Global Economics

Finding the Middle in Brazil


When a leftist labor unionist was elected President in 2002, Brazil's stock market swooned and interest rates soared. But it soon became clear that Luiz Inácio Lula da Silva had no intention of endangering Brazil's hard-won economic stability with a populist spending spree. Today, many view Lula, as he is popularly known, as a pragmatic mix of fiscal prudence and social responsibility. Along with the presidents of Chile and Uruguay, he is considered representative of Latin America's moderate left. Investors have pushed the stock market up 36% in dollar terms so far this year.

Although Lula hasn't officially announced he's running for reelection, most Brazilians assume he will win this October's presidential vote. Lula remains popular even though his finance minister and his chief of staff were forced to resign following allegations of vote-buying schemes in Congress and of illegal campaign financing during Lula's 2002 presidential campaign.

One reason for Lula's popularity is that many of Brazil's 182 million citizens, 40 million of whom live on less than $2 a day, can relate to the 60-year-old former union leader who was born into crushing poverty. One of eight children of an illiterate farmer, he quit school after the fourth grade and started working at age 12, later obtaining a high school equivalency diploma. What he lacks in formal education he makes up for in political savvy.

BETTER OFF. "Lula has a down-home appeal that is very important, and he has been brilliant at distancing himself from his own buddies in the Workers Party who have been accused of wrongdoing," says Riordan Roett, a Brazil expert at Johns Hopkins University in Washington, D.C.

And Lula has a good chance of winning reelection because many Brazilians feel they're better off than they used to be. For years, they lived under double-digit inflation that sharply eroded their buying power. Thanks to major economic reforms carried out in 1994 and Lula's continuing fiscal discipline, inflation has been low for the past decade and now is around 5%.

Brazil still has the worst income distribution of all of Latin America and the second-worst in the world, after South Africa. The poorest 20% of the population receives just 2.4% of national income, while the richest 20% enjoys 63.2%.

SOME DOUBTERS. But the distribution of wealth has begun to improve, thanks to a program created by former President Fernando Henrique Cardoso and expanded by Lula, which pays up to $48 a month to 8.8 million families if they keep their children in school and take them for regular medical checkups. Studies show that the program, called Bolsa Familia, helped raise per capita income of the poorest 20% of Brazilians by 12% from 2003 to 2004. Among recipients of the stipend, fully 48% say they plan to vote for Lula's reelection.

Still, little progress has been made on many of the country's other pressing problems, such as rampant crime. Drug trafficking gangs unleashed a four-day wave of violent attacks and prison revolts May 12 to15 in São Paulo, Brazil's biggest city, that left 81 dead, including 39 police officers. Rio, the most important tourist destination, has also been plagued by rising crime rates, especially for kidnappings and robberies.

These problems have caused some Brazilians to lose their faith in Lula. "I won't vote for him again," says Rafael Tavares, 24, who pays for his night-school university studies in business administration by driving a taxi. He had hoped a leftist government would do more to improve Brazil's educational system and boost security. But in Vidigal, the Rio slum where he lives, drug traffickers rule the streets. "Lula has done a few good things, but he could have done a lot more, and he's surrounded by corrupt people," he says.

CHANGE AT A CRAWL. Still, Brazil has changed for the better over the past 15 years. Consumer credit, though costly, is available. That has allowed poor families to buy essentials, such as electric fans, as well as some extras that were out of reach before. Alzira de Oliveira Rangel, who earns $400 a month as a nanny, recently bought her teenage son a computer on credit and opened savings accounts for each of her children. Before, with inflation high, setting money aside for the future was a joke. "I never would have dreamed of saving money back then," she says. "It made more sense to spend it before prices went up."

Today, Brazilians are unhappy that government inefficiency and corruption mean there is little money to spare to improve schools and hospitals, but they also understand that tight government spending is necessary to keep inflation low. "Brazilians became intolerant of high inflation, and opinion polls show that every time inflation goes up, the president's popularity goes down," says Maílson da Nóbrega, who was Brazil's finance minister in the late 1980s.

It may be difficult for outsiders to understand why Brazilians aren't angrier about widespread corruption and their country's marked inequality. Brazil is flanked by Venezuela, Bolivia, and Argentina, where aggrieved citizens regularly take to the streets to protest, sometimes violently. That has led to the rise of populist regimes. Not in Brazil. Roett attributes that to differences in the way the Portuguese and the Spanish governed their former colonies. "Brazil is a hierarchical, class-based society, and the lower classes have not tended to rise up in protest," he says. "It's maddening, but that's reality. Change happens in Brazil, but very slowly."

OIL INDIE. The big challenge for Brazil is enacting reforms to streamline government and reform pension and labor laws to speed economic growth. Overall, growth has been unimpressive under Lula. Brazil is benefiting from strong Chinese demand for its soybean, iron ore, and steel exports, but last year the economy grew just 2.3%, far short of Latin America's average of 3.9%. Exports have been hurt by the overvalued currency, which has appreciated 65% against the U.S. dollar -- more than any other international currency -- since Lula took office in 2003.

Yet, on Apr. 21 Lula was able to announce some good news: Brazil has become self-sufficient in oil, a remarkable accomplishment for a country that imported 85% of its oil in the 1970s, when oil prices soared and Brazil became swamped in foreign debt. Over the past decade, Brazil has become a world leader in deep-water oil-drilling technology to tap new reserves found off its coast.

Many Brazilians also take pride in the leadership role that Lula has assumed on the international stage as a spokesman for developing nations. He has pushed for reduction of U.S. and European agricultural subsidies so that countries like Brazil will have a better shot at placing their crops overseas.

CUP CRAZY. Closer to home, though, Brazil, which had considered itself the natural leader of South America, has lost diplomatic ground to Venezuela, whose President Hugo Chávez uses the country's vast oil wealth to curry favor with neighboring nations. Lula was caught flat-footed when Bolivia on May 1 abruptly nationalized its oil and gas industry, in which Brazil's state-run Petrobras oil company has a major stake.

While Brazilian diplomats and business leaders were dismayed by the turn of events, the average Brazilian shrugged it off. After all, most Brazilians don't pay much attention to international news, unless it concerns the upcoming World Cup soccer championship, which takes place in Germany in June.

For the next month or so, they will forget all about the corruption scandals and the coming presidential election as they root for the Brazilian team, the defending champion. If Brazil brings home the Cup for a record sixth time, the feel-good factor will likely catapult Lula even closer to reelection.


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