Brazil’s approach towards growth under Luiz Inácio Lula da Silva

In the 1989 Brazilian presidential election, he launched his first significant campaign and was defeated by Fernando Collor de Mello in the second round. In the 1994 and 1998 presidential elections, he made two additional runs but was defeated by Fernando Henrique Cardoso in the first round of both contests. In the second round of the 2002 Brazilian presidential election, he defeated José Serra and won. In the second round of the 2006 Brazilian presidential election, he defeated Geraldo Alckmin and won re-election. In contrast to the previous incumbent, Jair Bolsonaro, Lula is described as a left-wing leader which has led to certain anticipations regarding the overall governance approach and possible policies under his administration.

Brazil’s growth trajectory in past years:

The 1980s were significant for Brazil politically. After twenty years of military control, the country underwent a decade of "re-democratization," which culminated in the 1988 Constitution. In terms of the economy, that was a "lost decade" as the nation battled internal problems like the transition to a democratic government and high inflation. At the same time, the nation was confronted with external difficulties such as the early 1980s US interest rate jump, the 1970s oil crises, the 1982 Mexican debt crisis, and a generally unfavourable economic climate for all of Latin America. Tancredo Neves, a member of the Brazilian Democratic Movement Party (PMDB), was chosen to lead the country's transition to civilian control in January 1985. Towards the end of his term, monthly inflation had reached 80%, despite the plan's initial success.

Brazil had a closed economy initially, with the state playing a significant role in the production of commodities and services. After a lengthy history of high index inflation, the economy had transformed into one that was open to commerce in products and capital, while at the same time, the state's role had shrunk. Additionally, the economy experienced unheard-of price stabilisation. Following the "Washington consensus" on liberalisation, succeeding administrations started to privatise state-owned businesses and cut customs rates. On a global scale, the government concluded talks to create the Southern Common Market i.e., Mercosur, a process started by the previous administration, alongside Uruguay, Argentina, and Paraguay. However, rising prices and slower GDP growth tainted the administration's accomplishments.

The country was seriously affected by the 2008 financial crisis due to a decline in exports and a credit crunch, which caused some businesses to scale back operations, others to suffer significant losses, and still, others to file for bankruptcy. The economic policy took a different turn to address those repercussions. The easing of fiscal measures and the targeting of subsidised loans to the productive sector characterised this transition, furthered by the next president Dilma Rousseff. The National Bank for Economic and Social Development (BNDES), which provided funding for programmes like the 2007-established growth acceleration programme and the "national champions" strategy, was one of the government's key tools for action. This led to increased debt even if it helped Brazil withstand the global financial crisis better than other developing nations with the GDP rising by 7.5% in 2010. The economy's long-standing issues with corruption, low investment, inflated and wasteful public spending, high social security costs, low labour productivity, and subpar infrastructure appeared to be reflected in the situation in the 2010s. These problems still exist today and are discussed in the platforms of the politicians running in this year's election.

A Nova Matriz Econômica i.e., new economic matrix, a series of measures that included increased government intervention in the economy, currency depreciation, and interest rate reduction, was put in place to address them. It did not, however, increase growth and instead widened the fiscal deficit. Due to this, in March 2014, Standard & Poor's downgraded the nation's sovereign debt rating. The Brazilian economy saw one of its worst recessions ever from 2014 and 2016 due to a combination of internal and external forces as the root reasons. [1]

Economic approach under Bolsonaro:

Bolsonaro was prepared to relax the state's restrictions on government expenditures during COVID-19 and twice during the presidential campaign, similar to many other populists on either end of the ideological spectrum. In the early 2000s, he eliminated the conditional element of the Bolsa Familia cash transfer programme, which benefited more than 20 million households, and replaced it with simple cash transfers. Additionally, the Bolsonaro administration introduced a gasoline subsidy programme that included direct cash transfers to truck drivers in response to rising fuel prices and inflation. However, Bolsonaro's energy subsidy programmes have only served as a temporary bandage [2]. The attempt did not include support for basic household items and only temporarily stopped inflation from rising, bringing it down to under 10% in the fourth quarter of 2022. Even with the short-term benefits of artificially keeping inflation low, maintaining energy subsidies would be financially irresponsible for Brazil, breaching the government's own fiscal ceiling and adding to the nation's combined public and private debt load of 90% of GDP. Most economists believe inflation will resume once the energy subsidies expire.

All the economists involved in the creation of the Real Plan, which succeeded in controlling Brazil's inflation in the 1990s after decades of struggle under Fernando Henrique Cardoso's presidency, declared their support for Lula in the second round out of concern for the possibility of undermining the plan's achievements. [3].

The government also intensified a programme for natural resource concessions and infrastructure including motorways, port terminals, airports, and railroads that had previously begun under Temer and brought in about US$145 billion in investments and US$26 billion in government fees with the Brazilian Central Bank also achieving authority in February 2021. However, only the pension reform passed in a watered-down form, while the other measures languished, despite the widespread support Bolsonaro's business-friendly policies received. This was attributable to two things. First, Bolsonaro and his administration failed to negotiate deals with the opposition. In the context of his re-election campaign, Bolsonaro joined the Liberal Party (PL) in 2021 after leaving his previous party in 2019. Second, it was ascribed to his management of the COVID-19 epidemic, since Brazil saw more cases and fatalities from the disease than any other nation as a result of the government's first lackadaisical response to the issue.

Economic challenges ahead for Lula

Due to worries about the effects of rising interest rates, budgetary uncertainty, and the general global slowdown, growth projections for 2023 have been reduced. The official government growth prediction for 2023 decreased from 2.5% to 2.1%. However, independent experts are even more negative, with a consensus study predicting only 0.8% growth.

According to Alessandra Ribeiro, an economist with the consultancy Tendências, "when you put all these factors together, both local and external, we predict a substantial downturn of the Brazilian economy next year." Further, according to Marcelo Fonseca, chief economist of asset management Opportunity, "there are obvious signals that financing is getting scarcer and more expensive." "With very high-interest rates, we might anticipate a very swift slowdown in consumption." [4]. Additionally, the deep structural inefficiencies, low wages, and a long-term trend toward deindustrialization continue to constrain the economy.

Lula is likely to prioritise increasing social expenditures and implementing a redistributive fiscal strategy while continuing to pay attention to stable public finances. In addition to the required simplicity, Lula is also likely to eliminate restrictions on the growth of public spending and modify the tax code, which is likely to result in higher taxes for the wealthiest citizens. However, Congress will always be a barrier to any reform proposal being accepted in Brazil, especially given that it will once again be a strongly divided body. In order to avoid worsening the sustainability of public finances, Lula's plan calls for increased public spending on infrastructure, health care, and education that is paid for with increased tax collections. The overall approach may be focused on keeping government spending in check and moving on with the privatisation strategy, however, Lula does not plan to obstruct the current projects but is also not likely to undertake any significant new privatizations, such as Petrobras [5].

A more accurate indicator of living conditions is per capita income, which paints a dismal picture of Brazil's economic performance. Real per capita GDP figures from the IMF indicate that there has been stagnation on this front over the past few years. It peaked at 6,130 Brazilian reals in 2014 before dropping to 5,623 Brazilian reals in 2016. It gradually climbed to 5,696 by 2021. It is still 311 Brazilian reals (5,819) below its pre-recessionary level as of 2022, and the IMF anticipates that it will stay there through at least 2027 [6]. In light of this, it will be intriguing to watch what kind of economic measures Lula implements to increase per capita incomes.

Way forward for Brazil:

The ministerial speeches and public statements have provided insight into the economic priorities of the new administration. One of the more pro-market members of Lula's economic team is Vice President Geraldo Alckmin, who will also serve in the important economic position of Minister of Development, Industry, Trade, and Services. During his swearing-in ceremony, he spoke extensively about the necessity of measures that support the green reindustrialization of Brazil [7]. Here, it should be noted that Lula while tackling the economic challenges will also have to face environmental difficulties.

The Inflation Reduction Act, part of the Biden administration's own green industrial policy package, aims to achieve the same objective in the US. The historic legislation included about $370 billion for sustainable energy, and it even served as the model for a similar programme in France. Brazil, meanwhile, wants to reduce rather than increase its budget. If Lula and Alckmin succeed in reviving the nation's manufacturing industry at the same time, it might mark a turning point and serve as a model for other middle-income economies.

Endnotes:

1.     Briefing, Brazil’s economy: Challenges for the new President, European Parliament, 28 October 2022 https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2022)738196

2.     Dr Christopher Sabatini and Lilia Caiado Couto, Brazil’s new president inherits huge economic challenges, 31 October 2022 https://www.chathamhouse.org/2022/10/brazils-new-president-inherits-huge-economic-challenges

3.     Briefing, “Brazil’s economy: Challenges for the new President”, European Parliament, 28 October 2022 https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2022)738196

4. Bryan Harris, “Brazil faces economic headwinds as Lula prepares to take office”, Financial Times, 27 December 2022 https://www.ft.com/content/c1b3d202-0d15-4ede-9e59-69dcf635e211

5.     Antonella Mori, “Lula or Bolsonaro: Brazil’s Economy at a Crossroads”, Italian Institute for International Political Studies, 29 September 2022 https://www.ispionline.it/en/pubblicazione/lula-or-bolsonaro-brazils-economy-crossroads-36298

6.     Pavitra Kanagaraj, “The challenges ahead of Lula’s 3^rd Term in Brazil”, Hindustan Times, 14 November 2022 https://www.hindustantimes.com/india-news/the-challenges-ahead-of-lula-s-3rd-term-in-brazil-101668363845544.html

7.     Catherine Osborn, “Lula 3.0 Takes Shape”, 6 January 2022 https://foreignpolicy.com/2023/01/06/lula-brazil-inauguration-policy-bolsonaro-election-environment-economy/

Pic Courtsey-Yulya Korban at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)