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Lula Bows to Wall Street: Brazil’s New “Leftist” President Moves Right to Keep U.S. Happy

By Asad Ismi

Forty years after Brazil’s last leftist government was overthrown in a U.S.-backed military coup, the left appeared to have regained power there on January 1 when Luiz Inacio (“Lula”) da Silva, the candidate for the left-leaning Workers’ Party (PT), was inaugrated as President. Lula won the national elections last October in a landslide, with 61% of the vote compared to 38% for Jose Serra, his closest rival. Serra was the hand-picked successor of Fernando Henrique Cardoso, Brazil’s last president, who ruled for eight years. Lula won by the widest margin in Brazilian history, amassing the highest number of votes (52 million) ever received in the country. During the election, Da Silva, former head of the Metal Workers’ Union, promised to create 10 million jobs, double the minimum wage, reduce the gap between rich and poor, and end the hunger that afflicts 20 million Brazilians.

The top 1% of Brazilians own 53% of the country’s wealth, making it the fourth most unequal nation in the world; 50 million Brazilians live in poverty out of a population of 175 million, and eight million are unemployed. George Soros, the “Dracula” of currency speculators who has large investments in Brazil, said that Brazilians should not have been allowed to elect Lula. As he put it, “In the Roman empire, only the Romans voted. In modern global capitalism, only the Americans vote, not the Brazilians.”

In his election campaign, Da Silva rejected the neoliberal policies of his predecessor, which had concentrated income, increased poverty and unemployment, encouraged official corruption, and reduced industrial production with high interest rates. Promoted by the U.S., the IMF, the World Bank, and international banks, these policies produced a minimalist state, massive privatization, social spending cuts, the free flow of speculative foreign financial capital, and lower tariff barriers for foreign goods. As one observer put it, Cardoso was “unable to find a scandal-free candidate to confront Da Silva, the result of government corruption linked to neoliberalism and the privatization of public enterprises.” Roseana Sarney, Cardoso’s first choice, had to withdraw when $500,000 in cash was confiscated by police from her home; the money allegedly came from a bankrupt private company she helped create with public funds.

In place of neoliberalism, Lula called for a national development program to be implemented by the state for the benefit of workers, the middle class, and the manufacturing sector. The state would stimulate industrial production and quickly move towards solving social problems. Internationally, Lula is friendly with Cuba’s Fidel Castro and Hugo Chavez, Venezuela’s populist president. He has been critical of U.S. policies towards Cuba and Colombia, and during the campaign denounced the Bush administration’s emphasis on war since September 2001: “The United States has a president that for every ten words he speaks, nine are about waging war,” Lula said, “He is always seeking a new opponent.” Da Silva added that Brazil would not be treated like a “banana republic,” and he disparaged the U.S.-led Free Trade of the Americas (FTAA) pact as “annexation politics,” though he stopped short of rejecting it.

The IMF Still Rules

Lula’s rejection of neoliberalism, however, was limited to rhetoric. In practice, his policies thus far differ little from Cardoso’s. Brazil, wracked by a severe financial crisis, is too tied to foreign loans to act independently. The country has an astronomical $260 billion foreign debt, which is increasingly unsustainable. Lula’s pledge to fully repay this vast sum and his acceptance of an unprecedented $30 billion IMF bailout loan package (and its conditions) mean that international finance still dictates the Brazilian government’s economic policy. The IMF package is aimed at helping U.S. banks (especially FleetBoston Financial Corp. and Citigroup) which have outstanding loans of almost $30 billion.

After the election, the PT assured foreign investors that, as required by the IMF, Brazil would continue fiscal austerity, free market policies, and control of inflation. Lula even agreed to the IMF’s demand that he keep aside a 3.75% surplus to stabilize the debt. “The difficult course that Brazil will be confronting is going to demand austerity in the use of public monies,” Lula stated, adding that “budgetary restrictions” will be a major obstacle to the realization of his platform. Most reassuring to investors were Da Silva’s two key cabinet appointments to the top posts of the Central Bank and Finance Ministry. The first went to Henrique Meirelles, who until August 2002 was president of FleetBoston with an annual salary of $1.5 million. If anything was going to hearten Wall Street, this was it: that one of their own from a bank with large outstanding loans in Brazil was going to be running the Central Bank in a purportedly leftist government. After his appointment, Meirelles made clear his commitment to curbing inflation by maintaining the 25% interest rates that are crippling the Brazilian economy while enriching foreign investors.

Lula’s choice for Finance Minister was Antonio Palocci, a pro-market former PT mayor. Like Meirelles, Palocci supports anti-inflation measures. As mayor of the town of Ribeirao Preto, Palocci privatized local utilities even before the central government started on the same path. After these two appointments, Brazilian bonds shot up in New York. As one Wall Street analyst explained: “People are feeling positive about Brazil because so far Lula has said and done the right things.”

Lula’s rapid accommodation with international capital leaves the PT few funds for relieving poverty, hunger and disparity. Nor can the government do much to encourage increased domestic production, given its fidelity to high interest rates; such rates will further reduce production and so increase unemployment and poverty. Confirming its continued domination, the IMF called Lula’s economic proposals “prudent and appropriate,” and added that there were “affinities” between the PT’s economic plans and those of the IMF. This is surely the kiss of death for any Third World economic nationalist, considering the large number of developing economies that have been destroyed by the IMF. But, in spite of Lula’s capitulation to the demands of the IMF and foreign investors, Brazil may be forced to default on its debt anyway, since 80% of it is highly vulnerable to two factors the government has no control over: the U.S. dollar and floating interest rates.

Another Business Party?

Since its formation in 1980 as a socialist party, the PT’s main support base has been the Unified Union Federation (CUT), Brazil’s militant union central, made up of nine million workers, and the Landless Rural Workers’ Movement (MST), representing millions of landless peasants. As the candidate of these groups in previous elections, Lula called for a radical redistribution of wealth from the country’s obscenely rich elite to its peasants, workers and poor people; he supported the nationalization of industries, promised to reverse privatizations, and pledged to repudiate Brazil’s foreign debt.

This radical platform failed to win the PT enough middle-class votes or business support, and Lula lost three presidential elections in 1989, 1994, and 1998. He became convinced that “the PT will never win power nationally unless it allies with big players in the domestic economy.” Thus, in 2002, da Silva abandoned his fiery rhetoric and blue jeans in favour of a business suit and the slogan, “Lula: Peace and Love,” signifying “a conciliatory discourse on social issues.” He rejected nationalization, actually advocated privatization of water services, and agreed to pay Brazil’s foreign debt. Where once he had threatened to take away the money of the rich, now he allied himself with them. Da Silva chose Jose Alencar, Brazil’s richest textile magnate, as his running mate. Alencar, worth $500 million, is head of the small Liberal Party (which is actually conservative) and an evangelical church. He personifies the PT’s new-found alliance with a segment of Brazil’s capitalist class which sees little benefit from U.S.-enforced neoliberalism that opens up their country to Wall Street capital but does not provide new markets for their products.

With this alliance and the other policy reversals, Lula has fundamentally transformed the PT from a party of radical social change to a vehicle for elite politics. The PT now represents the national industrialist section of Brazilian elite that was adversely affected by the former government’s compliance with the demands of international financial capital. It used high interest rates to attract foreign capital, but these inhibited the expansion of domestic industry. Since the 1997 Asian crisis, Brazil’s annual growth rate has averaged less than 1%. Thus, what Lula and the PT stand for now is a different kind of capitalism: a more nationalistic variety based on greater domestic production rather than international borrowing. Members of Brazil’s industrial elite realize that deteriorating conditions for workers and the poor must be tackled through reforms so as to “head off a more explosive revolt.” As Sergio Haberfeld, the owner of a large packaging company who backs Lula, put it, “Unless we do something about our social problems, the country won’t survive.” In this sense, Lula is the elite’s insurance policy against revolution or social breakdown. However, Da Silva’s acquiescence to the IMF makes even his nationalistic form of capitalism impossible to attain.

The Military’s Man

Lula has sought to appease not only the IMF and the domestic business class, but, most disturbingly, even the Brazilian military. The armed forces overthrew the elected left-wing government of Joao Goulart in 1964 in a CIA-backed coup, and for the next 21 years Brazil suffered under a brutal military dictatorship enforced by death squads. Thousands of “suspected communists” (including children) were “disappeared” and tortured, unions were banned, peasants’ homes were burned, their land stolen, and drug dealers were protected. Military rule also laid the basis for Brazil’s appalling inequality. Lula himself led strikes against the dictatorship and was jailed several times.

However, in a speech to military officers last September, Da Silva lauded the military dictatorship for encouraging “internal development” (Brazil’s arms exports grew significantly under military rule). He called for more investment in the arms industry, pledged to continue the draft, and opposed Brazil’s signing of the Nuclear Non-Proliferation Treaty. Lula also supported building a new jet fighter and missiles to compete with the U.S. F-16. “Brazil must be an economic, technological and military power,” he announced, to great applause.

A Social Crisis

Despite his many compromises, however, Lula has so far retained his traditional support base of workers and the landless. But there will be enormous pressure from these sectors, as well as from the poor (who also voted for him in significant numbers) on Da Silva to deliver on his social promises. It is true that many Brazilians did not vote for a radical Lula, and that he won only by moving to the centre; but after 21 years of military dictatorship and 12 years of neoliberalism, people do expect substantive reforms from him: more jobs, less inequality, and an end to hunger and landlessness; in short, a kinder capitalism which distributes benefits more equitably. The failure of such reforms to materialize is sure to trigger a social crisis, with confrontations between the workers, landless and poor on one side and foreign and domestic capital on the other. Joao Pedro Stedile, the MST leader, said in September: “Lula’s victory will inspire the people of Brazil and Lula’s government will need an organized mass movement to give support for the necessary changes.” Stedile considers it necessary to give land to four million families in four years. Lula pledged to redistribute land to half a million families over the same time-frame.

This encouragement to class confrontation is the positive side of Lula’s victory. Many workers, landless and poor still consider Lula to be their political champion. His victory is likely to galvanize them, make their organizations stronger, and solidify their determination to take their fair share of Brazil’s wealth. When things do not change, the middle class could join these groups, as well, and the resulting mass movement may bring to power a genuine alternative to neoliberalism.

Continental Disaster

The Brazilian financial crisis which resulted in Lula’s election is only one part of the failure of neoliberalism in Latin America that has led to a regional resurgence of the left. As one observer remarked, “What is called a financial contagion is in reality the collapse of an economic model based on U.S. pillage, local corruption, and joint exploitation.” After a decade of IMF-enforced austerity, high interest rates, wholesale privatization, and massive corruption, Argentina is a catastrophe: its economy has completely collapsed, with a 67% decline in national income and 50% of its people living below the poverty line. It defaulted on its international debt in December 2001. The country was the most prosperous and industrially developed nation in Latin America and the most faithful follower of neoliberal policies. Argentina privatized almost all state assets, most crucially the banking system, which allowed foreign banks to loot the country and transfer $197 billion abroad. Such an enormous capital flight, combined with 90% interest rates, crippled industrial production and destroyed the national banking system. Neoliberalism meant the sucking-out of Argentina’s wealth into the coffers of the U.S. and other northern economies, leaving the country in total disintegration.

Similar scenarios are being played out to varying degrees in other Latin American nations trapped in a system which extracts wealth from Southern countries at such an incredible rate that even the richest ones can no longer survive. Uruguay, too, is in deep recession with a 15% unemployment rate, and had to get a $1.5 billion IMF loan to prevent its economic collapse. Paraguay was rocked by “deadly anti-government riots” when its currency lost 30% of its value last year. Alcides Gimenez, the country’s economics minister, warned in November that Paraguay’s long recession could deteriorate into “outright financial chaos.” Paraguay is having trouble paying its $2.3 billion foreign debt amid a run on the banks and resistance in the legislature to more austerity measures. The opposition has prevented the country from signing a $200 million loan deal with the IMF.

Peru is so dependent on World Bank-IMF loans that the World Bank recently insisted that the government privatize “everything,” as Argentina did. But the government’s attempt to privatize electrical companies last June caused “a social eruption.” President Alejandro Toledo’s approval rating plummeted from 70% to 16% after his failure to keep his election promise to create “thousands of jobs.” Unemployment and underemployment in Peru exceed 50%, and 54% of Peruvians live in poverty. Venezuela, under the government of Hugo Chavez, has forcefully rejected neoliberalism. Chavez, a former army colonel and coup leader, has increased social spending, created 450,000 jobs, and moved the country four places up on the UN Human Development Index. Not surprisingly, the U.S. tried to have Chavez overthrown through a military coup in April 2002, and when that failed, started calling for new elections while Chavez tries to withstand a strike by oil workers fomented by the country’s business elite and probably the CIA. Chavez has warned that a second coup attempt is imminent.

In Ecuador last November, Colonel Lucio Gutierrez, another left-wing former coup leader, was elected President on a platform of narrowing the gap between rich and poor and fighting corruption. Ecuador has to pay $2 billion on its $13 billion foreign debt in 2003, which is almost half of the country’s budget. As one commentator put it, “[Guitierrez,s election] has shown yet again that South America is fed up with the traditional political parties, which have dished out economic policy dictated from Washington. The region has turned left amid growing unrest and disenchantment with the free market. It is this model, along with what is seen as the interference of the U.S. and the IMF, that has provoked a political backlash, not only against the free market, but against the United States, which has a long and unfavourable history of intervention in Latin America.”


Published in the Canadian Centre for Policy Alternatives Monitor, March 2003.

Asad Ismi is the CCPA Monitor‘s international affairs correspondent and author of the report Profiting from Repression: Canadian Investment in and Trade with Colombia (2000).