control over strategy in the future. This coincided with two developments occurring during the 1990s: one, the party’s membership began to change, to include more professionals and middle class supporters who were less ideological in their views; and two, the PT’s more pragmatic stance appeared successful, contributing towards electoral success, including control of several important cities and state governorships. By 2001 Lula’s direction seemed sufficiently successful to encourage the membership to trust the leadership to make any cross-party alliances that it wished, including with the free-market Liberal Party.

Third, Lula and his election team saw no alternative to the model in 2002. Although Lula supported the prevailing economic model, it was not apparent that the markets believed this. As the election date approached the markets remained highly volatile. This encouraged political and business leaders to demand that Lula and the other election candidates commit themselves to pre-existing contracts made by the Cardoso administration, including the servicing of the public debt and the enforcement of a new IMF agreement. At the same time Lula and his election team published their ‘Letter to the Brazilian People’ which spelled out their commitment to Cardoso’s economic policies. This manifesto was significant in several ways, from the narrow nature of its drafting through to Lula’s refusal to qualify it following his election (1).

Insufficient economic growth

That Lula held to a policy of low inflation, high interest rates and liberalization caused considerable consternation among some of the PT’s constituencies. This included those left-wing intellectuals and members of the organized labor and the peasant movements who did not share his pragmatic stance and middle class concerns.

However, even if Lula had been predisposed to their views, there were two additional factors following the election that prevented him from doing so. Politically, he did not command a legislative majority in Congress. The PT won 91 out of 513 deputies in the 2002 election, which made it the largest party but did not give it a majority. He was therefore obliged to seek cross-party support with the catch-all and centrist Brazilian Democratic Movement Party (PMDB) both in the legislature and in cabinet. This only served to dilute the strength of the left in the PT.

Economically, Brazil was in a weak position in early 2003. Externally, the country faced lower levels of foreign credit following the financial crises of the late 1990s and the short recession in North America and Europe a few years later. Internally, the public deficit was large and continuing to rise. Although the markets had recovered following Lula’s support for his predecessor’s policies, the situation remained fluid. An IMF agreement dating back to 1992 also limited the state’s capacity to invest in infrastructure; breaking it could have undone the already weak levels of business confidence in the new government.

Given the political and economic situation, the new government’s economic policy was limited during its first year. A Development Plan was drawn up which identified several sectors for future work, including on semi-conductors, software, pharmaceuticals and capital goods (the latter which remained largely undefined). The administration also began to diversity its international economic relations by seeking ties beyond the US through closer links with the EU and non-OECD countries. This include the formation of the G3 with India and South Africa, followed by alliances with China and other developing countries against the North over agricultural subsidies during the abortive WTO negotiations in Cancún in 2003. At the same time the government was also burnishing its pro-market credentials. This included the passage of legislation relating to public private partnerships (PPPs) and the creation of a neo-corporatist Economic and Social Development Council (CDES) to provide advice to the president, half of whose members came from the business world.

Luiz Inácio Lula da Silva, President of Brazil. UN Photo/Mark Garten

The economy remained virtually static in this period, growing by only 0.54% of GDP. Recovery began the following year, rising above 5% of GDP in 2004 before settling back to 3.2% in 2005 and 4% in 2006. The main driver in this period was a rise in exports, of which agricultural commodities and a cheaper real played a significant role. For Lula and his supporters, economic growth was essential since it was believed that it would contribute to more jobs, higher incomes and lower levels of poverty.

The government’s optimism was misplaced, however. The Brazilian economy remained structurally weak and its growth both unsustainable. The impact of the late 1990s and early 2000s illustrated this, through what Csaba Deák called ‘hindered accumulation’ (2). Reviewing the first year of the PT administration he noted that the economic policy of both Cardoso and Lula was similar to that of followed that of previous governments, going back to the colonial period. Since the nineteenth century production surpluses had been largely expatriated through import consumption, foreign debt repayments and profit remittances. What little remained went back into the productive process as reinvestment, but never at a sufficient level to achieve substantial economic or social transformation across society as whole. As a result, most Brazilians were ‘losers’ of this process, remaining poor. By contrast a limited group who benefited from this surplus acquisition and spending constituted the ‘winners’. That the situation remained was evident in those sectors that did best in the early Lula years: large landowners and farmers working in the export sector whose economies of scale were more effective than those of small-scale and domestically-oriented tenant farmers.

In addition, that the economic growth in this ‘golden half decade’ was insufficient was apparent in two further ways. First, the growth rate was low, both historically and comparatively. The 1960s and 1970s, when the economy grew by 6% and 8.6% of GDP respectively, were the periods when transformation was achieved through the development of an industrial and manufacturing base. By contrast, a growth rate of 3.2% between 2001 and 2009 does not appear significant, especially against that of other comparable middle-income countries. Second, the reliance on agricultural exports meant that the larger proportion of poor people in the cities remained unaffected by the boom: while poverty declined across the country during the 1990s in urban areas it increased, from 13.5% in 1995 to 15% by 2004 (3).

Social democracy in action: the bolsa familia and PAC

Despite Brazil’s relatively poor economic performance, Lula continues to be extremely popular and the country stronger than before. How to account for this? The roots may be found in another aspect of its economic structure, along with the two key programs undertaken by the government in its first and second terms respectively: the bolsa familia and the PAC.

First, although the Brazilian economy is structurally weak and has failed to grow fast enough, it does have a comparative advantage over several of its neighbors in the region. This includes a much larger internal market (around 200 million in population) and a relatively more diversified and protected economy. This is apparent in particular sectors, including the aerospace industry and in the less onerous demands that its membership of the regional trading bloc, Mercosur, has had when compared to that which NAFTA has had on Mexico.

Second, Brazil has benefited from a redistribution mechanism introduced during Lula’s first year of office. “The bolsa familia” consists of four different programs that provided social security to previously excluded and marginalized people, combining several different social assistance and conditional cash transfers. They include some that predated the Lula government with others that were introduced for the first time, from payments made to mothers to send their children to primary school (the school grant or bolsa escola) and to discourage child labor along with financial assistance for basic foods and maternal nutrition.

The government moved quickly to increase the number of recipients of the program. Between 2003 and 2006 the number of beneficiaries increased from around 5 million to 11.1 million, of which 1.8 million mostly based in the poorer Northeast joined in the months preceding Lula’s re-election. The importance of the bolsa familia was especially important, given that for the proportion of employment earnings to household income had declined across Brazil from 90% to 48% between 1995 and 2004. As a result, the poor became an extremely important social and electoral constituency whose influence helped determine Lula’s re-election in 2006.

Lula’s re-election in 2006 was significant for the separation in the electoral base of the PT in the presidential and congressional elections that year. The effect of the bolsa familia was noted through the shift in Lula’s support from the professional and middle class voters in the PT’s historic heartlands in the South and Southeast to poorer and more rural voters in the North and Northeast. This latter region not only included a great number of bolsa recipients, but was notable for the fact that between 60% and 85% of all valid votes went to Lula (4). The scope of the bolsa familia has not been fully tapped politically though: despite the substantial increase in beneficiaries prior to Lula’s re-election, it only reached 40% of the eligible population.

Third, Brazil’s economic prospects have been helped by a stronger role for the state in response to the limits presented by economic liberalism. At the start of Lula’s second term in 2007, the government launched the Accelerated Growth Program (PAC). Its purpose was to overcome the constraint of low economic growth by expanding the country’s transport, energy, sanitation and housing infrastructure. The four year program was calculated to cost around R$504bn and would use both public and private funds, the former being provided mostly through state banks such as the National Bank of Economic and Social Development (BNDES). The government believed that it would add an additional one percentage point of economic growth each year, which would help push the country in a more dynamic fashion. According to Finance Ministry figures, the PAC soon appeared to have the desired effect: GDP growth increased from 4% in 2006 to 6.1% and 5.1% in 2007 and 2008 respectively.

The slowdown in 2008 may be traced to the financial crisis that swept the globe in the months after September. In contrast to several of its neighbors and other countries in the North, Brazil appeared to weather the storm reasonably well. The result was a highly self-congratulatory tone by the government which while stopping short of claiming advanced foresight of the crisis, emphasized the role that the PAC had as a form of insulation and sustaining productive activity during a period of growing retrenchment.

Beyond the PAC, the government’s other responses to the crisis included a loosening of the money supply and the injection of state credit into the country’s banks, sectors and firms. The effect of these measures helped turn the economy around, bottoming out by the middle of 2009 after economic growth fell from 6.8% of GDP to 1.3% between the final quarters of 2008. Currently the government estimates economic growth for 2010 will be around 5% of GDP. This is slightly down on anticipated growth rates at the time of its launch but may be attributable to the lower level of private contributions following the crisis (5).

Brazil after Lula: continuity whoever wins

In October 2010 Brazilians will go to the polls. For the first time since direct presidential elections returned in 1989, Lula will not be a candidate. Instead his hand-picked successor, Dilma Rousseff, a former energy minister and currently the president’s chief of staff, will be the PT candidate. Her main rival will be the same man that Lula beat in 2002, the PSDB’s José Serra. A former health minister in the Cardoso government, Serra subsequently carved out an independent base of support as a former mayor (2005-06) and governor (2007-10) of São Paulo city and state respectively. In mid-May, several months before the campaign will officially begin, public opinion appeared evenly split between the two.

Aiming to get the upper hand in this contest, Lula and Rousseff launched PAC2 in March, which is set to run from 2011 to 2014. Estimated at around R$959 billion over the period (nearly double what the first PAC cost), the government will finance it though revenue from the recently-discovered oilfields in the South Atlantic. It is planned that half of the funds will be spent in the energy sector, followed by a quarter for low cost housing and 11% towards transport (6). The publicity surrounding the event was designed to link Rousseff to Lula, who retains high popularity in the final year of his presidency, as the candidate of continuity and of the PAC and social redistribution. Given the dependence on oil revenues to fund the program, question marks may be raised about both its accessibility and the political will to achieve it, especially in the wake of the current environmental disaster following the deep sea oil spill in the Gulf of Mexico.

For his part, Serra also seems to offer Brazilian voters more of the same. When he announced his candidacy in April he noted that poorly maintained roads and overcrowded airports had served to slow Brazil’s economic growth. His economic manifesto is primarily concerned with achieving more effective implementation of infrastructure projects than present, along with lower taxes to stimulate growth - which he believes could be at least 50% higher than it currently is. At the same time he has proposed creating a PAC for health and public security while also endorsing his support for the bolsa familia - a position that the PSDB also held during the 2006 election. That Serra appears to offer much the same as that presently offered by Lula and the PT highlights the extent to which the political and economic situation in Brazil has stabilized since the 1990s

Just as the potential successors to Cardoso lined up to declare their commitment to the economic model set out by the Real Plan in 2002, the main contenders in 2010 are keen to show their support for the two main hallmarks of the last eight years: the bolsa familia and the PAC. The Real Plan provided for low inflation, even as it exposed the country to fiscal deficits and occasional instability during times of crisis. Those low levels of inflation and limited opening up of the Brazilian economy, along with a modest economic boom, have in turn provided the basis for public investment, both in social redistribution programs and infrastructure development.

The coming campaign will doubtless consist of both main candidates denouncing and criticizing the other. The value of the prize at stake will mean that the tone will no doubt be shrill as each tries to portray the image of the other in the presidency in suitable apocalyptic terms. Yet the reality remains that there has been and remains considerable overlap between the two, areas where the difference is more style than substance. Consequently, both Rousseff and Serra will have more in common than they care to admit. But this should not disguise the fact that the main parameters of Brazil’s economic policy look set to continue whoever takes office next January.

Guy Burton
Research associate on the Latin America International Affairs Program at the London School of Economics (LSE) Ideas Centre. He holds a PhD in Government from the LSE with particular focus on the Cardoso and Lula governments.

References

(1) MOLLO, M de LR & SAAD-FILHO, A “Neoliberal Economics Policies in Brazil (1994-2005): Cardoso, Lula and the Need for a Democratic Alternative,” New Political Economy, 11(1): 99-123, 2006.

(2) DEÁK, C, “Brazil: The Partido dos Trabalhadores in government,” Soundings, 28: 143-155, 2004.

(3) HALL, A, “Brazil’s Bolsa Família: A Double-Edged Sword?” Development and Change, 39(5): 799-822, 2008.

(4) HUNTER, W & POWER, T, “Rewarding Lula: Executive Power, Social Policy, and the Brazilian Elections of 2006,” Latin American Politics & Society, (49)1: 1-30, 2007.

(5) GOVERNO DO BRASIL, Balanço 3 Anos Programa de Aceleração do Crescimento (PAC): Fevereiro de 2010.
http://www.brasil.gov.br/pac/relatorios/por-balanco/balanco-3-anos/balanco-3-anos/parte-1-abertura [accessed 18 May 2010]

(6) LATIN AMERICAN NEWS, “On to the virtuous circle,” March, 2010.

The views and opinions of contributors expressed herein do not necessarily state or reflect those of Global Affairs

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