[stop-imf] 2 on Brazil, Lula and intl markets

[Robert Weissman]

Financial Times
Brazil Workers' party tries to calm markets
By Raymond Colitt and Richard Lapper in S=E3o Paulo
Published: October 22 2002 19:10

Brazil's Workers' party is ready to take tough fiscal measures to calm
continuing market uncertainty if - as expected - it wins Sunday's
presidential elections.

The party is prepared to cut government spending to ensure a primary
budget surplus larger than the 3.75 per cent of gross domestic product
already agreed for next year, said Ant=F4nio Palocci, co-ordinator of the
Workers' party (PT) government platform.

Mr Palocci said that an incoming PT administration would seek to avoid
cuts on social spending but would not allow states to renegotiate their
debts to the federal government, at least during its first year in office.

He also played down investor concerns that looser monetary policy could
trigger higher inflation.

"We will not reduce interest rates so as to risk an increase of
inflation," he told Globo television.

The statements were designed to address investor concerns ahead of the
expected victory of Luiz In=E1cio Lula da Silva in Sunday's presidential ru=
n-off.

In an article in Wednesday's Financial Times, Mohamed El-Erian,
managing-director of Pimco, an investment management company, says that
among other measures the new government "needs to remove all ambiguities
regarding Brazil's willingness to respect the rule of law, honour all
debt contracts and maintain the free operation of the domestic payments
and settlement system."

The party is also moving to secure broader-based alliance in congress.
It won 91 seats in the lower house and also has support from a series of
leftwing and centrist splinter parties.

Mr da Silva said on Tuesday that he would hold talks with the centrist
Democratic Movement party (PMDB), one of the largest parties that has
been supporting the campaign of Jos=E9 Serra, the government candidate.

"If I win, I want to sit down for talks immediately with the president
of the PMDB," Mr da Silva said, according to Globo news reports. Michel
Temer, the PMDB president, reiterated his support for Mr Serra but added
that he was "happy" about the prospect of talks with Mr da Silva.

Separately, Mr Palocci said Mr da Silva would announce on Monday a team
to co-ordinate the two-month transition period with the current
government before taking office on January 1.

There were some indications that the PT's efforts have been rewarded by
the markets. The yield spread of Brazilian bonds over US Treasuries - a
common measure of country risk - narrowed this week to about 20
percentage points from nearly 24 percentage points in late September.
The downgrade of Brazilian debt on Monday by Fitch Ratings agency from
B-plus to B, appeared to have little impact.


-------------


New York Times
October 23, 2002
Brazil's Democracy Takes a Chance
By JEFFREY W. RUBIN

      BOSTON =97 The potential contradiction between democracy and markets
is nowhere more apparent than in Brazil this month. A leftist candidate,
Luiz In=E1cio Lula da Silva,       known as Lula, won 46 percent of the
vote in the first round of Brazil's presidential elections on Oct. 6,
twice the share of the next contender, centrist Jos=E9 Serra. Current
polls       show Mr. da Silva poised to win the runoff elections on Oct. 27=
.

This would change the political map of Latin America, where no leftist
party with both high ambitions and democratic credentials has had a
chance at national power in more than a decade.

If Brazilians choose Mr. da Silva, they may find some innovative ways to
escape the inequality and poverty that have characterized Latin America
in the 20th century =97 that is, if global markets do not so prejudge Mr.
da Silva as to void Brazilians' democratic choice. The disruptive
potential of markets has been apparent throughout the presidential
campaign. As soon as Mr. da Silva surged in the polls last spring and
foreign observers realized that his Workers' Party might govern Brazil,
international banks warned investors to beware. Immediately, Brazil's
currency =97 the real =97 began a precipitous decline. Central bank efforts
to bolster the real by increasing bank reserve requirements and raising
already high interest rates do not appear to be helping. The reason for
the decline in the real has been clear all along: uncertainty about
Brazil's political and economic future.

This uncertainty is quite rational. While Mr. da Silva has toned down
his past radicalism and promised to abide by Brazil's financial
commitments, he has also continued to advocate relieving the poverty and
misery suffered by more than half of Brazil's 170 million people. This
requires innovative policy regarding wages, profit rates, land
distribution, education, social welfare policies and taxation.

Twenty years ago, Latin American military dictatorships gave way to
democracies, accompanied by vigorous social movements and great hope for
electoral competition and the rule of law. At the same time, neoliberal
economic reforms =97 encouraged by the World Bank and the International
Monetary Fund and supported by the new generation of Latin American
leaders =97 did away with subsidies, social welfare policies and
state-owned enterprises, freeing market forces domestically and
encouraging foreign investment.

The assumption was that democracy and markets would lead to prosperity
in some sort of automatic, if gradual, way. What resulted was big
increases in productivity and efficiency and credible processes of
administrative decentralization, especially in emerging markets like
Brazil and Mexico. However, little changed in the distribution of wealth
or the persistence of poverty. Great prosperity and the benefits of
modernity and globalization continued to coexist with misery and
exclusion. Now even the gains are being rolled back.

At the same time, Latin American democracies have functioned with
impressive continuity despite the challenges of guerrilla movements,
economic crises and coup attempts. Democratic institutions have taken
root in Latin America, in both political practice and popular
imagination. But if democracy is to persist, one question must be
answered: Will democracy better people's lives?

Supporters of unrestricted free trade believe that democratic citizens
must endure dire poverty and wait for market-generated wealth to improve
income levels. In contrast, Brazilians are deciding, democratically, in
the course of a long and much debated political campaign, that they
would like to modify some basic arrangements.

This means asking tough questions. Should land be more equally
distributed, in order to strengthen competition and nourish rural
communities? Should urban tax rates be high enough to provide sewer
systems in all neighborhoods? Would policies that strengthen small
farmers rather than agribusiness be able to produce abundant, healthy
crops and keep rural people employed? How would education and small
business employment be affected if public universities sent faculty out
to urban neighborhoods and rural towns to teach courses that respond to
local needs? What are the links between basic health-care services for
women, gender equality and a more creative civil society?

In other words, how can the gains of economic liberalization be combined
with innovative policies that preserve many market incentives but bring
about fairer results?

In addressing this question, the private sector may have to rethink some
of its assumptions, just as the left has modified its past stances. For
example, Brazilian businessmen may come to believe, as their
counterparts in much of Europe did over the past 50 years, that it is in
their personal interest to live in a society without extreme misery and
violence, and in their corporate interest to have a healthy and
well-educated work force. In this light, high profits might rationally
be traded for wage increases or after-school computer training programs
in shantytowns. Indeed, groups of prominent Brazilian businessmen are
already making such proposals in Brazil's major cities.

Mr. da Silva's Workers' Party has a 20-year record of putting new ideas
into practice. For example, cities and states governed by the party have
instituted participatory budgeting programs in which people in
neighborhoods decide how parts of municipal budgets should be spent.
Local governments run by the Workers' Party have assembled reformist,
multiparty coalitions that have improved schools and health care =97 in
small towns and big cities alike =97 while promoting private sector growth.

If domestic and international investors run from Brazil in the face of a
victory by Mr. da Silva, it will be impossible to expand these
innovative policies or implement new ones. And if the very existence of
debate about a society's economic bargains leads investors to strangle
the economy, then change will be impossible, and democracy will have
been defeated.

In that case, we would have to revise commonly held views about
international support for democracy and recognize a different truth: the
international community supports democracy in developing countries so
long as it doesn't do much more than efficiently administer the status quo.

Individuals, businesses and foreign governments need to invest in Brazil
precisely because its people are willing to take some risks. By shaking
things up, Brazilians might find ways to alleviate some of the worst
problems of contemporary societies. This is supposed to be one of the
attractions of democracy, after all: its creativity.

Jeffrey W. Rubin is professor of history at Boston University and and
research associate at the Institute for the Study of Economic Culture.
He recently completed a year of research in Brazil on democracy and innovat=
ion.