Staying the Course

Brazil will hold presidential elections on October 6th, and if no one wins an outright majority, the first- and second-placed candidates go on to slug it out alone in a second-round election three weeks later. There are three front-runners, from the left, center-left and center-right. With the elections still more than six months off, only the foolhardy will guess which – if any – of these three will succeed President Fernando Henrique Cardoso January 1.

Yet there is a growing conviction that the lead of Luis Ignácio Lula da Silva – veteran head of the Workers Party and forerunner in the opinion polls for months with about 30% of voter intentions – is slipping. Once the campaign begins in earnest in the second half of the year – Brazil grinds to a halt in July to cheer on its soccer team World Cup championship – Lula, as he is known, may be struggling for a slot in the second round.

Facing him are likely to be José Serra, health minister in Cardoso’s center-left government, and Roseana Sarney, conservative governor of the backward northeastern state of Maranhão. Serra is cerebral but lacks charisma and launched his campaign with a backing of just 7% in the opinion polls. Roseana, as Sarney is usually known, burst on the scene at the end of 2001 and quickly gained 20% of voter intentions. She is the daughter of José Sarney, the conservative president who led Brazil into hyperinflation and a moratorium on debt payments in the 1980s.

Says Walder de Góes, a political analyst in Brasília, “Unless the government makes some very big mistakes Serra or Roseana will go to the second round. Serra will grow at the expense of Lula or Roseana, no one knows which.” The consensus is that no matter which candidate wins, the general direction of economic policy will not change substantially. Lula, who has lost the last four presidential elections he has contested, has moved to the center and cast off some of his more radical ideas such as auditing the foreign debt and returning to protectionism, that scared away the mass of mainstream voters. Serra, an economist, says he would protect and support Brazilian industry more. Roseana has promised a brutal fiscal shock in her first year in office to pave the way for sustained growth.

Although both Serra and Roseana are overtly committed to continuing and deepening Cardoso’s reforms, there are important differences between them. Góes says, “The financial elites are with Roseana and the industrial elites are with Serra. Roseana is more pro-market and Serra is more interventionist.”

This political consensus in favor of free-market economics is remarkable, given the widespread rejection of Cardoso’s policies and the troubles engulfing Argentina. The events there have a certain morbid fascination for Brazilians but so far have had little direct impact on the political debate. At most, candidates from the right and left use Argentina’s crisis to demonstrate either the folly of free-market policies or the dangers of giving in to protectionism and populism. Serra warns, “What happened in Argentina is an example of what we mustn’t do in Brazil. Argentina’s suffering [shows] the risk of leading a country with weakness and incompetence. We must avoid populism and ineptitude.”

But pollsters say most voters mistrust Cardoso and dislike his policies. According to Ibope, Brazil’s top polling agency, 64% of voters “do not trust” the president and 59% disapprove of the way he is running the country. Nearly as many say they will not vote for candidates promising to continue his policies. This is in spite of two-thirds of respondents saying that 2001 was a good year for them and three-quarters expecting 2002 to be better still.

Yet most analysts, commentators and business leaders agree that Cardoso’s eight-year term in office has revolutionized Brazil. He has stopped hyperinflation, opened up the economy and privatized state-owned companies by the dozen. He has improved the quality of public health and education services. Furthermore, he has achieved all this mainly through political negotiation rather than by imposition, and avoided the more grotesque political and corruption scandals that have scarred previous administrations.

Under Cardoso, Brazil has strengthened institutions such as the Supreme Court and Congress, which now wield considerable power and influence independent of the wishes of the government. No party has a majority in Congress, which limits Cardoso’s ability to legislate and should impose a similar check on his successor. This also means that economic reform is incomplete. The government has not even submitted legislation modernizing the tax system, completing social security reforms or granting the Central Bank independence because mustering majorities to pass these bills is so difficult. Each of these initiatives is very controversial and requires the government to laboriously assemble a new alliance to win a majority. Stitching majorities together to pass landmark laws has led to unseemly horse-trading and influence peddling that has reflected badly on the government, even if Cardoso’s personal integrity remains beyond reproach.

The president’s authority grew last year following an offensive against political sleaze. Two leading Senators who were members of the government coalition – Jader Barbalho and Antonio Carlos Magalhães – quit in a succession of corruption scandals. Financial markets feared the fall of Magalhães, Brazil’s most powerful political boss, would shake the government to its foundations. However, Norberto Valdrigue, senior executive director at Banco BMC, recalls that, “The trading room fell silent when the TV started showing Magalhães’ resignation speech in the Senate. Soon it was obvious he had nothing to say and everyone drifted back to work. It was as if nothing had happened.”

Getting Better
The government has set up several new semi-independent regulatory agencies following privatization or deregulation of the telecoms, power, oil and other industries. The government has revamped the aging and toothless CVM securities regulator. But some of these agencies have a poor record. For example, Aneel, the electricity industry regulator, failed to deal adequately with a power shortage last year. Fortunately, Brazil’s aggressive media has cracked dozens of scandals over the years and remains as scrappy as ever, providing the ultimate check and balance.

In 2000, Congress passed a fiscal responsibility law that caps spending on government personnel at all levels and clamps down on pre-election spending. As a result of this and an overhaul of local finances led by the federal government, state and national governments have run large and growing primary budget surpluses since 1999.

These laws and the country’s more robust institutional framework – not to mention Brazil’s financial straits – impose a considerable limitation on the ambitions and freedom of action of future governments. The final piece in the jigsaw is the Central Bank, which has won de facto independence from the finance ministry to implement its inflation targeting monetary policy. However, this independence is on sufferance only until Congress approves legislation granting it full autonomy.

Although Brazil’s political maturity has advanced considerably under Cardoso, it is still fragile and susceptible to changes in attitude at the highest, reaches of government. José Luciano Dias, an associate of Goés, says the fiscal responsibility laws are working because it is in the interests of Brasília to keep the public finances in good shape. Future governments may feel less pressure to keep spending under control and cease enforcing the law’s limits strictly.