Brazil: Lula’s Historic Legacy

BY JOACHIM BAMRUD

When Luiz Inácio Lula da Silva exits Brazil’s presidency in January, he will leave behind a solid legacy that has transformed Latin America’s largest economy. Especially the last four years of his eight-year administration has seen Brazil go from strength to strength. In doing so, it has also helped lift Latin America’s global stature.

Lula’s legacy has been a positive surprise. Experts and the business community alike were highly nervous about what to expect from Lula, a radical former union leader.

“Lula was elected as the "possible default president", and he left office as the "pragmatic president", a president that for the most part was able to control his strong past ideological biases,” says Alberto Bernal-Leon, Head of Macroeconomic Strategy Research at Bulltick.

Lula garnered early praise by naming Henrique Meirelles, a widely-respected former head of BankBoston, as the president of the central bank and then giving him autonomy during his eight year administration – despite heavy opposition from other members of the government and ruling Workers Party.

Meanwhile, Lula’s first finance minister Antonio Palocci also surprised positively by following relatively market-friendly policies.

The business community – local and foreign – was pleased by the fact that Lula did not implement any radical changes from his popular predecessor, Fernando Henrique Cardoso, who had shifted Brazil towards a more market-oriented economy.

THE CHAVEZ FACTOR

That pragmatic policy, combined with increased focus on social programs, helped Brazil make real progress in reducing poverty and boosting its middle class.

It also marked a clear contrast to its northern neighbor Venezuela, where Hugo Chavez implemented radical policies that scared away foreign investment and made the oil-rich country a basket case in economic terms, with oil rigs rusting, food rotting, bridges falling apart, growing power outages and crime and inflation setting new records.

While Brazil’s economy is expected to grow by 7.7 percent this year (its best result in 25 years), Venezuela’s economy will fall by 1.6 percent (the second-worst performance in Latin America after earthquake and cholera-ravaged Haiti), according to new estimates from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and historic data from the International Monetary Fund (IMF). 

THE CARDOSO FACTOR

Then there’s the Cardoso factor. There’s no doubt that Lula has been helped by policies implemented by his predecessor – even those he criticized while being an opposition politician.

As finance minister before becoming president in 1995, Cardoso was able to tame Brazil’s notorious hyper-inflation through the Real Plan, which introduced a new currency (the real) while implementing strict fiscal and monetary policies and opening up the economy. Inflation fell from 2,076 percent in 1994 to 66.1 percent in 1995 to 16 percent in 1996. Subsequently it has never been higher than 14.8 percent.

As president, Cardoso ended the monopoly of telecom giant Telebras and opened up for strong competition, resulting in one of the most dynamic wireless markets in Latin America.  He also privatized CVRD, the world’s largest iron ore producer, and steel giant Acesita.

WASTED OPPORTUNITY

When Cardoso handed the presidency to Lula in 2003, Brazil still had its share of major challenges.

They included a cumbersome tax system, a still-large bureaucracy, too much red tape, corruption, a weak education system and inefficient infrastructure.

Lula, however, did not tackle any of these issues, despite having two mandates and strong economic growth.

“He did waste an important opportunity,” Bernal says. “He could have reduced the size of government via closing some superfluous ministries. He also could have streamlined government paperwork, so that Brazil could score higher on the World Bank Doing Business report. Brazil lags most of Latin America in the easiness of doing business.”

Meanwhile, he marred his presidency by a string of corruption scandals and by cozying up to global pariahs like Iran’s President Mahmoud Ahmadinejad (who denies the Holocaust) and keeping friendly connections with Chavez, even after he insulted Brazilian lawmakers as “parrots” of Washington when they opposed Venezuela’s entry into Mercosur.  “His controversial stances on the foreign policy front [has been Lula’s biggest negative legacy],” Bernal says. “Specifically, his closeness with Iran and Venezuela. “

Foreign investors have also become increasingly alarmed by the growing state role of the economy, while many Brazilians criticize the political meddling in Petrobras.

MAKING HISTORY

Yet, for all his flaws, Lula will go down in history as the president who brought Brazil to new heights.

In September, state oil giant Petrobras sold shares for $70 billion – the biggest share sale in world history.  That sale also made the Sao Paulo Stock Exchange the world’s second-largest by market value.

Much of that success is due to another historic milestone – the 2006 discovery of pre-salt oil reserves off the coast of Rio de Janeiro, the largest oil discovery in the Western Hemisphere in 30 years.

In between those two milestones, Brazil was awarded the 2016 Olympic Games – the first ever to be held in South America and only the second to be held in Latin America (after the 1968 Olympics in Mexico City).  The games, which were awarded last year, will be held in Rio de Janeiro and have already resulted in an avalanche of investments in everything from hotel construction to manufacturing.  As part of its agreement with the International Olympic Committee, Rio had to boost the number of hotel rooms from 19,000 to 40,000.

According to Sérgio Cabral, Rio’s state governor, the state's coffers will increase by $50 billion thanks to various public and private initiatives as a result of hosting the Olympics. Meanwhile, the value of commercial real estate in Rio was expected to grow more than 50 percent from 2009 to 2016, experts say.

However, two years before the Rio Games, Brazil will host the 2014 World Cup in soccer – the first time it has hosted the event in 64 years. Apart from the privilege of hosting such an important event for soccer-crazy Brazil, the cup will also bring in billions of dollars in investments.  They include $6.3 billion high-speed train between Sao Paulo and Rio and a $3 billion upgrade of the key airports.

Both these events are likely to attract a record number of tourists to Brazil, benefiting many foreign hotel chains and airlines.

Meanwhile, the social programs put in place by Lula were a key factor behind last year’s cushion against the global crisis. The Brazilian economy only contracted by 0.2 percent versus the Latin American average of a 1.7 percent decline. Many Brazilians continued buying, helping offset the weaker trade and investment climate worldwide.

Brazil is now not only Latin America’s top economy by far (80 percent larger than number two, Mexico), but also is set to replace Italy as the world’s seventh-largest economy in 2011, according to a Latin Business Chronicle analysis of the IMF projections.

Lula once and for all killed the old saying about Brazil being the country of the future – and always would be.

Brazil’s moment is now. And Lula deserves much of the credit for that.  

© Copyright Latin Business Chronicle