The question is whether the laws of economics have changed. The president-elect won a landslide victory on a feel-good populist platform of more jobs, higher wages, bigger pensions and better health care. Now he needs to deliver–and many analysts doubt he can do it. Brazil’s government simply doesn’t have the money. “Lula made too many promises,” says Daniel Gleiser of the European investment bank Dresdner Kleinwort Wasserstein. “Not everybody is going to be satisfied. They want results soon.”
That’s the problem–not only in Brazil but across Latin America. As long as business was good, most people were willing to stand for the technocrats’ austerity programs. The cutbacks in government payrolls and social services were painful, but it was all about reform. Now the economy has lost its steam, and the electorate has run out of patience. Shut-up-and-take-your-medicine technocrats are out; instant-gratification populists are in. Lula’s runaway win is only the most immediate example. Both candidates in Ecuador’s Nov. 24 presidential runoff are unapologetic populists. In Argentina, most analysts assume that the next president will be whoever wins the nomination of the party that virtually invented Latin American populism, the Peronists. Never mind that the economy’s current meltdown was largely caused by the unrestrained social spending of the last Peronist to lead the country, Carlos Menem, who left office in December 1999.
No one has to look back that far to see how much trouble a populist president can get into. Hugo Chavez won Venezuela’s presidency in 1998, promising to narrow the gap between rich and poor and clean up one of the most corrupt administrations in the history of Latin America. He squandered hundreds of millions of dollars in oil revenues on ill-conceived social-welfare schemes. They didn’t cure Venezuela’s economic ills, and his stratospheric approval ratings went into free fall. Today he has few supporters left outside the slums that are spreading across the country. Active-duty generals in his own military call publicly for his resignation. Few independent observers think he can hold out until his term ends in 2007.
Lula’s prospects don’t look nearly so grim. He has at least one huge advantage: despite the recent economic downturn, Brazil continues to be an economic dynamo. In September the country posted its biggest monthly trade surplus ever. Forecasters say the annual figure could reach a record $20 billion next year. Nevertheless, Lula has already set to work cooling down his supporters’ wildest expectations. Their rallies during the first-round campaign might have been mistaken for old-time revival meetings, but during the runoff he began warning them not to expect miracles. He may not have abandoned his promise to double the $53 monthly minimum wage by 2006, but he certainly stopped talking about it. And he has flatly refused to listen to pleas for a budget-busting federal bailout of debt-laden state governments.
His restraint has reassured the markets. Earlier this year they collapsed into shivering fits at the first hints of a possible Lula victory. He responded by reversing his old stance, pledging that Brazil would honor its obligations to international lenders. Last week the country’s currency, the real, gained strength against the dollar, further assuaging fears about a possible default. The positive news still didn’t seem to remove all doubts for Paul O’Neill. “The markets are going to look very carefully at what he [Lula] does today, tomorrow and the next week, to provide reassurances that he’s not a crazy person,” the U.S. Treasury secretary predicted.
His blunt words offended many Brazilians. But there’s no guarantee that Lula won’t do anything foolish. He’s facing intense pressure to generate new jobs and boost social programs. Some analysts worry that he might find no other way to do it than by revving up the central bank’s printing presses. He wouldn’t be the first Brazilian president to make such a mistake: that’s how the country’s inflation rate broke 2,000 percent back in the early 1990s.
Such easy fixes present a powerful temptation these days almost everywhere in Latin America. Overseas investors have bailed out of emerging markets en masse. Among major countries, only Mexico and Chile consistently get good grades as congenial markets for working cash. Since the peak year of 1996, private capital flows to Latin America have plunged from their high of $326 billion to an estimated $128 billion this year, the lowest figure in a decade. According to a recent J.P. Morgan forecast, economic growth for the region as a whole is likely to be less than 1 percent next year.
The leaders of the populist backlash blame just about all their countries’ woes on the market reforms of recent years. But they can’t turn back now. No one has the money to bring back the days when bloated central governments controlled prices and protected local companies in a cocoon of tariffs. Lula all but concedes as much. From the earliest days of his campaign, he often closed his stump speech with a single, telling refrain: “I can’t make a mistake.” He wasn’t claiming to be infallible. He was saying that a misstep could be disastrous. He was right.
