Snatching defeat from the jaws of victory? Lula, the 'losers' alliance', and the prospects for change in Brazil (1).

The Brazilian Workers' Party (PT) won a resounding victory in the presidential elections in October 2002. Its candidate, Luis Inacio Lula da Silva (Lula) received 40m votes (46.4%) in the first round, and 53m (61.3%) in the second round of the elections. His nearest rival, Jose Serra, a former minister in F.H. Cardoso's administration (1994-2002), was beaten by 20m votes in both rounds. (2)

The new president, a former lathe operator and trade union leader, commands nearly universal appreciation. He has been feted by the international left as well as the US government, the IMF and the World Bank, and he is probably the only person ever to be cheered both in the Davos World Economic Forum and the Porto Alegre World Social Forum. This can be explained by Lula's impeccable leftist credentials and personal integrity, and by his adoption of a thoroughly neo-liberal economic programme. This article examines the reasons for continuity and the scope for change during the new administration.

Neo-liberalism in the 1990s

Since the late 1980s successive Brazilian administrations have followed the standard neo-liberal-globalist policy menu. These policies included financial, trade and capital account liberalisation, large-scale privatisations, economic deregulation and monetary stabilisation though the 1994 Real plan. (3) Brazilian neo-liberalism is peculiar only because of its relative lateness and gradualism. This was partly due to Brazil's protracted transition to democracy, stretching between the mid-1970s and the late 1980s, and partly due to the political resistance against the neo-liberal reforms.

Brazil liberalised its trade and capital accounts of the balance of payments only during the nineties. When the first stage of the reforms was finally completed, in 1994, the international environment was already much more hostile than in the earlier period. The Russian crisis of 1998 was especially damaging, having triggered capital outflows leading to an unsustainable balance of payments deficit (US$46.5 billion between the third quarter of 1998 and the first quarter of 1999). In order to defend the currency, the Real, the Brazilian government negotiated with the IMF and the G7 a rescue package worth US$41.3 billion. However, these loans were insufficient and, in January 1999, government support for the Real was abandoned. The currency immediately sank by 40 per cent (see Morais, Saad-Filho and Coelho 1999).

After the crisis, Brazilian economic policy shifted towards a combination of inflation targets, primary fiscal surpluses (in order to service the domestic public debt) and lower real interest rates. These changes were insufficient to restore economic growth. Between 1990 and 2002, annual average GDP growth rates were only 1.7 per cent, significantly below the growth rates of the so-called 'lost decade', the 1980s. This declining trend persists. In the meantime, the foreign debt has doubled to US$240 billion, the productive and financial sectors were largely denationalised, most state-owned enterprises were sold off at bargain basement prices, and the domestic public debt has increased from below 30 per cent of GDP to over 60 per cent. Finally, the concentration of income and wealth has remained unchanged.

Neo-liberalism, the currency crisis And exchange rate instability have triggered substantial changes in the Brazilian productive sector. Manufacturing industry, previously relatively well integrated through import-substituting industrialisation, has been fragmented and hollowed out, and key industries were absorbed by transnational capital (see Saad-Filho and Morais 2000, pp. 14-18). As a result, industry has become increasingly dependent on foreign suppliers and markets, and strategic planning has been subordinated to the global strategy of the parent companies. Finally, privatisation, often to foreign bidders, has reduced state capacity to influence industrial development, and the composition of the output. World-com, Bell South, Telefonica, Portugal Telecom and Telecom Italia have purchased parts of Embratel, the former state monopoly; Enron, AES, El Paso, Duke Energy, Iberdrola, EDF and EDP have swallowed pieces of the electricity generation and distribution systems, and HSBC, ABN-Amro, BBV and Santander have moved into the banking and financial sectors largely through their purchases of state-owned banks.

The domestic and foreign financial institutions have seized the co-ordinating and allocative roles of the state. This includes not only inter-sectoral resource allocation and the composition of investment, but also the determination of economic policy. Peculiarly, in Brazil the financial institutions exercise their influence not mainly through the financing of industry or stock market operations, but through their holdings of Treasury and Central Bank bills. Given the size and liquidity of these assets, and the government's inability to stabilise the debt-GDP ratio, a small number of financial institutions can dictate economic policy, control the sources and levels of consumption, investment and growth, and select monitary and exchange rate policies to their own advantage (see below). Ironically, the domestic public debt is not the product of state profligacy. Quite the opposite; the debt is almost entirely due to the high interest rates required to attract foreign capital and subsidise financial interests during the nineties (see Saad-Filho and Morais 2000).

In addition to these important changes in the structure and dynamics of the economy, there has been a substantial shift in the power relations within the elite. The representatives of financial capital have dislodged the industrialists, oligarchs, technocrats and the military from the state bureaucracy, and asserted their control of the state through the growing power of the Ministry of Finance and the Central Bank of Brazil. The directors of the Central Bank and the key policy advisors in the economic ministries are typically either recruited from financial institutions, or retreat to them after a stint in Brasilia. For example, former Central Bank president Arminio Fraga was hired from George Soros's New York office, while the main strategist behind the Real plan, Edmar Bacha, abandoned his prestigious academic position in Brazil for greener pastures in Manhattan.

The window of opportunity

The exhaustion of the majority (including a significant part of the elite) with F.H. Cardoso's economic policy was clear long before the elections. The failure of neo-liberalism to overcome economic stagnation was widely recognised, the government was highly unpopular, and it was agreed that the social tensions in the country were becoming intolerable. The neo-liberal camp was badly fractured. No presidential candidate was willing to defend the government's record, and Cardoso's supporters deserted his ship. Even though neo-liberalism is advocated by powerful interests, it has become indefensible except through the tired claim that 'there is no alternative'.

Lula shrewdly realised that Ins fourth bid at the presidency might be successful, and he positioned the PT accordingly. In order to contextualise fins policy shift, a brief digression is necessary. The Brazilian Workers' Party is a peculiar type of left-wing political organisation. It was founded in the late 1970s by a coalition of trade unionists, left intellectuals, Catholic activists and Trotskyite organizations fighting against the military dictatorship. (4) The PT was never a Marxist organisation, and it was embroiled in bitter conflicts with the traditional communist parties--until the mid-1980s, when the PT became hegemonic in the Brazilian left and the rival organisations became its satellites. The PT has traditionally been to the left of the European social democracy, even identifying 'socialism' as a strategic goal (the meaning of which was never made very dear). However, after Lula's defeat in the presidential elections of 1989, 1994 and 1998 the ruling 'Sao Paulo group' has imposed an increasing degree of control over the party. Radical leftists were either expelled or (by and large) cowed into submission, and a small group of cadres around Lula has shifted the party's goals towards winning local elections, managing local government 'efficiently', and preparing the organisation for national power.

In 2002, although the party's discourse still emphasised 'change', the PT carefully avoided any specific commitments. Lula's programme and TV advertisements were emotionally charged but politically vacuous. Lula was already leading the opinion polls six months before the elections. In the meantime, the other three main candidates struggled to attract the interest of middle classes, which might allow them to lead a right-wing coalition against Lula in the second round.

Capital attacks

Brazilian and international financiers were increasingly concerned not only with their potential loss of leverage over policy-making, should Lula win, but also with the possibility of default or compulsory rescheduling of the public debt by the new administration. In the first quarter of 2002 the financial institutions were already demonstrating their concerns, and their clout, by refusing to purchase government bills maturing after 31 December (the last day of Cardoso's presidency). The weekly open market auctions became largely fruitless, as brokers demanded rising interest rates to roll over the government debt. If higher rates were not forthcoming the brokers liquidated their positions and shifted funds to the dollar market, devaluing the Real. At the same time, their international partners repeatedly downgraded Brazilian bonds and foreign debt certificates, allegedly because of 'lack of policy credibility'. As a result, foreign banks started recalling their short-term loans and commercial credit lines, half of which were rapidly lost. The dollar rose steadily from R$1.95 in January to R$2.75 in October (inflation was only 4 per cent during that period).

The unfolding crisis had immediate political repercussions. The media howled with indignation, demanding that the presidential candidates (i.e., Lula) must guarantee the continuity of Cardoso's economic policies in order to 'calm the markets'. Eventually, exhausted by their daily tribulations and full of patriotic concern for the country's balance of payments, the Minister of Finance and the President of the Central Bank theatrically demanded on television that the candidates must 'explain' their economic programme to 'the markets'. Lula blinked. On 22 June Lula issued a 'Letter to the Brazilian People' declaring that his government would respect contracts (i.e. service the domestic and foreign debts on schedule) and enforce the policies agreed with the IMF. This limited surrender was enough to secure Lula's wobbly leadership in the polls, but it was not enough for financial capital. It now demanded institutional guarantees, especially an independent Central Bank committed to following a 'responsible' monetary policy, and a new IMF agreement spanning well into the new administration.

The possibility of a catastrophic ran on the Real was viewed with preoccupation in New York, because several large US banks were heavily exposed and would suffer substantial losses if Brazil defaulted. It is rumoured that intense lobbying took place in Washington, and generous campaign contributions were made just ahead of the crucial mid-term US elections, in order to ensure that the IMF would speedily offer Brazil a new loan. Coincidentally or not, the agreement was reached in record time and signed on 4 September 2002. It states that:

   a combination of a worsening
   external environment and increased
   uncertainty among investors about
   the future course of economic
   policies has led to a deterioration in
   financial market variables in recent
   months. The ... new Stand-By Arrangement
   with the Fund ... [is] designed
   to safeguard economic stability, and
   provide a frame work for the continuity of
   core macroeconomic policies next year
   [under the new administration]. (5)

The Brazilian government also agreed to submit a constitutional amendment granting independence to the Central Bank. In exchange, the IMF offered US$30 billion, of which only US$6 billion would be available immediately. The rest would be offered to the new government, but only if its economic policies conformed with IMF expectations. Faced with the prospect of an immediate economic meltdown, Lula signalled his agreement. His consent opened to the Workers' Party the doors of financial institutions and conservative governments around the world.

The 'Losers' Alliance'

At the party political level, Lula was supported by the reformist Communist Party of Brazil (PCdOB) and the non-descript Liberal Party (PL) (see Saad-Filho 2003). However, in order to understand Lula's victory we must review the social composition of his voters.

The PT is traditionally supported by the unionised urban and rural working class, including not only skilled and semi-skilled manual and office workers, but also the lower ranks of the civil service, sections of the professional middle class and many informal workers. In addition to them, a range of disparate forces and interests also voted for Lula in 2002. All they had in common was the experience of losses under neo-liberalism. For example, several prominent manufacturing capitalists supported Lula hoping that his government would implement a nationalist and expansionary economic programme in order to restore growth, reduce the debt burden of productive capital, and minimise exchange rate volatility. Typically, Globo, a reactionary and heavily indebted media empire, ditched the official presidential candidate and supported Lula, hoping that his administration would help the corporation avoid bankruptcy.

Many reactionary regional oligarchs also supported Lula. They had been squeezed out of their influential positions in Brasilia by the growth of financial interest, and had been starved of 'development' funds by the fiscal austerity measures required by the neo-liberal reforms. Finally, the oligarchs felt betrayed by Cardoso and Serra in the run-up to the elections. By switching their support to the PT, the oligarchs rightly anticipated that Lula would depend heavily on their support in Congress and the State Assemblies, thus maximising their political power and influence.

The Brazilian urban middle class is relatively small but it exercises a disproportionate electoral influence because of its economic power and influence on the media and the work-place. This group is deeply heterogeneous and, in 2002, its support was divided across the main candidates. By and large, the middle class was disappointed with neo-liberalism and felt deceived by Cardoso. It was also badly hit by declining incomes and the vanishing prospect of 'good jobs' for themselves and their children, especially in the civil service and the state-owned banks. However, the urban middle crass also feared Lula's 'left-wing radicalism', and rejected any potential break with the 'globalised world' that it had only recently joined.

Since it was impossible to synthesise the conflicting expectations of this 'losers' alliance' into a coherent government programme, the PT evacuated Lula's manifesto of concrete commitments, and appealed to pious sentiment and clever advertising instead. This tactic worked brilliantly during the campaign. However, its triumph implies that Lula has received an unclear mandate. The disparity between his massive support and the distribution of seats in Congress, where the PT and its dependable allies hold only a minority of seats, shows that whereas hope is high on the agenda, radical changes are not unambiguously popular.

The new administration

Lula's election is, in part, a reflection of the failure of the neo-liberal policies imposed across Latin America since the mid-1980s. The election of Venezuelan president Hugo Chavez was the first clear sign that the peoples of the region were exhausted, and were looking for alternatives. The popular revolts in Ecuador and Bolivia, and the Argentine collapse, have reinforced this tendency. The frightful implications of the meltdown of the Argentine economy, and the difficulties faced by Chavez, were-interpreted by Lula as a warning against 'voluntarism'. From this point of view, the US strategy of confrontation--for example, facilitating the attempted coup against Chavez, intervening militarily in Colombia, and so on--has been successful because it has limited the capacity of Latin American governments to implement alternative policies.

These limitations are clearly visible in the Brazilian case. Although the PT remains, by and large, a left-wing mass party, Lula's government is not implementing a progressive programme. Lula leads a centre-left administration attempting, on the one hand, to introduce an ambiguous programme of social and economic reforms and, on the other hand, seeking to preserve its own credibility with 'the markets' and, thereby, guarantee the solvency of the state. This is a reflection of the fundamental ambiguity of the new administration; Lula was elected by voters demanding change, but key groups of supporters are unwilling to bear the costs and implications of change. The elite hopes that Lula will be a 'Third Way' president, able to contain social conflicts through his personal authority, and to manage the economy more 'efficiently' than Cardoso's neo-liberals. The left expects the government to spearhead a programme of social integration and distribution of income and wealth breaking with five hundred years of history. These conflicting aspirations can be made compatible only to a limited extent. Specifically, it remains to be seen to what extent the elite is willing to pay for the creation of a democratic welfare state in Brazil.

It will be very difficult to break with neo-liberalism. However, if the government and the majority work together to erode elite resistance against distributive policies and a pro-poor growth strategy, and to weaken the grip of the financial markets, change would become possible. The point, then, is the extent to which Lula and his allies are prepared to undermine the coalition that has elected them only recently, in order to create the political conditions for economic change. This is a risky prescription. Although a military coup is unlikely, there is more than one way to dismiss a president. Fernando Collor was impeached in 1992, ostensibly for corruption, but in fact because he trampled carelessly upon powerful interests in pursuit of a 'modern' agenda. Lula must play his cards carefully. However, excessive caution--as he has displayed until May 2003, when this article was written--will disappoint and alienate his traditional supporters, who will be needed in any confrontation against the neo-liberal consensus. In the meantime, the clock is ticking. Lula's neo-liberal policies and the economic stagnation in Brazil and its principal markets will inevitably erode the goodwill granted to the new administration. Turbulence in the balance of payments or fiscal arenas will require fundamental decisions to be made, not only by the government, but also by Brazilian society.

Notes

(1.) We are grateful to two anonymous referees for their helpful comments.

(2.) The most important candidates were Lula (Workers' Party), Jose Serra (Brazilian Social Democratic Party, PSDB), Ciro Gomes (Popular Socialist Party, PPS), and Anthony Garotinho (Brazilian Socialist Party, PSB). Two other candidates represented small Trotskyite organisations.

(3.) For an overview, see Saad-Filho (2003), Saad-Filho and Mollo (2002) and Saad-Filho and Morais (2000, 2002).

(4.) See Branford and Kucinski (1995, 2003) and Fernandes (1991).

(5.) Brazil--Letter of Intent, Memorandum of Economic Policies, and Technical Memorandum of Understanding, August 29, 2002, http://www.imf.org/external/np/loi/2002/bra/04/index.htm, paragraph 26 (emphasis added).

References

Branford, S. and Kucinski, B (1995) Brazil Carnival of the Oppressed--Lula and the Brazilian Workers' Party. London: Latin America Bureau.

Branford, S. and Kucinski, B. (2003). Politics Transformed--Lula and the Workers' Party in Brazil. London: Latin American Bureau.

Fernandes, F. (1991) O PT em Movimento. Sao Paulo: Cortez.

Morais, L., Saad-Filho, A and Coelho, W. (1999) 'Financial Liberalisation, Currency Instability and Crisis in Brazil: Another Plan Bites the Dust', Capital & Class 68, pp. 9-14.

Saad-Filho, A. (2003) 'New Dawn or False Start in Brazil: The Political Economy of Lula's Election', Historical Materialism II (I), pp. 3-21.

Saad-Filho, A. and Mollo, M. (2002) 'Inflation and Stabilisation in Brazil: a Political Economy Analysis', Review of Radical Political Econimics, 34 (2), pp. 109-35.

Saad-Filho, A. and Morais, L. (2000) 'The Costs of Neomonetarism: The Brazilian Economy in the 1990s', International Papers in Political Economy 7 (3), pp. 1-39.

Saad-Filho, A. and Morais, L. (2002) 'Neomonetarist Dreams and Realities: A Review of the Brazilian Experience', in P. Davidson (ed.) A Post Keynesian Perspective on 21st Century Economic Problems, Cheltenham: Edward Elgar, 2002.

Lecio Morais is Economics Advisor, Camara dos Deputados, Brasilia, Brazil.

Alfredo Saad-Filho is senior lecturer in Political Economy of Development in the Department of Development Studies, SOAS, University of London.