Nobody knows who the next president of Brazil will be, but it is certain that he will not govern alone. The good news – from the viewpoint of the financial markets – is that the two left-wingers who have dominated the campaign for most of the year will probably not be able to carry out any incendiary policies if elected. Both have had to form alliances with small conservative parties. Indeed, if the two opposition candidates do indeed meet in a runoff election, they will need to strike alliances with the country’s mainstream conservative and center left parties, which will naturally require policy concessions and government ministries in exchange for their support.
What’s more, Congress is likely to remain as fragmented as it is now, so the next government will have to stitch together majorities for almost every piece of important legislation, just as the outgoing administration of President Fernando Henrique Cardoso has had to do for the last eight years. Furthermore, Cardoso has already set the next year’s budget priorities, tying the hands of the incoming government. In any case, the Fiscal Responsibility Law, one of the outgoing administration’s legislative triumphs, imposes strict limits on spending throughout local and national governments. As if this were not enough, the government’s $30 billion August bailout agreement with the International Monetary Fund comes with tough performance criteria attached for years to come.
Reaching Agreement
The next government’s economic policy framework looks set in stone. The drawback is that the horse-trading required to form a government and pass legislation also makes it hard, but not impossible, to push through fundamental economic reforms many of which require constitutional amendments. And Brazil’s conservatives do not necessarily guarantee political stability or policy continuity, since they have supported populist and heterodox policies in the past and might well buckle under pressure from the streets to roll back market reforms as the country’s economic crisis persists.
But it does help that all three leading candidates in their rush for the middle ground now say they agree on the same, basically rational economic principles.
Luis Inácio Lula da Silva, the former firebrand union leader and founder of the Workers Party, has mellowed with age and with three previous election defeats behind him realizes that this will be his last chance for a serious run at the presidency. His speeches are now studded with Third Way platitudes worthy of Former US President Bill Clinton or British Prime Minister Tony Blair. He stated in July that, “We need to unite the country in a national economic and social development project with a new political leadership that will allow Brazilians to recover their self respect and confidence in the future. The challenge is how to resolve the problems of unemployment [and] poverty [while] maintaining the public finances and inflation under control.” This is very different from his utterances in previous campaigns when he referred to banks as “parasites,” foreign investment as “international extortion” and vowed to “interrupt the immense drainage of resources overseas” caused by foreign debt payments.
Lula knows he will lose again unless he promises moderate change that does not disrupt the country’s basic economic system. He even chose Senator José Alencar, a textile magnate, as his running mate. Brazilians do not want to go back to the years of double- and triple-digit inflation. They do want growth and employment, and most people understand that deficit spending is ultimately ruinous. Instead, Lula promises to kick off “a virtuous circle of rising exports, rising growth, a lower public sector deficit and solving social needs.”
Similar ideological blurring has occurred with Ciro Gomes, the dark horse candidate of the former Communist Party, who swept aside the government’s candidate months ago. Gomes, who is only 44, was a successful state governor and finance minister and is no Communist. He borrowed the Popular Socialist Party as a vehicle for his one-man show campaign. Along the way he has collected fellow travelers like conservative boss Antônio Carlos Magalhães, a former Cardoso ally. Gomes is a northeasterner, an impoverished region notorious for its reactionary governing elites. He indulged in crude populism to win a 30% rating in opinion polls, but began distancing himself from his earlier statements as the country’s financial crisis deepened. As the campaign has progressed, Gomes moved toward a more centrist position. He once advocated unilaterally restructuring the domestic debt but now favors reforming the tax and social security system to stabilize the debt and allow interest rates to fall naturally. Gomes now says that his promises to reform the social security and tax systems can only be carried out by winning a substantial Congressional majority. Many of these changes require constitutional amendments that need a three-fifths majority in Congress, which his tiny coalition could never achieve unaided.
Rooting for Change
José Serra, the government candidate, is the only candidate to remain true to his roots as a social democrat in the European tradition. Serra was a successful health minister under Cardoso and has an impressive record in public life. However, he is an uninspiring candidate who has failed to excite an electorate tired of the present government’s policies and personalities. He has dismantled Cardoso’s alliance with the conservative PFL party, which is siding with Gomes, and he has angered members of his own center-left PSDB many of whom have defected to Gomes. If Serra fails to make it to the second round of voting, he will only have himself to blame. He is the candidate financial markets hope will win, particularly since government officials and Serra supporters stated earlier in the campaign that a vote for Lula would be a vote for disaster of Argentine proportions. Instead of giving Serra a push and derailing Lula’s campaign, the message sent the markets into a frenzy.
Lula seems set to contest the second round, as he has done in the last three elections. Gomes is his likeliest opponent, but must deal with growing concern over the checkered past of some of his backers. Fernando Collor de Mello, the disgraced former president, has not helped by endorsing Gomes. The candidate’s running mate, senior campaign staff and heavyweight backers like Magalhães have all been implicated in corruption scandals, although nobody has ever credibly associated Gomes with graft.
The crisis in July and August helped further concentrate the minds of Lula and Gomes on the realities of government. Both resisted pressure from the government and the IMF to commit publicly to continuing Cardoso’s policies of fiscal retrenchment. Many urged them to follow the example of South Korea’s President Kim Dae Jung, who as the leading left-wing candidate in the country’s 1997 elections, reluctantly accepted the IMF’s stringent conditions for a $58 billion loan package. But Lula and Gomes insisted that dealing with the financial crisis was Cardoso’s problem, until reality intruded as the real crashed. Cristóvam Buarque, the PT’s former governor of Brasília, was the first to see the light. He said, “It is essential to preserve economic stability. Regardless of the electoral dispute, the candidates cannot forget that they will eventually govern a country that needs to be preserved.”
The day the IMF announced its $30 billion package for Brazilin August, Lula and Serra both indicated that if elected they would comply with the loan’s conditions, principally a 3.75% primary budget surplus (before interest payments). Gomes equivocated, saying he wouldn’t get in the way of an accord.
All three candidates agree on what ails Brazil and how to solve its problems. Their diagnosis can be boiled down to low growth, vulnerable external accounts and the government’s excessive indebtedness. Their policy proposals are also roughly similar. These include reducing interest rates and extending maturities on the government’s local debt without resorting to artificial fixes. A tax reform that would benefit the working class and lower-middle classes would complement a jobs program that includes a shorter working week (proposed by Lula) and a $100 minimum monthly wage (promised by Gomes). Growth would come from increasing exports which would also strengthen Brazil’s external accounts. Gomes favors a radical reorganization of the dysfunctional INSS social security system.
Unclear and Uncertain
The candidates’ policy statements are so vaguely worded that it is hard to unravel their meaning. The Gomes camp’s position paper on the public debt, for instance, states that: “The solution is not a default or to disrespect contracts by any other means. The solution is to create the practical conditions to establish a regime of realism and responsibility – above all, responsibility with the workforce and the producers – in the management of the public debt.”
So far, the candidates have not said whom they would appoint to key ministries. Although the Workers Party has run some of the country’s main cities and states competently and honestly, it has no members with experience in national government. Their advisers are either lightweights or steeped in quasi-Marxist economic theories. Yet the party is famously pragmatic. In São Paulo, Brazil’s biggest metropolis that is run by the Workers Party, the mayor put João Sayad, a respected former planning minister who is close to President Cardoso, in charge of the city’s finances.
Gomes has a more impressive array of close contacts which include several luminaries of the Cardoso era all of whom would make credible finance ministers or central bank presidents. Francisco Gros, the patrician president of Petrobras, the national oil company, and a former central bank head, has said he is impressed by Gomes. Tasso Jereissati, an influential state governor and a member of Cardoso’s center-left party, is Gomes’s political mentor. Gomes is also friends with Pedro Malan, the outgoing finance minister.