March 7, 2006


Brazil: Lula's leap (The Economist

Why is he now likely to win? Speaking to The Economist in a rare interview, Lula cited over and over what he regards as his twin triumphs: economic stability plus social progress. “How many countries have achieved what we have: fiscal responsibility and a strong social policy at the same time?” he asks. “Never in the economic history of Brazil have we had the solid fundamentals we have now.” Brazil is ready for “a leap in quality”, he says.

Such a leap is what Brazil—a country with a population (186m) equal to that of the whole of the rest of South America and a land area bigger than all 25 EU countries combined—has been waiting for since the early 1970s, when it was one of the world's fastest growing economies. Then its economy stumbled into debt and inflation, while other emerging economies like China and India began to take off, generating more global buzz. In his interview at the presidential ranch, Granja do Torto, Lula defended a slow and steady approach to growth and promised further reform in a possible second term. “The future”, he says, “will be built on strong investment in education and training, with tax relief to encourage new investment, notably in science and technology.” Since becoming president in January 2003, he has achieved much of what he set out to do, but has not yet cleared all obstacles to Brazil's great leap forward. [...]

[L]ula got two big things right: the economy and poverty alleviation. Comparing Brazil's vital indicators when Lula took over with the same ones now “is like looking at two different economies”, says Vinod Thomas, former head of the World Bank in Brazil. In the autumn of 2002, Brazil's currency, the real, plunged, largely because the markets feared Lula's arrival. Inflation, already in double digits, threatened to spike higher and the yield on Brazil's dollar bonds was 25 percentage points above that of American Treasuries. The new government swerved away from disaster. The finance minister, Antonio Palocci, raised the target for the public sector's primary surplus (before interest payments) by half a percentage point to 4.25% of GDP, persuading the markets that Lula could be trusted to pay Brazil's public debt. The central bank steadied the real and raised interest rates to choke inflation.

An economy that swooned every time confidence in emerging markets wobbled now looks steadier. Spurred by a devaluation in 1999 and buoyant demand for commodities, exports have boomed, turning a current-account deficit into surplus. Mr Palocci has used the inflow of dollars to pay off foreign creditors, including the IMF. Soon, Brazil will no longer have to worry about a falling real driving up its debt burden. The risk premium has fallen to a record low of two percentage points.

Much of the grumbling is about the price Brazil has paid for stability. Under Lula, economic growth has averaged just 2.6% a year, barely better than the dismal average of the last 15 years. There are at least three culprits. At around 11%, Brazilian real interest rates are among the highest in the world. Government grabs an estimated 38% of GDP in the form of taxes and contributions, well above the tax take of most other Latin American economies. Even with all that revenue, central government investment has shrunk to a derisory 0.5% of GDP. [...]

The next president should disentangle state sales taxes, restructure trade unions and “update” labour law to make it “less burdensome for an employer to hire a worker”, Lula says.

How do you say Third Way in Portugese?

Posted by Orrin Judd at March 7, 2006 12:58 PM

terceiro meio...I think.

Posted by: Bartman at March 7, 2006 2:12 PM

Or terceira maneira. Or terceira via. Or, borrowing from de Soto, terceiro caminho.

Posted by: Jorge Curioso at March 7, 2006 8:38 PM

Or terceira maneira. Or terceira via. Or, borrowing from de Soto, terceiro caminho.

Posted by: Jorge Curioso at March 7, 2006 8:38 PM

He's playing for regional power, and refused to let the IAEA to take a look at their nuke plants, they supposedly have some technology, IIRC.

Posted by: Sandy P. at March 7, 2006 9:29 PM