Then came a backlash from lawyers, constitutional scholars, journalists and diplomats. Brazilian newspapers blasted the government’s harsh reaction as both arbitrary and authoritarian. Lula’s foes in Congress had a feast. “This is the biggest error in a year and a half of government,” Arthur Virgilio, leader of the Social Democratic Party declared. In the end diplomacy prevailed: Rohter, through his lawyers, wrote a letter to Lula expressing regret for the episode. It was not a retraction, but the president quickly seized upon the letter and agreed to let Rohter stay in the country.
Though short-lived, the imbroglio was a telling window on the new skittishness in Brasilia. Lula, the former union leader turned pragmatist, has achieved some notable successes in a short period of time: exports are soaring, inflation has been held in check (under 6 percent), key pension- and tax-reform bills have been passed and the government is sticking with its commitment to fiscal austerity–necessary to produce a budget surplus that is a vital sign of responsibility to international investors. But his administration has been a high-wire act from the beginning. He won over swing voters by promising fiscal sacrifice, while his victory was also hailed as redemption for “os excluidos,” the forgotten Brazilian Everyman with needs–for a job, or a larger paycheck, or more health benefits.
That balance is becoming increasingly hard to strike. “I’m giving it everything I have,” Lula reportedly admitted behind closed doors to members of a high-level policy council early this month. “But I can’t meet the campaign expectations. Government programs can’t possibly keep pace with the promises.” Brazilians have noticed–both those who expect more help from the president, and those who worry that he’ll provide it. “Frustrations are growing,” says economist Eduardo Giannetti, who teaches at the Sao Paulo business school, Ibmec. “The government is on the defensive.”
Lula’s dilemma is both simple and serious: as the Sao Paulo-based consultancy A.C. Pastore & Associados put it last week, he’s taking “strong political flak” for spending too little on social programs at a time when Brazil’s economic outlook is slowly weakening. And his room to maneuver is shrinking. The economy is projected to grow by 3.5 percent this year. That’s not bad, but not robust enough to push down the 12 percent jobless rate, or to free up money for new bridges, roads and hospitals, or to attract foreign direct investment. FDI is projected to be a paltry $13 billion.
While Brazil’s large foreign debt is manageable, it’s pegged to always unpredictable interest rates. The gathering signs of an impending hike in U.S. rates have already pushed up the premium on Brazilian bonds–a trend that could eventually cause investors to flee, dumping their emerging-market securities. As lenders demand higher rates to keep refinancing Brazilian debt, the government will have even less leeway to invest in social programs, despite a record inflow of export dollars. That’s bound to worsen political discontent. Indeed, the administration’s approval ratings have slumped to a record low of under 35 percent, compared to 72 percent at the beginning of Lula’s term.
Poverty and unemployment pressures are nothing new in Brazil or Latin America, of course. But when combined with austerity programs like Brazil’s, social steam builds quickly. Finance Minister Antonio Palocci is struggling to hold the line on spending, but the government is beginning to bend. Last month the Landless Workers Movement, a militant rural group, launched “red April,” a wave of invasions of big ranches and farms to pressure Brasilia into accelerating land reform. While landowners sandbagged their gates and clamored for help from police, the Rural Development Ministry promptly released nearly $570 million for land reform.
Public-sector employees, the bedrock of Lula’s Workers’ Party (the PT), are now pressing their demands, too. Federal police, health workers, agronomists and nearly half the civil service have gone on strike, causing huge backups at customs, freezing crop research and paralyzing many public-health clinics. “Everyone sees an opportunity to squeeze the government for concessions,” says Ricardo Amorim, head of Latin American research at Idea Global, a New York financial consultancy. “The government has lost control of the political agenda.”
In Congress, where Lula must patch together a fragile working majority at every vote, the government’s putative allies on the left are often the biggest stumbling block. Earlier this month Lula’s foes in Congress, abetted by PT renegades, overturned a ban on bingo parlors–a direct affront to the government, which had shut them down in March as suspected fronts for money laundering. Worse, after spending a full month forging an accord to raise the national minimum wage by around $7 a month, rebel lawmakers are conspiring to push it higher. Brasilia fears that would bust the budget. “The government has suffered one defeat after another,” says Amaury de Souza, a political analyst with MCM consultants in Sao Paulo.
During Lula’s first year in office, he practically had the legislature in his pocket. The hard left grumbled over the government’s conservatism but basically kept quiet, wanting to share in the PT’s rise to glory. But support began to crumble earlier this year after Brasilia crushed a nonpartisan call by lawmakers to investigate a kickback scandal (following story). Sensing weakness, and with municipal elections approaching, Lula’s swing supporters in the Congress began to drift while at the same time demanding their share of the pork.
Part of the problem is the inexperience of Lula’s inner circle of advisers, most of whom are PT potentates. Only one of them, Palocci, a onetime city mayor, had ever held an executive job. Lula himself, though a former federal legislator, had never commanded anything bigger than a union or the PT. “They came to power with incredible naivety,” said de Souza. “They thought they could learn by doing.” The president hasn’t set a great example for his underlings. The former steelworker still likes to indulge his admirers, wading into crowds like a pop star and holding forth at every truck stop, ribbon-cutting and lectern.
Like a political Houdini, Lula believes he can negotiate his way out of any jam. His task, however, is immeasureably complicated by the need to overhaul Brazil’s populist political culture. After three thumping defeats at the ballot box, he learned to shed his caustic, capitalist-bashing rhetoric–and to persuade his party to do the same. But while the PT was following a borrowed script–socialists in Spain and Germany, along with the British Labor Party, all had changed tack much earlier–they were doing so at an accelerated pace. Those others “took 20 or 30 years to move to the middle,” says economist Mailson da Nobrega, a former Finance minister. “Lula turned the PT on a dime.”
The shift has left Brazil’s political culture disoriented. Although the government has launched some basic market reforms, the hand of the state still looms large, which sends mixed signals to investors. Last year, for instance, PT officials were furious after the independent telecom and energy authorities raised their rates. The officials charged that the government had “outsourced” its decision-making powers to outsiders. Under new rules, the agencies will retain their clout, but will still be required to meet “performance targets” under vague management contracts. “The institutional climate is not favorable to investment in Brazil,” says Giannetti.
The official explanation for these mixed signals is that the PT is a pluralist party with many voices. The more likely reason is that the party is suffering an identity crisis. Bolivar Lamounier, a senior Brazilian political scientist, argues that everyone beginning with Lula knew the left’s old doctrine was doomed. “But when you abandon an ideology, you need to quickly adopt another point of view, and that hasn’t happened,” Lamounier says. “At heart, Lula’s government still isn’t sure whether they want Brazil to be a modern capitalist democracy or not.” There really isn’t much of a choice, if Brazil’s expects to consolidate its economic gains of the recent years. The question is whether the country’s political culture will accept that fact, or not.
