Brazzil
Nation
March 2003
Most of the schools have resumed their classes and in spite of the heat and periodic flooding, life is returning to its normal pace. Congress met briefly to confirm their salary and benefit increases and elect the presiding officers of both houses and committee chairmen. They are expected to reconvene February 17.
Lula and his ministers have acted quite responsibly since a few minor mishaps in early January. There exists a general feeling of good will toward his government even from segments of the society that a few months ago were aghast at the possibility of Lula's becoming president. A second cabinet meeting took place and differently from the first this one resulted in no gaffes on the part of ministers.
The main complainers are the radical elements of Lula's own Workers Party or PT. Since little else is happening locally, the press has given ample attention to these internal problems of the party. The radicals are themselves divided, but their main gripe is that on the economic front, Finance Minister Antonio Palocci seems to be following many of the sensible policies of his predecessor Pedro Malan.
The PT would like to maintain unity in order not to undermine their legislative base, which is quite fragile. As time goes on and Congress begins to function, I expect to see more sparks flying that will hinder progress in making changes that require legislation and/or constitutional amendments.
Inflation has been in excess of 2 percent per month for the last three months, but may be subsiding. It will quite difficult to keep it within the stated target of 8.5 percent for the year, in my opinion. Most of the blame is placed on the weakening of the real in the months leading up to the presidential election. Fears that Lula would "turn over the table" caused investors and speculators to short the real and hedge causing a run up in the value of the dollar that now seems to be stabilized in the US$1=R$3.50-3.60 range.
However fuel prices have increased causing transportation costs also to rise. The utilities will also be granted price increases adding to the burden of meeting bills especially among those who earn little, the vast majority of Brazilians. It would be wise for Lula to try and push for the urgent reforms before his popularity erodes because of inflation. He is still riding a crest of popularity due to his homey style and the Zero Hunger program that helps a few people in the state of Piauí.
Financial markets have begun to open up for Brazil, displaying a certain degree of confidence in what the government intends to do. Citibank announced that it would be renewing loans maturing this month and may add as much as $200,000,000 in new credits to finance foreign trade. A few banks and blue chip corporations that export have successfully placed overseas bonds and promissory notes for tenors not exceeding a year at interest rates up to 7 percent.
This has contributed to the stability of the real. The final investors in these instruments are more probably Brazilians with money abroad, who can access the potential risk, rather than the dentist in Stuttgart, the lawyer in Bologna or the retired schoolteacher in Kansas. The near term future of Brazil is still uncertain in no small way due to the specter of a war over Iraq.
The original proposal for the promised reforms of social security and pension benefits for government employees has already been watered down due to pressure from special interest groups. If and when Congress votes the changes, their positive effects will not be felt in the government budget for several years. This may displease the International Monetary Fund (IMF) and investors and creditors.
An IMF mission arrived in Brazil in February for a sojourn of two weeks or more. They will be examining statistics to see if Brazil lived up to its commitments last year. Except for inflation, a goal that was exceeded, things look acceptable. Palocci has announced voluntarily that a target for the primary surplus has been raised from the current 3.75 percent of GNP to 4.25 percent.
This will help in extending the easy relationship that has been established by the new government and the IMF. Brazil may ask that the expenditures for "investment" on the part of government owned companies such as Petrobras and Electrobrás be excluded from the calculations. This would free up more funds for social programs. I doubt if the IMF will accept this mechanism.
Recent articles in the Brazilian press have pointed out that taxation here is among the highest in the world as a percentage of GNP. The income from four months' work goes to pay local, state and federal taxes. Only the Swedes and Germans pay more of their income to their governments. What Brazilian taxpayers receive in return are decrepit schools and hospitals, underpaid teachers, poor streets and highways, inadequate public transportation and a complete lack of personal security.o Most of tax receipts go to pay active government employees and the absurdly generous pensions of retired judges, legislators and employees of all three branches of government.
Many of the states are in flagrant violation of the Fiscal Responsibility Law. One of the worse offenders is Itamar Franco, ex president and most recently governor of Minas Gerais. In keeping with old habits of impunity, in stead of being punished and publicly disgraced, Itamar will be rewarded with the ambassadorship in Rome, one of the most coveted overseas posts. Franco's ability as a diplomat was tested when Fernando Henrique Cardoso made him ambassador to Portugal. He amused and disturbed his neighbors in Lisbon by raising chickens in the back yard of the posh embassy residence. It seems that Lula and Cardoso have one thing in common and that is to have Itamar as far away from Brazil as possible. Franco wanted to be named ambassador to Argentina but was refused by Lula since this is an important post in the scheme of things and is also close by.
José Sarney, another former president who seems unwilling to gracefully fade away, will be attracting attention since he was elected president of the senate. Sarney, whose clan has controlled the backward state of Maranhão for nearly forty years, is currently a senator from the thinly populated state of Amapá, where I doubt if he has ever spent more than a few days. His daughter, at the time governor of Maranhão who was expecting to run for president, was involved in a yet to be explained scandal involving heaps of cash that were discovered in a safe of a company belonging to her and her husband. Sarney was peeved about the slandering of Roseana and blamed this investigation on José Serra, who also wanted to be president.
This caused José Sarney to throw his support in the presidential election to Lula, who had been a very vocal adversary when he was in the opposition and Sarney as president. Lula coerced the PMDB to nominate Sarney for president of the senate. His daughter was elected as a senator from Maranhão by a wide margin and the senate will be presided by a man who is there through a process of political intrigue after having been elected to the senate in the first place by a handful of voters. Such is democracy in the tropics. Whether Sarney can unite the unruly senate to act on the desperately needed improvements in tax and social security legislation, remains to be seen.
The next weeks may witness some executive measures and legislative activity before things shut down again for a week or more for Carnaval. Ash Wednesday is March 5 so serious business will only begin the week of March 10 unless Lula, who himself is a hard worker, can inspire some discipline and a sense of responsibility in Brasília.
Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. During the past thirty-eight years, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br