Lula’s Political Economy: Crisis and Continuity

May 12, 2011

For most of his two terms in office (2003–10), Brazilian president Luiz Inácio Lula da Silva followed the same economic policy imperatives established by his neoliberal predecessors. He prioritized the fight against inflation with raised interest rates, assuring investors high returns while settling accounts with the International Monetary Fund (IMF), and he committed to maintaining a high budget surplus. In the second half of his last term in office, however, the global financial crisis of 2007–9 forced a last-minute change in direction. Lula broke from the mold—he invested locally, raised the minimum wage yet again, and quickly lifted Brazil out of the meltdown as no one had expected.

 

In a March 30, 2009, op-ed in Le Monde, Lula hit out against the crisis. “Unlike the crises of the last 15 years—in Asia, Mexico, and Russia—the current storm that has struck the planet has its origins in the center of the world economy, the United States,” Lula wrote. He added: “I never tire of repeating that it is time to restore the policy and the role of the state. The leaders have to assume the responsibilities bestowed upon them to society. It is important to save banks or insurance to protect deposits and Social Security. But it is more important to protect jobs and stimulate production.”1

 

With the neoliberal model in crisis across the planet, even Brazilian economists aligned with the establishment were willing to change their positions on important issues. From then on, the government looked not only to pursue economic growth, but also to maintain stability. The search for economic development—as opposed to just economic growth—returned to the government agenda, with a focus on reducing social and economic inequality.

 

The government began to adopt Keynesian counter-cyclical policies in order to prevent Brazil from being seriously hit by the effects of the crisis. These policies included tax breaks and fiscal stimulus in important sectors in order to maintain the level of employment and the supply of goods such as cars and appliances. The government also allocated significant resources to the National Bank for Economic and Social Development (BNDES), to provide investments and loans at subsidized interest rates through the National Treasury. The strategy, which meant some degree of a break with the traditional recipes of economic orthodoxy, showed positive results: Although GDP fell into a mild recession in 2009, the Brazilian economy was already growing again the following year.

 

The Lula government also played an important role in strengthening the internal market. It raised the minimum wage, which directly affects roughly half of formal employees, and also indirectly affects those in the informal sector where wages are often determined by the minimum wage. Pensions and social security benefits were also strengthened, affecting the more than 50% of retirees who receive social security benefits that amount to the value of up to one minimum wage. The government also expanded the network of cash-grant beneficiaries in the Bolsa Família (Family Stipend) network, now reaching over 40 million people and roughly 25% of the population.2 The cash grants vary according to the situation of each family, but the monthly stipend can reach almost 15% of the equivalent of a monthly minimum wage.3 These three instruments—the minimum wage, social security, and cash grants to poor families—were essential to maintain demand and cut short the recessionary effects of the crisis.

 

Brazil has now experienced an unprecedented process of recomposing income levels. The monthly income of many households at the base of the social pyramid—the so-called D and E classes, composing 30% of the population—increased, and many have now joined the C class. This group has been called the “new middle class,” because it seems to have helped boost general demand for popular consumer goods.4 Vehicle sales have hit record highs every year since 2009. The sale of motorcycles has also boomed, which has resulted in an increase in accidents and motorcycle fatalities. In 2010, for the first time in Brazilian history, the number of passengers traveling by plane overtook the number of passengers by bus. There are endless examples of how this new pattern of income and consumption has contributed to maintaining aggregate demand.

 

Overall, however, the Lula administration implemented measures that were more geared toward satisfying the needs of financial capital than the great majority of the population. Among several examples, Congress in 2005 passed a new law, long demanded by banks and large corporations, in which labor and the state would be primarily liable in cases of bankruptcy. The administration also pushed to end the public monopoly on the reinsurance sector, in which insurance companies take out policies on themselves as a means of risk management. Lula opened this strategic market in order to open the door for large international conglomerates interested in working in the country. Preparations were made to privatize the state reinsurance company, the Brazil Reinsurance Institute; it was never sold only because Finance Minister Antonio Palocci resigned in 2006, after he was implicated in a series of corruption scandals.5

 

The growing financialization of the economy strengthened the role played by banks and other financial institutions. Never in Brazilian history had this sector earned so much money. Along with the record profits, capital was further concentrated into large financial conglomerates.6 Banks maintained the spread charged to clients in their transactions, and it remains one of the largest in the world. Despite owning two of the largest banks in the system, the Bank of Brazil and Caixa Economica Federal, the federal government did almost nothing to change their behavior in the market, such as providing better-quality services or lower tariffs to the majority of the population.

 

As has been reported widely, inequality in Brazil has decreased between the richest 10% and poorest 10% of the population, improving Brazil’s Gini coefficient, which is commonly used to measure inequality. However, the net worth of the richest 1% of the population has grown more than proportionately to the improvement of the lower classes. This is because during Lula’s eight years in office, the transfer of resources from the federal budget to the financial system and the Brazilian elite occurred in the form of interest payments on the debt—about $600 billion worth.7 That is 10 times the amount of resources allocated to programs aimed at the low-income population.

 

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Lula’s fealty to the neoliberal imperatives of his predecessor should be understood in context. In the run-up to the 2002 presidential elections, the financial markets were nervous that Lula, perceived as a radical, might actually be elected. The influential financier George Soros cautioned that a Lula victory would plunge Brazil into economic “chaos,” and the corporate media warned of rising inflation.8

 

Less than four months ahead of the election, Lula attempted to reassure investors by publishing a “Letter to the Brazilian People,” in which he declared: “There are no miracles in the life of a people and a country. A clear and sensible transition between what we have today and what society demands is what will be necessary.”9 He added that he would respect “the country’s contracts and obligations”— meaning that he would maintain the essential elements of the political economy developed by the preceding government of Fernando Henrique Cardoso (1995–2002) of the Brazilian Social Democratic Party (PSDB), the PT’s staunch opponent both in the National Congress and on the streets.

 

The “Letter to the Brazilian People” set the tone for everything that followed. Lula’s appointee to the Finance Ministry, Antonio Palocci, had implemented orthodox neoliberal policies while serving as mayor of the Ribeirão Preto, where he had privatized the public sanitation and telephone companies. Upon taking office Palocci placed important figures from his previous team in key ministry positions and convinced Lula to name Henrique Meirelles—who until the eve of the elections had served as president of the International Bank of Boston, one of the country’s largest creditors—as president of the Central Bank (BC). After building his entire professional career as a well-behaved member of the private international financial system, Meirelles ran for a congressional seat with the PSDB. He won, but quickly traded congress for the BC. Lula promised him total political and administrative autonomy, a promise that was fulfilled. Meirelles left office eight years later, in December, when Lula ended his second term.

 

The goal was to continue Cardoso’s economic policies, coupled with a generic discourse of “respect for contracts” to appease the so-called market forces. Politically speaking, the idea was to remove any doubt among investors that Lula would pursue economic stability, following the basic contours of the anti-inflation program established in 1994 known as the Real Plan. The central elements of the stabilization plan, which Lula promised to ensure, were (1) to combat inflation with high interest rates, (2) maintain a free-floating exchange-rate regime, and (3) build the national surplus.10

 

Early in the government, amid contacts with the international financial community and missions from the IMF, Lula unilaterally announced his willingness to increase the goal of generating an already high primary surplus from 3.75% to 4.25% of GDP.11 This emblematic measure meant, however, that the government would have to radically commit to contain budget expenditures in infrastructure and social services, in order to direct even more public resources to pay the interest on the federal debt.

 

Meanwhile, the government’s orthodox monetary policy kept official interest rates high. During the 96 months of the Lula government, Brazil had the highest rates in the world. Adjusted for inflation, Brazil’s real interest rate hovered between 6% and 12% per year between 2003 and 2010. Inflation remained relatively under control. In 2002, before Lula took office, prices grew at a rate of 12.6% a year. During Lula’s first term (2003–6), the average annual price growth was down to 6.3%; during his second term (2007–10), annual inflation averaged 5.2% a year.12

 

In achieving this, Lula benefited from the international prices on commodities and quickly looked to Brazilian exports to boost economic growth. Within only a couple of years, Brazilian exports had already broken successive records. In 2002, total exports were worth about $60 billion. During Lula’s first term, the annual average jumped to $106 billion. During his second term, exports continued to climb to an average of $178 billion a year. In March 2004, the government celebrated the milestone of exporting $100 billion of commodities in 12 months. Just under six years later, in January 2010, Brazil reached the symbolic landmark of $200 billion in annual exports.13

 

This impressive performance enabled Brazil to significantly improve its international solvency—in December 2005, Brazil paid off its debts to the IMF and other creditors, although this was coupled with an increase in domestic debt, which is now over $1 trillion, or about 40% of GDP.14 The boom also helped Brazil build up its national reserves, which went up every year during the Lula government. Shortly before his inauguration, Brazil had $38 billion of net international reserves. In December 2006, that figure had risen to $86 billion. At the end of the Lula government reserves had jumped to $290 billion.15

 

The export boom also had an impact on GDP growth. During the period 1999–02, GDP had grown at an annual average of 2.2%. During Lula’s first term (2003–6), the annual average rose to 3.5%. During his second term (2007–10), Brazil’s GDP grew at an annual average of 4.5%. Although these numbers show improvement, critics have pointed out that they are well below growth figures for the countries that occupy a comparable position in the new dynamic international economy—Russia, India, China, and South Africa, which together with Brazil are known as the BRICS. Just for comparison, during the Lula’s first term, China and India grew at average annual rates of 9% and 7% respectively. During Lula’s second term, they grew at 10% and 9% a year. In other words, once could conclude that Brazil is actually losing the opportunity to take a true and necessary leap toward development.

 

The negative side of this boom, however, was that it was anchored in products of low aggregate value—primary products, especially agricultural commodities and extractive goods like oil and iron ore. These products represented up to 57% of all exports, including iron ore (14.3%), oil (8%), soybeans (5.5%), sugar (4.6%), chicken (2.9%), and coffee (2.6%). As opposed to manufactured products, which can generate additional value for the Brazilian economy across the chain of production, these products, with little value added, had almost no multiplier effect.16 Meanwhile, imports grew, predominantly manufactured goods like automobiles and auto parts, circuits, micro-electronics, pharmaceuticals, steel products, transmitters and receivers, motors, generators, pumps, bearings, gears, and so on. In other words, Brazil remains clearly deficient in terms of intensive technology and value-added production.

 

Lula’s policy of high interest rates only further reinforced Brazil’s status as an exporter of low-value goods and importer of high-value products. The high rates attracted a major influx of international finance capital, which hit the market without exchange controls. As a result, the Brazilian currency, the real, appreciated. The higher currency immediately harmed the export of manufactured products, which were unable to offer competitive prices abroad. Meanwhile, the very same currency appreciation stimulated the import of manufactured goods from abroad. Because of the difficulty of competing with imports—especially from China and other Asian countries—many sectors reduced their investments in the expansion of domestic productive capacity. In the controversy over the currency issue, there was clearly a division, even in the business sector. Those who produced goods demanded a devaluation of the real, while the representatives of finance capital called for the continuation of the facade of free exchange.

 

With Lula’s support for the export sector, his government became politically dependent on groups related to agri-business. He even stated in 2007 that the sugar mill owners were the “true heroes” of the country—a sadly ironic statement, considering the dark stain of slavery and its legacy that these groups still carry from the 18th and 19th centuries. The Brazilian sugar industry is still characterized by poor working conditions, low wages, and a record of workplace accidents.17 In terms of agriculture and land policies, Lula made little progress in expanding land reform and stimulating family farms. The movements organizing around these issues were frustrated by the Lula administration, especially with the expectations they had when he was elected to office.18

 

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The economic policies of Lula’s handpicked successor, Dilma Rousseff, have thus far shown little difference. Perhaps it is a matter of time. But it is noteworthy that she chose Lula’s former finance minister, Palocci, for the strategic post of chief of staff. In a sign that there could be some continuity of the heterodox approach, she maintained Guido Mantega at the Finance Ministry. The Central Bank was handed to Alexandre Tombini, a career economist at the institution. The economic policy decisions, adopted during the first months of government, maintain the trend of elevating official interest rates with a priority on fighting inflation.

 

The foundation of the orthodox model of monetary policy remains intact, and little has been done to counteract currency appreciation. Moreover, in Rousseff’s first week in office, she announced a significant budget cut for 2011, which is weakening the government’s ability to act.19 The Central Bank continues to increase the official interest rates as an instrument to combat inflation.20

 

In March and April, the government announced some measures—to little effect—to try to curb the appreciation of the Brazilian currency in the exchange market. However, the results were not efficient, largely due to the high interest rates that continue to attract a steady flow of speculative capital. There is an urgent need to establish control mechanisms for the entry and exit of foreign capital.21

 

According to what we have seen in the first months of the Rousseff government, there is an intense political dispute over the direction the government’s economic agenda. On one side are powerful forces aligned with the financial system that don’t intend to give up the benefits they have acquired from the conservative economic policies. They support a model based on macroeconomic adjustments accomplished by raising official interest rates, cutting public expenses, and maintaining the policy of the appreciated exchange rate of the real. On the other side, there are those who favor again embracing the developmentalist agenda, in which the state’s most essential role is to improve the profound social and economic inequalities of country. They propose confronting the economic questions with industrial policies and distribution, recognizing that the magic solution of the market is not always the best option for the country.

 


 

Paulo Kliass is an economist and columnist for the Brazilian online magazine Carta Maior (cartamaior.com.br).

 


 

1. Luiz Inácio Lula da Silva, “Au-delà de la récession, nous sommes face à une crise de civilisation,” Le Monde (Paris), March 31, 2009.

 

2. “Bolsa Família: Changing the Lives of Millions in Brazil,” The World Bank, accessed April 22, 2011.

 

3. Instituto de Pesquisa Econômica Aplicada (IPEA), “PNAD 2009 – Primeiras Análises: Distribuição de Renda entre 1995 e 2009,” comunicado de IPEA, October 5, 2010.

 

4. Marcelo Cortes Neri, ed., “The New Middle Class,” Centro de Políticas Sociais, Instituto Brasileiro de Economia, Fundação Getulio Vargas, August 2008.

 

5. Folha Online, “Entenda o chamado ‘caseirogate’ e a cronologia dos fatos que derrubaram Palocci,” March 27, 2006.

 

6. Paulo Kliass, “Mais uma vez, os incomensuráveis lucros dos bancos,” Carta Maior, February 5, 2011.

 

7. Câmara dos Deputados, “Lei Orçamentária Anual para 2011,” February 9, 2011.

 

8. Clóvis Rossi, “Soros diz que EUA irão impor Serra e que Lula seria o caos,” Folha de São Paulo, June 8, 2002; Camilla Bustani, “The Challenges to Lula’s Revolution,” Open Democracy, January 16, 2003.

 

9. Luiz Inácio Lula da Silva, “Carta ao povo brasileiro,” June 22, 2002.

 

10. Rosa Maria Marques and Paulo Nakatani, “A Política Econômica Do Governo Lula: Como Mudar Para Ficar No Mesmo,” Forum des Alternatives, March 3, 2008.

 

11. Agência Brasil, “Governo fará aperto fiscal para garantir superávit maior em 2003, diz Palocci,” Agência Brasil, January 13, 2003.

 

12. Banco Central do Brasil, “Economic Indicators; 1.2 Price Indices,” chart, April 20, 2011.

 

13. Ministério do Desenvolvimento, Indústria e Comércio Exterior, “Panorama do Comércio Exterior Brasileiro 2010,” report.

 

14. EFE, “Brasil paga dívida com FMI mas mantém política econômica austera,” January 10, 2006.

 

15. Banco Central do Brasil, “Daily International Reserves,” accessed April 2011, bcb.gov.br/?DAILYRESERVES.

 

16. Paulo Kliass, “Nossas exportações: opção política ou vocação natural?,” Carta Maior, January 27, 2011.

 

17. Repórter Brasil, “Especial: O avanço da cana-de-açúcar,” compilation of articles, accessed April 2011, reporterbrasil.org.br/conteudo.php?id=107.

 

18. Gilberto Costa, “Estrutura fundiária brasileira continua inalterada,” Agência Brasil, February 22, 2011, mst.org.br/node/11286.

 

19. Luciene Cruz and Stênio Ribeiro, “Governo anuncia corte de R$ 50 bilhões no Orçamento,” Agência Brasil, February 9, 2011.

 

20. Banco Central do Brasil, “Review Of COPOM Meetings and Short-Term Interest Rates,” accessed April 2011, bcb.gov.br/?INTEREST.

 

21. Michael Hudson, “How Brazil Can Defend Against Financialization,” CDES conference paper, September 17, 2010.

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