The Macroeconomics of Lula: The Aftermath of the Brazilian Elections
The electoral victory of Luiz Inacio Lula da Silva marks an important milestone in Brazil's long and sometimes erratic road to its place among the world's major democracies. By outpolling his centrist and government-backed opponent, José Serra, there can be few doubts about the legitimacy of Brazil's choice in one of the most open and cleanest elections in its history.
Instead, the doubts that hang over Lula's decisive victory are economic ones. No one believes that Brazil's macroeconomic path over the next presidential term will be an easy one. Employment growth, for one thing, has been far too low for an open society with Brazil's demographics. The downside of labor productivity gains in recent years is that GDP growth more robust than that of the last few years would do little to alleviate the unemployment and underemployment pressures that weigh on much of Lula's electorate. Yet more rapid income growth soon bumps up against the tight constraints that Brazil's external payments situation impose on attempts to grow faster.
It is clear from the vote, however, that the vast majority of Brazilians were willing to run the risk of entrusting a candidate with no experience of governing at the national level, rather than continue current policies that have more approval outside Brazil than within it. Indeed, many Brazilians regarded the election as a plebiscite on the policies of the outgoing Fernando Henrique Cardoso government.
The lopsided vote may be an unfair and impatient judgment. It clearly reflects, however, the disillusion of an electorate whose expectations appear to have outrun a positive but increasingly modest economic performance. As the euphoria of the Cardoso government's clear success with the Plano Real in bringing inflation down from annual rates in the thousands to single digit levels has faded, Brazilians have unforgivingly turned their attention to the more stubborn economic problems that have yet to be successfully addressed.
At the top of this list is Brazil's squalid income distribution, arguably the most inequitable of any of the world's major economies. (Ironically, the Cardoso government has a better record in this respect than many of its predecessors.) Important gains in public health and in primary education have also helped. For most voters, however, these welcome trends have come too little and too late to persuade them to stick with the "neo-liberal" policies of the current government and its would-be heirs. Hence, the desire for change.
Lula's personal appeal and charisma undoubtedly explain some of his political success. For some voters, however, his well-established credentials as a populist critic of the Brazilian establishment are of equal importance. For others, especially among those who have rallied only recently to his cause, his past is a source of considerable debate and even potential opposition. Should his traditional base in the Workers Party (PT) convince him to revert to his populist positions of earlier (and unsuccessful) campaigns, he will face a number of hard macroeconomic choices and provoke deep divisions among many of those who have so recently voted for him.
The roots of this potential schism are not hard to find. Under pressure to broaden their political support, the military governments that dominated Brazilian politics between 1964 and 1985 turned increasingly to both domestic and international capital markets to finance public sector expenditures. Although this was in the long-run a less desirable strategy than developing an effective and equitable tax system or increasing the efficiency of the expenditure process, there was a (short-term) political logic to it--especially as long as domestic and foreign sources of capital were available. A number of borrowing crises and failed stabilization plans in the eighties and nineties, however, signaled that the long-run constraints could not be ignored forever. Serious efforts to address the underlying fiscal imbalance were delayed by successive governments.
While economists will probably never reach a consensus about how much debt is too much for Brazil, there is no question that the resulting high real interest rates have raised the costs of capital formation and widened the gap between the minority that receives this interest income and the large majority that must ultimately pay the bill. In the short run, the perverse logic of public sector indebtedness requires that real interest rates remain high or even increase, if voluntary lending to the Brazilian public sector is not to be interrupted. As the probability of Lula's victory increased over the past several months, Brazil's Central Bank has in fact been forced to raise rates, however costly this may be for the nation in the long run.
The macroeconomic choices facing Lula are daunting, but they are not very different from those that would be faced by any of his opponents. One road, possibly favored by Lula's traditional core of supporters, if not by the President-elect himself, would be an external debt moratorium, likely accompanied by various forms of a disguised moratorium on internal debt. Although this might in principle buy time in which to address the underlying fiscal imbalance, it is likely that the resulting radicalization of the institutional environment would prevent the emergence of any national consensus broad enough to support economic reform.