Lula’s Brazil: Facing a financial time bomb and the war

In the third month of his presidency, Lula faces the dangerous prospect of the US war against Iraq scuttling Brazil’s fragile financial order and throwing the country into an economic depression.

Roger Burbach

AS Luis Inacio Lula da Silva enters his third month as president of Brazil he enjoys popular approval ratings approaching 80%. His ‘Zero Hunger’ programme has begun with pilot projects around the country, and as promised in his electoral campaign, he has set up councils comprised of members of civil society to make recommendations on key policy issues.

But as Reinaldo Gonzalves of the Economic Institute of the Federal University of Rio de Janeiro notes, ‘Lula faces a financial time bomb that could explode at any time’. While Lula is moving forward full throttle to change the country’s social policies, he is already confronting serious economic problems that could undermine and even destroy his government.

The first crisis he faces is an essentially bankrupt social security system because of the policies of the previous government. According to Cesar Benjamin, a social policy analyst who is a leader of the Popular Consultative Movement, ‘Former president Fernando Henrique Cardoso’s neoliberal free market policies undermined the country’s stable work force, greatly expanded the informal sector, thereby curtailing the number of contributors to social security.’ The number of retired beneficiaries in major states like Rio de Janeiro now significantly exceeds the number of people who are paying into the system. And like the United States, there is no reserve because the social security payments that came in during the Cardoso years went out to cover other government expenditures, including the foreign debt.

Regarding the debt, Gonzalves states, ‘The government is facing a major fiscal crisis because of the skyrocketing debt, both internally and internationally. In the medium or long term it is unpayable.’  The debt burden expanded dramatically in terms of the national currency due to a significant drop in the international value of the Real before Lula took office. Now the debt is equal to 56% of the country’s gross domestic product.

To the dismay of many leading figures in Lula’s Workers’ Party, the new government up until now has adopted fairly traditional measures to deal with the fiscal crisis. To help meet payments on the debt, the Minister of Economy has ordered the government to cut expenditures and to raise the expected budgetary surplus, excluding debt payments, from 3.75% to 4.25%. And to stop capital flight due to the country’s financial woes the Central Bank has raised interest rates from an already astounding 25.5% to 26.5%.

Senator Heloisa Helena from Alagoas, an impoverished state in north-eastern Brazil, declares, ‘the policies of the economic advisers will not work.’ The leadership of the party tried to discipline her, but it was forced to back off when many others in the party supported her statements and her right to speak out.

Lula enjoys the full support of the more progressive sectors of the Workers Party for one major financial reform he is proposing - a restructuring of the country’s tax system. At present tax revenues come overwhelmingly from a value added tax. This means that approximately 24% of the income of the poorest fifth of the population goes to pay taxes while the upper fifth pays only 12%. Lula is calling for a progressive income tax that would shift the burden away from the poor. But Congressional approval is needed to change the tax code. While some changes may be implemented, the fact that the Workers’ Party does not command a majority in either chamber of Congress means that there will not be a radical shift in the tax burden from the poor to the rich in a country with one of the greatest extremes of wealth and poverty in the world.

Social policies

While criticising the government’s financial measures, the more militant sectors of the Workers’ Party remain fervently committed to Lula’s social policies. Francisco Meneses, who is a member of the newly formed Council on Food Security that represents the interests of civil society, states, ‘Lula is aggressively dedicated to fundamental changes in Brazil’s food and agricultural policies.’ The council decided to double the amount of food distributed to the poorer families in the country’s schools in its first meeting on 30 January. Then in a meeting on 27 February the council agreed to direct the Ministry of Agriculture to transform its historic policy of supporting agribusiness interests. ‘The new objective is to support cooperatives, small-scale agricultural producers, and to help people attain food self-sufficiency at the local level,’ states Meneses.

The agricultural and anti-hunger policies will not face the immediate budgetary squeeze of other government programmes because the UN Food and Agriculture Organisation along with the World Bank see Lula’s ‘Zero Hunger’ programme as a global model and are pumping around $5 billion into Brazil to support the plan. But as Gonzalves notes, ‘This is only a temporary fix. These are almost exclusively loans that will add to Brazil’s already enormous international debt.’

War worries

The impending US war with Iraq will only deepen these problems. It has already upset Brazil’s financial markets. Even Lula’s orthodox economic advisers recognise that the war will have a shock effect on the Brazilian economy, causing a drop in exports and adversely affecting the country’s ability to deal with its debt and capital flows.

Lula has been outspoken in opposing the US war. In a recent phone conversation with Chancellor Gerhard Schroder of Germany, Lula declared he would weigh in with Mexico, Chile and Angola - three members of the UN Security Council with which Brazil has historic ties - to vote against the new US resolution for an Iraqi war.

In Brazil, as elsewhere, the war clearly hangs as an albatross over the country’s future. Marcos Arruda of PACS, an independent research centre, notes, ‘We have no idea what the war will mean. We could be thrown back to a period like the 1930s when all of Latin America was in a depression. It will minimally create new difficulties making it virtually impossible to continue paying the country’s enormous debt.’ 

As Francisco Meneses states, ‘Sooner rather than later Lula and his economic advisers will have to break with the past. They have no choice but to come up with new strategies and alternatives. This may lead Lula to call for popular mobilisation, and the formation of participatory councils at the grassroots community level to challenge the stranglehold of the domestic and the international elites over the Brazilian economy.’

Roger Burbach is director of the Center for the Study of the Americas (CENSA) and has written extensively on Latin America and globalisation. His next book, The Pinochet Affair: State Terrorism and Global Justice, will be released by Zed Books in the fall.