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Lula Falls Foul of a Foreign Fantasy

Author: Kenneth R. Maxwell, Nelson and David Rockefeller Senior Fellow, Council on Foreign Relations
September 27, 2002
Financial Times


In Latin America "magical realism" has faded as a literary fad. But when it comes to Brazil, fantasy reigns supreme within the International Monetary Fund and on Wall Street. How else can you explain the demonisation of Luiz Inacio Lula da Silva, presidential candidate of the Workers' party, or the ridiculous, "Lula-meter" invented by Goldman Sachs last June to predict the value of the Brazilian currency against his standing in the public opinion polls.

The "Lula-meter" was thankfully locked away from public view. But wherever it is, it must be ticking away furiously. With barely a week to go to the first round of the Brazilian election, Mr da Silva is in striking distance of an outright victory. Jose Serra, the government candidate, who remains Wall Street's favourite, languishes a full 25 points behind Mr da Silva in the polls. And Anthony Garotinho, the former governor of Rio de Janeiro, is chipping away at Mr Serra's chance of even reaching the second round.

Mr Serra has run a negative campaign. This has done little to improve his standing so far, but it did succeed in eliminating two of his main rivals. If Mr Serra makes it to a second round, he will try to destroy Mr da Silva's image as an affable moderate by running television clips of the "old" radical in meetings with Hugo Chavez, the volatile Venezuelan president, and with Fidel Castro, the Cuban leader.

But the red flags and red stars of Mr da Silva's Workers' party notwithstanding, someone should tell Wall Street and the IMF that the cold war is long over. In fact, they should pray that Mr da Silva gains an outright victory next Sunday. With the real in free fall, the last thing Brazil and the international financial system needs is a scorched-earth campaign stretching to a second-round vote on October 27. It is hardly something the IMF, with its $30bn Brazil bailout package at stake, should be hoping for.

Solid public support is critical for any Brazilian president, and a relentlessly negative campaign will only weaken the capacity of either candidate to govern effectively in 2003. The truth is that Brazil's current vulnerability has been created under IMF guidance. Risk premiums were bound to rise at a time of electoral uncertainty, increasing risk aversion among investors and a weaker global economy.

Under these circumstances, interest payments tied to the value of the real or indexed to the dollar were bound to be difficult to bear regardless of whether Brazil maintained a primary budget surplus of 3.75 per cent. To blame all this on Mr da Silva is ludicrous.

Mr da Silva has run for the presidency four times. He has learned from past failures, as has the Workers' party (PT). The PT has used the past decade to modernise its ideology and move towards the political centre. For 20 years, party members have been elected to the state and local offices. They know that efficient and honest administration is more important than strident partisanship. The PT has quietly formed alliances with other parties and during the campaign has reassured the military.

It has maintained an open link to President Fernando Henrique Cardoso. If Mr da Silva does win in the first round, Mr Cardoso is likely to ensure a smooth transition and to work with him to deal with the financial crisis. It is very much in Mr Cardoso's interests to do so since he does not want to step down from office in the midst of an economic meltdown, with his reputation as a statesman destroyed. A da Silva presidency can also expect more or less the same support from a solid centre-left coalition in Congress as a Serra presidency. Wall Street analysts and IMF bureaucrats should leave Brazilian politics to its 115m voters and stop confusing fact and fantasy.

The writer is director of the Latin America programme at the Council on Foreign Relations.

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