Can President Lula redeem democracy
in Latin America?
inauguration of Lula (Luis Inácio Lula da Silva)a trade
unionist and one of the founders of the grass-roots Workers Partyas
President of Brazil on January 1 of this year marked a watershed
in the history of both Latin America and Brazil. Since the early
1980s, when democracy was restored in Argentina, Brazil, and Uruguay,
Latin America has been suffering its gravest crisis. The years
following that restoration combined relative political stability
with a deep economic trouble, marked by high levels of external
debt and inflation. In the late 1990s this situation deteriorated
sharply. Colombia has been torn apart by civil war; economic chaos
in Argentina has led to political chaos; the Chávez adventure
in Venezuela triggered a logic of mobilization and counter-mobilization,
sending that country to the brink of civil war.
The current mix of economic and
political upheaval has had a profound and disturbing impact on
future prospects in the region. One measure of the danger comes
from the Latinobarometroa nonprofit organization that has
conducted polls in Latin American countries since 1996. A recent
survey showed that support for democratic government dropped from
60 percent to 48 percent between 2001 and 2002. Moreover, the
number of people who think that democratic and authoritarian governments
are the same increased from 17 percent to 21 percent. In 2002,
68 percent of Latin Americans distrusted those in charge of political
In Latin America democracy itself
is now under challenge. Brazil under President Lula, with his
promise of economic recovery and a traditional left platform for
social reform, has emerged as the great test case for democratic
possibility and democratic commitment.
Through the 1990s Brazil managed
to escape the worst aspects of the regions economic crisis.
Four factors distinguish Brazil from other Latin American countries
and help to account for its relative success.
First, the size and diversity of
its internal market meant that Brazil had greater capacity than
other countries in the region to deal with the debt crisis of
the early 1980s. In particular, the nature of the internal market
meant that it could continue for a longer time with an economic
strategy of import substitutionof shifting from
imported manufactures to domestically produced goods.
Second, because the Brazilian public
sector was more efficient and productive than its Latin American
counterparts, particularly in Argentina and Mexico, Brazilian
society was more resistant to neoliberal policies of privatization
and reduced public spending, which were introduced selectively
during the presidency of Fernando Henrique Cardoso (19942002).
Today the Brazilian state still owns Petrobras, considered one
of the more efficient oil companies in the world, and Banco do
Brasil, which is first in the ranking of Brazilian banks. In addition,
the state developmental bank, BNDES, has more resources than the
multilateral Inter-American Development Bank, and the size of
its resources has permitted the state to retain some control over
Third, Brazil has a more organized
society, from trade unions to middle-class associations to opposition
parties. A dense civil society, as students of democracy from
Tocqueville to Robert Putnam have emphasized, fosters better politics.
Because of the high levels of association Brazil was less vulnerable
to such political disasters as the Chávez adventure in Venezuela.
<0.830000>Finally, the Brazilian
right was discredited by the impeachment of President Fernando
Collor de Mello in 1992. Collor was forced to leave office on
grounds of massive personal corruption; his resignation put the
conservative sectors on the defensive and pushed them into an
alliance with Cardoso, a political centrist. As a result, Brazilian
neoliberalism was more moderate and therefore less disastrous
in comparative perspective. 0.830000>
These differences help to account
for the course of the Cardoso presidency. Cardosos 1994
election was the result of a decade-long crisis of Brazils
traditional conservative sectorsa crisis that followed the
collapse of military rule. Established after a 1964 military coup,
the Brazilian authoritarian regime was different from the dictatorships
in Chile and Argentina: it did not close Congress, and it had
a party (the Arena) to support it. Still, by the mid-1980s the
political forces behind the dictatorship were substantially discredited.
And with the end of military rule and the 1984 campaign for direct
presidential elections, the Arena imploded, creating the PFL (Party
of the Liberal Front), which became the most important bastion
of Brazilian conservative sectors. However, the PFL itself was
badly wounded by the Collor impeachment and sought to escape its
troubles by allying with Cardosos Brazilian Social Democratic
Party (PSDB). Despite early opposition from prominent members
of the PSDB, the alliance with the PFL allowed Cardoso to win
the 1994 elections against Lula.
Between 1994 and 1997 Cardosos
government took advantage of a favorable international situation
(including a strong U.S. economy) to stabilize the currency, introduce
the real (Brazil had two currencies between 1986 and
1994, the cruzado and the cruzeiro), and
pursue neoliberal economic reforms: privatizing large companies
such as Vale do Rio Doce, the Brazilian steel-mining company;
breaking the state monopoly on oil production; and privatizing
telecommunications and part of the state-run electricity sector.
Some troubling signs appeared even with this first wave of reformseconomic
growth was slower than the government had envisioned; it was associated
with a sharp process of deindustrialization, particularly in the
state of São Paulo, where the number of unemployed grew steadily
from 1994 to 1997, rising to more than one million.
With the 1997 Asian economic crisis,
Brazils situation grew significantly worse. The Brazilian
real was under speculative attack for all of 1998,
when Cardoso ran for reelection. Within weeks of his second inauguration,
in January 1999, Cardoso fired the Central Bank president and
devalued the currency. In one month the Brazilian real
devalued around 80 percent, leading to a similar increase in the
government debt, which was heavily indexed to the U.S. dollar.
A political crisis followed, marked by doubts about the governments
capacity to service its debt. Those doubts were fueled by the
fact that neither tax revenues nor inflation were significantly
altered with the devaluation. The IMF, which was already working
with the Cardoso government, proposed that the Brazilian state
respond to the growing debt by running a 3 percent primary
fiscal surplus (fiscal surplus less interest payments).
Cardosos government was hostage to the primary fiscal surplus
from that point forward. Combined with the crisis of the Brazilian
electric sector, this sharply limited economic growth during Cardosos
second term (19992002).
The crisis of the electric sector
is a good example of the drawbacks of Brazilian neoliberalism.
Brazils electric system is based on hydroelectric power.
Between 1960 and 1990 the country built one of the worlds
most cost-effective systems of electric-power generation. Energy
from Brazilian dams cost around $7 a kilowatt, whereas in Europe
the price is around $70. In addition, hydroelectric power is renewable,
and the entire Brazilian system is already paid for. When the
Cardoso government decided to privatize electricity it took two
contradictory steps: first, it broke up an integrated system of
generation and distribution of energy and kept only the less-profitable
component in public hands (moreover, the distribution companies
in Rio de Janeiro, São Paulo, and the south of Brazil were
sold before the devaluation, and the government signed contracts
indexing their remuneration to the U.S. dollar); second, the IMF,
seeking to boost privatization, included government companies
in the fiscal surplus target. Thus, the government could cut investments
in electricity and oil and the money saved by these companies
would be accounted as state fiscal surplus. This strategy meant
sharp cuts in energy generation investments, and by the beginning
of 2001 Brazilians were paying a huge amount of money for energy
and facing shortages in the major cities. The government responded
by rationing electricity, which reduced economic growth, investment
in the economy, and the entrance of foreign capital.
The crisis of the electric sector
damaged the economy and, perhaps more importantly, shook the countrys
belief in neoliberal economic policies. Neoliberals in Brazil,
as in Latin America more generally, argued that privatization
would bring greater efficiency and planning to the economy. But
Brazilians saw the opposite: the population as a whole was paying
more money for the same or less service, and investments were
shrinking. The final blow came in December 2001, when it turned
out that the contracts the Cardoso government had signed with
the power companies required a price adjustment in case of declining
consumption. Thus, the reduced energy consumption in 2001 simply
meant that Brazilians would have to pay more for energy in 2002.
The energy crisis changed public opinion about privatization,
which now looked bad in terms of distribution, growth, and competence.
appeared on the Brazilian political scene in the 1970s as a metalworker
and trade unionist who insisted on trade-union autonomy from the
state. Under the authoritarian regime the ministry of labor was
allowed to interfere with the affairs of unions and labor courts
to decide wage disputes between workers and owners. In 1978 and
1979 Lula led the two largest challenges to the regimes
policies. In the latter case the government intervened in the
São Bernardo Trade Union and arrested Lula for violating
the National Security Law. These experiences convinced Lula and
the São Bernardo group that the interests of Brazilian workers
required a new political party. Also in 1979, an amnesty brought
back to Brazil a number of exiles, including left-wing militants
such as Jose Dirceu (now Lulas chief of staff) and church
militants such as Herbert de Souza (Betinho). 0.000000>0.800000>1.000000>
Formed in 1980, the Workers Party
(PT) brought together union activists, base militants of the Catholic
church who saw the need for a new political project, and left-wing
militants, in particular those who had returned from exile. In
1982 Lula ran for governor of São Paulo and won roughly 10
percent of the votes. On the national level, however, PT performance
was poor, and in most states electoral support ran under 2 percent.
In the second half of the eighties, PT electoral performance improved,
and in 1988 it won elections in several capitals, among them Porto
Alegre and São Paulo. These early signs of electoral viability
were confirmed the following year, when Lula made it to the final
round of presidential elections against Collor de Mello. The Brazilian
elite responded by using all means at their disposal, from the
police to the media. Two astonishing events took place the weekend
of the election. First, police broke into a hiding place where
a kidnapped São Paulo entrepreneur was being held; the next
day they released photos of the kidnappers wearing PT t-shirts.
Then, Brazils largest TV network, Globo, edited for its
prime-time news the last debate between Lula and Collorthough
it was clear that Lula lost the debate, no one considered his
performance to be as poor as Globo tried to portray it. Together,
the two maneuvers were enough to untie a tied election.
During the nineties the PT built
on earlier electoral successes by developing a strong record of
administrative competence at the local level. Porto Alegre, the
capital of Rio Grande do Sul, was the PTs first great administrative
acheivement. In 1990 the PT municipal government introduced participatory
budgeting, a form of public deliberation on budget priorities
with more than 20,000 people participating annually, which quickly
emerged as an effective approach to distributing basic public
goodsroads, sewers, clean waterat the local level.
Participatory budgeting was extended to 103 cities in 1997, and
it has been adopted as policy by other political parties in Brazil.
In 1994 Cristovam Buarque, the newly elected PT governor of the
Federal District, introduced a program called Bolsa Escola, a
sort of minimum-revenue policy for poor families with children
who attend school. In 1996 participatory budgeting won the United
Nations Habitat Award, and Bolsa Escola has also won several international
The PT also established
a strong record in parliament. This record was closely linked
with the anticorruption struggles of the nineties, from the Collor
impeachment to several issue-oriented campaigns against corrupt
practices that tend to be generalized in the Brazilian parliament,
including the employment of members relatives in parliamentary
offices and secret and illegal contributions to electoral campaigns.
The PT constructed a strong parliamentary record by distancing
itself from those practices and leaking information about illegal
conduct to the press and courts.
Still, Lula lost the presidency
to Cardoso twice in the 1990s: in 1994 he was defeated by the
success of the currency stabilization plan introduced shortly
before the elections; in 1998 Cardoso managed to convince Brazilian
middle-class sectors that the economic crisis had an international
component which only he had the expertise to handle. Until the
currency devaluation of 1999 and the electricity crisis, many
sectors of the Brazilian middle class were still well-disposed
to a neoliberal program.
The election of 2002 began with
a split in the ruling alliance that supported Cardosos two
electoral victories. Cardoso chose as the candidate for his succession
José Serra, his strong-tempered health minister, whom liberals
considered unacceptable. The liberals picked Roseana Sarney, governor
of the northeastern state of Maranhão and daughter of former
president José Sarney (19851990). In early March she
was running high in the polls when the Brazilian federal police,
having bugged her office, broke in to discover a safe packed up
with 1.3 million reais (approximately $500,000). Within a week
she had offered three different explanations of how the money
got there, and her campaign was all but dead.
Because of the shadow cast by traditions
of corruption and clientelism, the Brazilian right had no candidate,
which made it all the more surprising that Serras candidacy
did not benefit from Sarneys fall. Instead, Lulas
candidacy started to grow, for three different reasons. First,
Serras campaign was in trouble in part because of divisions
within the ruling alliance of liberals and Social Democratsthe
liberals were unhappy with Cardoso and Serra about the police
seizure of their electoral office. Second, the ruling coalition
lost support from a strong group of entrepreneurs who became distrustful
of neoliberalism. For example, Lulas candidacy had support
from Gradiente, a maker of electronics equipment in São Paulo.
Gradiente saw its 2001 sales fall close to zero during the period
of electricity rationing. Other São Paulo industralists followed
Gradientes lead between the first round of elections and
the runoff. Even FIESP, the strong federation which gathers São
Paulos largest industrialists, and Bovespa, the stock exchange
company, expressed neutral or supportive attitudes toward Lula
at the beginning of October. And third, Lula picked José
Alencarowner of an extraordinarily successful textile firm
and member of a small conservative partyas his running mate
and, unlike 1994 and 1998, the PT itself ran on a center-left
political platform which departed from issues such as defending
a large state-run sector or making explicit its trade-union support.
The PT chose instead to speak about support for the Brazilian
poor and state reform.
With Lula in the lead, the Cardoso-Serra
group played the fear card. Brazilians were tired of neoliberalism,
IMF-imposed fiscal surpluses, and near-zero economic growth for
two years in a row. But an even greater fear haunted Brazilians
in 2002: would they face the fate of Argentina, whose financial
system collapsed, leading to a GNP fall of almost 15 percent?
In May, Serra and other leading members of the Cardoso government
began to suggest, in public and private, that Lulas election
would put Brazil on the same path as Argentina, whose fiscal irresponsibility
and high level of foreign debt lead ultimately to default. The
remarks had nearly disastrous consequences. While the Brazilian
public seemed increasingly supportive of Lula, a ruling coalition
trusted by the markets argued that a Lula victory would turn Brazil
into Argentina. International markets responded badly.
In July 2002, short-term investors
and international lenders fled Brazil, and the countrys
risk indicator jumped from around 800 to 2,000 points. With the
economy on the brink of collapse Cardoso called the IMF, which
responded with a Sword of Damocles: Brazil would get a new credit
line of $30 billion, but only $6 billion would come that year.
The rest would arrive in 2003, provided that all candidates supported
its measures, including an increase in the primary fiscal surplus,
tight inflation targets, and friendly policies toward international
financial markets. The PT issued its declaration of support on
August 22, in what became known as the Carta de Brasilia. Lula
pointed out that the speculative attack against the Brazilian
real, the risk of outright default, and the lack of credit
for Brazilian companies required the acceptance of the IMF conditions.
In early August 2002, in an interview
in Folha de São Paulo, George Soros
said that in ancient Rome only the Romans voted. In modern
global capitalism, only Americans vote. Brazilians do not vote.
Soros was right about the power of international financial markets
in determining Brazilian economic policy, but wrong to think that
the United States could impose Serra on Brazil.
On October 26 Brazilians voted,
and Lula was elected president with more than 60 percent of the
vote. The PT also won the largest number of seats in the Brazilian
Congress, allowing it to choose the president of the lower chamber.
The following day, Lula announced in a press interview the two
main axes of his presidency: an economic policy founded on an
autonomous central bank headed by a market-friendly central bank
president Henrique Meirelles, a Harvard graduate and former
president of BankBostonand an ambitious campaign against
hunger which he called Fome Zero (Zero Hunger). In one of the
most unequal societies in the world, with millions suffering from
starvation, Fome Zero would mean extraordinary change. Can Lulas
government succeed with Fome Zero if his government sticks to
the current economic policy? And what political risks does Lula
face if he moves away from economic orthodoxy?
Lulas economic group is composed
of Antonio Palocci, a close political adviser, longtime member
of the Workers Party and PT mayor; a group of economists from
the Getulio Vargas Foundation in Rio de Janeiro (a conservative
economic think tank); and Henrique Meirelles. This group is betting
that, if they abide by the international rules, they can decrease
the countrys risk indicator from 2,500 points to less than
700 (as of May 2003, most of this drop had already occurred),
and decrease the exchange rate of the real (the value
of the dollar in Brazil has fallen 15 percent in 2003). If these
plans succeed, interest rates will fall (the current Central Bank
annual interest rate is 26 percent, and it has been above 16 percent
for two years), and, they hope, reignite economic growth and permit
the government to reduce its fiscal surplus.
So far this strategy has been working:
a recent issue of bonds by the Brazilian government was well received
by financial markets. But continued success is uncertain. Brazil
was helped by a flight of speculative capital from Turkey after
the Turkish parliament refused to authorize the United States
to use its military bases against Iraq. Moreover, it is widely
agreed that the markets had exaggerated the countrys risk
because of the political events in 2002.
But a nation that has suffered
three speculative attacks on its currency in the last five years
cannot rely on short-term attraction of capital. In addition,
Brazil will have to pay back the IMF in 2004, which means that
it will also have to face the possibility of a currency crisis
for at least the next 18 months. Thus, the issue of establishing
some form of control on movements of speculative capital will
remain on the agenda for the next year. But most PT economists
are remaining silent on this option, holding it as a last resort,
and betting on a favorable evolution of the markets view
of Lulas government.
The most pressing problems that
Lula will face are related to social programs. Brazil has a mixed
social policy structure. In two areas of social policybasic
education and public healthaccess is provided for all Brazilians.
The pension system has nearly universal access. In contrast, several
policy areas have more targeted benefits, including programs to
fight hunger and to subsidize kitchen gas access.
Lulas Fome Zero would provide
a universal approach to hunger by ensuring that poor Brazilians
have three meals a day. (Although many Brazilians would not qualify
as suffering from starvation, they do lack seguranca
alimentarfood securitywhich means that they cannot
afford three meals a day.) Fome Zero now lies at the heart of
PT social commitments: the Brazilian World Cup team wears Fome
Zero shirts, a combination of public and private resources
have been lined up, and large debates are underway about how best
to implement it (through in-kind or cash grants, by new agencies
or existing bodies). Other social projects that may assume similar
relevance in the medium term are Bolsa Escolaschool fellowship,
which guarantees minimum revenue for poor mothers who put their
children in schooland some form of democratization and accountability
of the federal budget-making process may also be introduced.
There are already some economists
within the government who are proposing to scale down the universal
access programs. These pressures are likely to create more conflict
within the PT than the adhesion to an orthodox economic policy.
The government proposal of pension fund reform, for example, shows
the kind of constraint that Lulas government will face.
The Brazilian pension fund system is a mix of different aims.
On one hand, middle class and state employees bend a few rules
to acquire enormous pensions and deplete state funds. (Thus, for
instance, military personnel pay very small contributions and
collect full benefits, which sometimes can be bequeathed to a
single heir; members of Congress collect full benefits after two
mandates (eight years); and members of the judicial system can
accumulate benefits as they advance in the court.) On the other
hand, the system provides minimal welfare for old and poor Brazilians.
In the northeast and rural areas, the countrys poorest regions,
more than six million people receive benefits. State pensions
are often the only source of income for poor families in small
cities of the northeast.
In addition, because of Brazils
inequality, life expectancies vary greatly. The pension fund system
used to have a very low age requirement for retirement (55), which
used to be the average life expectancy in the country. However,
with modernization and urbanization, life expectancy of middle-class
sectors increased to more than 75, whereas it is still around
55 in rural areas. Such an imbalance allowed the middle class
to rent seek the system. Thus, pension system reform faces three
problems: the governments willingness to withdraw privileges
from strong interests to make the public system fair; how to increase
the age requirement without making it impossible for the poor
to retire; and the legal matter of the legitimacy of retroactive
Lulas governments first
test has not gone well: its pension fund reform will impose a
contribution on retirees (which seems rightly tough but legally
problematic) and increase age requirements, without gutting some
of the most outrageous privileges. It probably will result in
conflicts with the courts and public employees and will make retirement
more difficult for the poor population. In addition, it will be
unclear how much the government will save until the courts decide
on the legality of the changes.
The large bet within the PT is
that the government will be able to invest in innovative social
programs, thus preserving Lulas enormous political capital
and perhaps easing the move toward economic orthodoxy by providing
some real benefits to the poor. Yet, if pension fund reform is
any indication of how Lula will handle social policies, his government
may eventually alienate many of the PTs constituencies.
The path between social innovation
and economic constraint will be difficult to navigate, and there
seem to be three broad possibilities for the first year of Lulas
government. In the first and most optimistic scenario the economic
situation in the Southern Cone region improves, the Brazilian
currency suffers no further attack, and the country manages slowly
to export its way out of the economic crisis that began in 1997.
As the economy improves, the government manages to reduce its
primary fiscal surplus and ensures that Fome Zero and other social
policies have the resources they need. This rosy scenario will
require a very favorable environment in which everything that
has gone wrong since 1997 turns around, including the willingness
of speculative capital and foreign investors to have an enduring
commitment to Brazil. Lulas economic team seems to be working
with this scenario, and they have had some early successes. Still,
it is hard to believe that everything will continue to go as well.
In a second, more realistic scenario,
the post1997 pattern of currency decline and flight of speculative
capital will continue and Lulas government will need to
adopt some capital controlseither controlling exit, deepening
the current process of import substitution, or combining both
types of measures. The pursuit of this strategy, however, will
likely draw strong reaction from the IMF and the U.S. government,
among others. The negotiations for the Free Trade American Area
(FTAA) are also likely to interfere here. Brazil ran high external
deficits from 1994 to 1998, in part because of the pegged currency
and an indiscriminate opening of its markets. One of the bright
spots of the recent two years is precisely the reversal of the
deficits, which neared zero with last years devaluation.
Lulas government will have to pursue a double-edged strategy
vis-à-vis the IMF and the FTAA negotiations. If too many
concessions in the area of technology and services are made with
the FTAA, it could lead to renewed deficits. Yet some kind of
concessions will have to be made in order for the IMF and the
United States to accept measures designed to halt currency devaluation
and promote a new path of sustainable economic development. With
this second path PT can preserve its social policies and implement
a program that its grass-roots constituents have hoped for.
The third scenariocombining
economic deterioration and orthodox responseis more complicated
and more risky. Here the response to currency devaluation and
capital flight would be to impose further cuts on social policies
and further constraints on the poor. A document is already circulating
in the Economics Ministry that challenges the universalization
of social policies and proposes that Brazil needs to move to more
targeted policies in all areas in order to generate a larger fiscal
surplus. This position may become stronger if the economic situation
deteriorates. If the PT moves in this direction it may lose both
the political capital Lula has acquired and the PTs social
base: Lula would look like a Brazilian version of Argentinas
Fernando de la Rua. This is the largest risk that Lula and the
PT face today, and it may require that they put a halt to orthodox
economic policies at some point. At precisely what point this
is no one in Brazil knows, yet most people believe that it will
The first two scenarios would allow
Brazil to address the current political crisis in Latin America
and show the capacity of democracy to provide economic solutions
that work for broad national benefit. If Lula and the PT face
the third scenario, the democratic project that has dominated
Latin American politics for the past 20 years would be in danger.
Latin Americans today look to Brazil for an alternative to the
current troubles in Argentina, Venezuela, and Colombia. They are
counting on a grass-roots party, with a leftist tradition, to
reinvent the processes of economic and political development that
have been thrown into question by neoliberalism, and, in the end,
to vindicate the promise of democracy itself. <
Leonardo Avritzer is professor of political science at the
Federal University of Minas Gerais and visiting scholar at MIT.
He is author of Democracy and the Public Space in Latin America.
in the Summer 2003 issue of Boston