WSJournal 10/28/2002 What Lula Wants
Heavily favored Worker's Party candidate Luis Inacio "Lula" da Silva won hands down in Brazil's run-off election yesterday, making him the first avowedly left-wing president in the history of South America's largest economy. But as Mark Twain once said of Wagner's music, we can hope this isn't as bad as it sounds.
A limp economy and rising joblessness and poverty are today squarely on the shoulders of Lula, a child of the Brazilian slums and former metal-worker who has spent his political career denouncing the establishment. Now he is the establishment.
Most Brazilians who voted for Lula aren't asking for a socialist revival but simply want a better life. If he's to satisfy those hopes, Mr. da Silva will have to revive growth and investment. There are already signs that he understands this; he stopped demagoguing private markets a few weeks ago. Perhaps he has learned even more than he's let on.
The troubles Lula inherits are daunting, so it's worth remembering that in economic policy timing matters. We'd submit that as much as creating budget surpluses would appease the International Monetary Fund, Brazil won't revive growth until it first re-establishes currency stability. Inflation fears, which have a long history in Brazil, are the main cause of its vicious cycle of capital flight, high interest rates, ballooning debt and fiscal imbalance.
Conventional wisdom holds that Brazil's latest crisis began when the far-left, anti-market Lula emerged as a serious presidential contender. But we'd suggest that Brazil was an accident waiting to happen since it abandoned its fixed exchange rate in 1999 and floated the real under a central bank that lacked independence.
The market panic about Lula, after all, reflected a standard and not unreasonable dread: that governments, when they get into fiscal trouble, will ask their central banks to print money to finance debt. Lula's promises of more social spending and more recent suggestions of state debt restructuring make these fears more real.
He can counter these fears first by endorsing central bank autonomy, at least partially insulating it from political meddling. Second, Lula could back a monetary rule that goes beyond the current policy of inflation targeting, a system that hasn't worked since the panic began earlier this year.
The IMF prescription of fiscal austerity and a falling real has been a disaster. Lula will need fortitude to challenge the IMF's monetary stance because it's holding out the promise of $24 billion if he swallows the Kool-aid. But on its current path there is little reason to believe that private foreign capital will return to Brazil even with the IMF cash. The country is likely to find itself chasing a downward spiral and Lula will end up squandering any public goodwill by pursuing unpopular spending cuts.
One hopeful portent is that Lula understands inflation. As a labor leader during Brazil's military dictatorship (1964-1988), he came to prominence by fighting for inflation adjustments in wages. Who better to fight currency depreciation than someone from the working class poor who suffer most from the ravages of inflation?