June 24, 2008

Does Brazil's success under 'Lula light' mean the financiers were right?

When Luis Inácio Lula da Silva stood for election to the Presidency of Brazil in 2001 he faced a classic financial market attack, as predicted by John Bunzl in his book The Simultaneous Policy, published that same year.

Lula, as he is popularly known, had stood in the past on a radical left wing platform including policies such as renegotiating loans to the International Monetary Fund. He had lost three times before, twice to Fernando Henrique Cardoso (FHC) who had introduced Thatcherite privatizations and participated in Tony Blair's 'Third Way' international get togethers.

But free-market economics failed to deliver social cohesion in a country with a massive gulf between rich and poor which fuels a virtual state of civil war in the major cities where drugs gangs rule most of the slum areas or favellas. Lula was riding high in the opinion polls again José Serra, FHC's designated successor.

Bankers and investors weighed in, risk rating Brazil on a par with Angola and Nigera. Angola: swinging between civil war and anarchy. Nigeria: rampant corruption. Brazil: Lula, a left-winger, looked like he might win. The Brazilian Real fell against the dollar as investment dried up and currency fled the country. Interest rates climbed and inflation began to follow. There was talk that Brazil would go the way of Argentina that was in crisis after the link between the peso and dollar had been broken and had slid to 30% of its previous value.

Lula met financiers from São Paulo to New York, pledging that he had not only dropped his earlier policy of renegotiating Brazil’s foreign debt, but would follow FHC’s spending plans for the first year of his government. He announced as his running mate, José Alencar, a millionaire business man, in an alliance with the Liberal Party.

He was billed as ‘Lula light’ in the media, a less threatening version of the old Lula.

With the economic fears of the electorate laid to rest, he won convincingly for his promise to tackle the inequalities in Brazilian society, which have left over 30% of the population below the poverty line and crime soaring. In Rio de Janeiro, where police raids on drug gangs in the favellas prompt the hijacking and burning of buses in the city centre, the vote for Lula was 79% in the run-off against Serra.

Lula won a second term despite his party being embroiled in a scandal where public contracts had fed massive payments to many members of Congress who had joined his ruling alliance. A few were thrown out of Congress by their peers, more by the electorate. Whether the law will catch up with those involved still remains to be seen.

Lula's flagship programme has been 'Fome Zero' or 'Zero Hunger'. It was billed as support for small-scale family agriculture. After his victory it was controversially hi-jacked by Nestlé (which I monitor closely as part of my job), which used it to distribute processed food, including powdered milk, while advertising its support heavily. National and international protests resulted. The programme transformed into 'Bolsa Familia' or family income support, with families receiving payments to put them above the poverty line on the condition they vaccinate children and put them through school.

Lula's handling of the economy has been lauded (though the architect of his policy, Antonio Palocci, fell in another corruption scandal harking back to his time as a small-town mayor). Brazil's risk rating on the credit market has fallen to the point where in 2008 it was listed as an investment-grade country by Standard and Poor. As the International Herald Tribune reported in April this is: "signaling that Brazil is now officially recognized as a safe place for investors to park money." Brazil's annual growth is above 5% while other developed economies wobble on the brink of recession. The money is flowing and easy credit is fuelling a consumer boom. Coupled with discovery of new oil fields, Brazil, long billed as the country of the future, feels like it is arriving.

The impact on the poor has been documented in a report released today by the Institute for Research in Applied Economcs. The three poorest percentiles have seen their income rise up to 5 times that of the richest, reducing inequalities. The BBC in São Paulo reports those with monthly incomes in the bands R$ 206 (about US$100) , R$ 378 e R$ 422 have seen incomes increase by 21,96%, 29,91% and 15,79% between 2002 and 2008. For comparisson the three most rich (with average income of R$ 1.159, R$ 1.797 e R$ 4.853) have seen gains of 2,3%, 2,1% and 2,6%. The inequality ratio has fallen from 0.543 to 0.505.

While criminality remains so problematic that the army has been sent into some of the favellas in Rio, economic activity is booming, with small businesses flourishing (and, as an aside, Nestlé is once again targeting the poorest with a range of what it calls 'Popularly Priced Products' - again including its milk powder).

Gains are threatened by oil and food price rises. However, Brazil is protected as its domestic energy is almost entirely hydo-electric (and energy use was shocked into an efficiency overhaul in 2001 when there was a sudden realisation that the water levels were too low to sustain the country) and it has its own oil supplies for transport, making it virtually self sufficient. Brazil also has had, for decades, many cars running on alcohol from sugar cane plantations and is developing its bio-diesel production.

While much of the world is blaming the use of land for bio-diesel for increases in food prices, Brazil has much land still under-utilised - even without encroaching on the Amazon and other sensitive ecosystems. This week, Lula said he would not be following the examples of Argentina, Bolivia and Mexico, which have put a freeze on food prices and obstacles to exports (see the Folha de São Paulo). He is leaving the market to set prices while promising to make massive amounts of credit available to boost the next harvest by 5%. The sum of R$65 billion (about US$32 billion) is being made available to agrobusiness and R$13 billion to family farms (see the Folha de São Paulo).

Even the political class is recovering its reputation in Brazil, with the Senate recently refusing to renew an unpopular tax on bank account movements and currently engaged in simplifying the entire tax system.

As for renegotiating the loans with the International Monetary Fund, Lula paid them off early in 2005, along with those owing to the Paris Club of donors, saving a fortune in interest payments. He is reported in Brazzilmag: "We are making this payment because we want to show the world and the market that we are in charge. When we do things we might make mistakes or we might get things right, but we decide."

Brazil's government, through a great deal of luck as well as judgement, has played within the rules of the financial markets and is, at present, on a winning streak. There may be problems for the future in the making: consumer debt at home and the credit crunch in its export markets, peak oil and food price inflation. But no doubt the financiers look to Brazil as vindication and contrast it with other Latin American countries following very different paths.

So is a global financial system that punishes those who do not follow its decrees working? Should other countries simply follow Brazil's example?

Or are reforms already put forward for inclusion in the Simulteanous Policy necessary, such as the Tobin Tax on financial speculation and an International Clearing Union to replace the International Monetary Fund? Are those calling for a complete overhaul of how money is created correct to promote their Monetary Reform proposal? Is a country's health measured too narrowly by GDP as those proposing Beyond GDP measures suggest?

Within the Simultaneous Policy campaign those defending present global governance systems, such as the International Monetary Fund, have as much right to participate in proposing, discussing, developing and approving policies as anyone else. Join the debate and cast your vote by signing up as an SP Adopter at:

No comments: