The logo of Lula’s Workers Party (PT) is a telltale red star, but his landslide win was no triumph of the ideological Brazilian left. In last month’s state and congressional elections, for example, the PT garnered well below half the votes Lula received in the presidential balloting. Rather, it was an indication that crowd-pleasing populists–who want to bring back the state as an economic catalyst–are again in vogue as Latin America stumbles through a prolonged economic slump. More pragmatic than their predecessors, the new populists recognize the angst of working people who don’t feel they’ve benefited much, if at all, from privatization and fiscal austerity.
Against that backdrop, Lula’s feel-good vision of more jobs, higher wages, bigger pensions and better health care excited the voters. A similar vision helped Hugo Chavez crush his rivals in Venezuela’s 1998 general election, and both candidates in the presidential runoff vote in Ecuador this month are preaching the populist gospel. The winner of the Peronist party’s presidential primary in December will be the odds-on favorite to sweep elections in Argentina next year.
But experts say the new populists will have a tough time fulfilling their rosy promises–for the same reason that prompted them to make them in the first place: the region simply doesn’t have the money. And while Latin America’s frustration with its dependence on volatile international capital markets is understandable, even the new crop of pols are beginning to realize that there really isn’t a happy alternative. “We come out of a tradition where the state was huge, and some would like to bring back the old welfare state,” says Eduardo Gamarra, the head of Florida International University’s Latin American and Caribbean Center. “But leaders in the region can’t afford to do that because there are constraints on going overboard in public spending.”
That’s the catch for Lula and other like-minded Latins on the left. Because the old, free-spending ways are no longer viable, they must now reinvent themselves as fiscal conservatives. But that opens them up to charges of betrayal from their followers when they fail to deliver on their pledges of plenty. That’s a lesson that Venezuela’s Hugo Chavez never fully grasped. He came to power on a tidal wave of voter discontent and a commitment to narrow the gap between rich and poor. Chavez spent hundreds of millions of dollars in oil revenues on ill-conceived welfare schemes. But when his leftist-flavored “peaceful revolution” didn’t cure the country’s assorted economic ills, Chavez’s approval ratings went into free-fall. Now he’s so beleaguered and isolated that he can’t stop active-duty Army generals from publicly calling for his resignation, and most independent observers think he’ll be gone well before his term as president ends in 2007.
For a variety of reasons, Lula is unlikely to go the way of Chavez. Although Brazil is bowing under a $270 billion debt burden, the economy is bigger, sounder and more diversified than Venezuela’s or Argentina’s, both of which are suffering through major depressions. Under the standby agreement that Brazil clinched with the International Monetary Fund in August, the Lula government will have to maintain a primary budget surplus of 3.25 percent to qualify for the $24 billion in fresh loans that the IMF is supposed to provide next year. Lula has pledged to honor Brazil’s obligations to international creditors, maintain the budget surplus and keep inflation low. Driven largely by agribusiness, Brazil posted its largest-ever monthly trade surplus in September, and analysts say the country may rack up a record $20 billion surplus next year. That could ease the country’s need for high-interest-rate foreign loans–and help stimulate genuine growth.
Most important, Lula seems to understand his predicament. He candidly told supporters last month he was no miracle worker. Tacking toward the political center, he has dropped talk of doubling the $53 monthly minimum wage in the next four years. He won’t even listen to the pleas that he use federal funds to bail out debt-ridden state governments, which could bust the budget. Ironically, too, his leftist credentials may give Lula more leeway with impatient voters than a conservative politician might have enjoyed, at least at first.
The Lula Lite image has thus, for the moment, reassured the markets. They certainly panicked in the late summer over the prospect of a Lula victory. But last week the Brazilian real strengthened against the dollar, and fears eased over a possible default on the country’s huge foreign and domestic debt. U.S. Treasury Secretary Paul O’Neill was the most prominent Lula skeptic. Never the diplomat, he predicted that the markets would scrutinize the president-elect’s selection of economic advisers to make sure “he is not a crazy person.”
Lula, however, can’t afford to be just a darling of Wall Street. The last thing his constituents want is more of the stringent policies that dogged the second half of centrist Fernando Henrique Cardoso’s eight-year presidency. Lula’s proposals to hike social security pensions, boost the defense budget and carry out genuine land reform in rural areas will therefore come back to haunt him. “Lula made too many promises during the campaign, and not everybody is going to be satisfied,” says Daniel Gleiser of the European investment bank Dresdner Kleinwort Wasserstein.
Brazilians, and Latin Americans in general, may simply have to be patient. As Pedro Lacoste, the cofounder and partner of the consultancy APL Economia in Buenos Aires said last week, the region must strive for “sustainable growth,” and for that “there are no shortcuts.” The region as a whole is expected to grow by less than 1 percent next year, according to a forecast from JPMorgan. With the bearish world economy, investors have abandoned emerging markets in droves. Private-capital flows to Latin America have fallen from a high of $326 billion in 1996 to an estimated $128 billion this year, the lowest figure in a decade.
The grim picture is likely to prolong the collective sense of grievance at the grass-roots level of Latin American society. Reform was the byword of the 1990s: virtually every Latin American government overhauled its economy-lowering tariffs, promoting exports, bringing inflation under control and shedding hundreds of money-losing state companies. But the promised bounty of new jobs and investment that was always supposed to be part of the deal has been disappointing. The buoyant optimism sweeping through the hemisphere 10 years ago has been replaced by a resentment of foreign bankers and neoliberal economists who supposedly sold the locals a bill of goods.
The term neoliberal, in fact, has become a dirty word in the political lexicon of Latin America. “People are clearly frustrated with the performance of the economy in the last several years, and many are attributing that to the [free-market] model,” says Princeton University economist Jose Alexandre Scheinkman. Signs of the regionwide malaise flared in the Ecuadoran capital of Quito last week, where riot police fired tear gas at young protesters demonstrating against U.S. government proposals to create a free-trade bloc of the Americas.
Critics of the Washington model say that many governments in the 1990s went too far in opening up their economies to the outside world. But others charge they didn’t go far enough. The results were predictably muddled. Corruption flourished under Argentina’s Carlos Menem despite the importance that free-trade advocates placed on clean government. Mexico took seriously the recommendation to diversify its export sector, and oil now accounts for only 10 percent of the country’s annual export earnings. But Venezuela never tried to curb its addiction to oil, which still accounts for 85 percent of its export revenues. Among major countries, only Mexico and Chile consistently receive high marks as foreign-investor-friendly markets. “The Washington consensus is merely common-sense prescriptions that are practiced all over the world in varying degrees,” argues former Peruvian finance minister Pedro-Pablo Kuczynski. “But other than Chile, no one did much to reform the state and deregulate the economy.”
Brazil, Latin America’s largest economy, is not quite as unstable as most of its neighbors. Cardoso has done much to improve Brazil’s international standing over the past decade, and the people are rightly loath to lose some of the gains they’ve achieved in recent years–stable prices, an improved telecommunications system and a life less cluttered with red tape. Most Latin Americans recognize the need for more access to the global marketplace, not less. The new leaders of the anti-neoliberal backlash will probably have no choice but to quietly embrace that which they instinctually oppose–more market reforms.
But it’s not simply about catering to “the market.” Experts say that to create the conditions for lasting economic growth, more domestic institutional change is paramount–improved tax collection, better education systems, less corruption. Albert Fishlow, director of the Institute of Latin American Studies at Columbia University, says that there is a “simple” way for the region to wean itself from unforgiving foreign investors. “Latin America must increase its domestic savings rate, which has not kept pace with other regions, and increase substantially its rate of exports. It’s not very complicated.”
If only that were true. While Brazil might sidestep a debt default, Lula will be under intense pressure to generate new jobs and boost social programs. That in turn could lead him to print money and rekindle runaway inflation–Brazil’s longtime economic scourge. That is the perennial temptation in Latin America. “The choice for Lula will be either to persevere in the direction of reform or revert to the populist policies that Brazil experienced in the past,” says Amaury de Souza of the So Paulo-based MCM economic and political consulting firm. No one knows that better than Brazil’s first-ever working-class president. From the earliest days of his campaign, he often ended his stump speech with a single, telling refrain: “I can’t make a mistake.” That’s only a slight exaggeration.
