Can Brazil's Lula Survive Corruption Charges and a Struggling Economy?Published: March 01, 2006 in Knowledge@Wharton
Corruption scandals involving Brazilian President President Luiz Inacio Lula da Silva and his government show no signs of letting up, and they are beginning to have an impact on Lula's popularity. In October, his approval rating dropped to 46.7% from 50% the previous month -- the lowest since he came to power three years ago. The government, however, is in a worse position: Only 31.1% of all Brazilians expressed confidence in its leadership, compared with 36% in September.
According to Anita Kon, an analyst with the Econolatin network in Brazil and a professor at the Catholic Pontifical University of São Paulo, the government's declining popularity can be traced to the large number of politicians in his Workers' Party (the PT) who are involved in corruption scandals dating back almost six months. The accusations against them range from illegal campaign financing to bribing legislators to achieve the parliamentary majorities that Lula needs in order to govern.
Over time, those corruption cases have harmed Lula, although, as the public opinion polls show, his personal stature has not eroded as much as the credibility of the government itself. According to Carlos Malamud, chief Latin American researcher at the Elcano Institute, this is because "the government's efforts to preserve the stature of the President have had a positive impact." In addition, says Kon, "Lula has distanced himself from the political crisis ... insisting that the accusations against his PT party members are a plot by the country's elite." Furthermore, the government's strategy of "diverting governmental resources to Brazil's classes, so they can buy food, has kept those voters loyal [to Lula]," she adds. In general, "those people are not as well educated and have little information about politics. Most of them live in Brazil's northeast, where Lula's populist rhetoric is" especially intense.
But Malamud warns that the political crisis is not over and that, indeed, the image of the government and the President could continue to erode. "They recently stripped José Dirceu of his status as a deputy," he notes, referring to a decision by Congress on November 30 to officially remove Dirceu, formerly Lula's right-hand man and chief spokesperson for his presidential campaign. Dirceu was accused of organizing an illegal plot to finance electoral campaigns and bribing lawmakers in exchange for their political support. Dirceu is not the only top politician who could tumble from power in the near future. Others, within both the government and the opposition, could be investigated and dismissed.
One of those people could be economics minister Antonio Palocci, who is accused of engaging in corrupt activities during the years when he was mayor of Ribeirão Preto, a small city in the State of Sao Paulo. While Palocci may soon be called to testify before the parliamentary commission investigating corruption, that is not his biggest problem. "Palocci has the difficult task of managing economic policy, and the latest news about the Gross Domestic Product and growth is not the best," says Malamud. During the third quarter [of 2005], GDP slowed down by 1.2%, compared with the previous quarter. As a result, annual GDP growth is expected to drop from 3.5% to 3%.
Palocci has been under the gun from critics, even within the government, for following a policy focused on savings, and for his reluctance to sacrifice the country's primary account surplus, which amounts to 4.25% of GDP. Indeed, Palocci wants to increase that figure. Dilma Rousseff, who replaced Dirceu as a cabinet member in the government, has said publicly that the government's policy of establishing fiscal discipline is not the most appropriate way to achieve economic growth. Some members of the PT believe that focusing on growth could help rebuild Lula's credibility in time for presidential elections 10 months from now.
Kon suggests believes that dissatisfaction is rooted in the fact that "Lula's fellow party members are disillusioned by the complete turnaround in economic policy compared to their proposals before the election and to the ideology that the PT has always defended." Another reason for the loss of confidence is some critics' belief that the government's economic policies are not about promoting economic growth but instead, reflect efforts by politicians to maintain their power in the next elections.
According to Malamud, this division of opinion about economic policy is nothing new. Ever since the PT came to power, "the government has been divided in its approach between those who want policies of fiscal adjustment in order to set the stage for longer-term economic growth, and those who want an economic policy that involves higher spending." Malamud suggests that the executive branch's approach is appropriate. "Before the corruption scandals, it was a success. Then, the trend toward growth turned things around. Everything will get back to normal if [the government] manages to turn the economic situation back around again," he says.
Indeed, positive news about Brazil's economy surfaced this week with a report that early next year, Brazil will produce as much oil as it consumes, soon becoming "a net oil exporter," according to an article in the Philadelphia Inquirer. The story described the development as "an energy milestone that promises to shield Brazil from the twists and turns of the international market" and it was achieved because of "decades of government efforts to keep oil consumption low by encouraging the use of alternatives such as ethanol from sugarcane and soy."
Interest Rate Issues
In the meantime, high interest rates are increasingly a hot-button topic for the government. The Central Bank currently maintains an annual rate of 18.5%. According to Kon, interest rates have been held at an unusually high rate for a long time in order to keep inflation under control and "attract foreign capital to the country through direct investment." Nevertheless, she says, "for several months, the inflation situation has allowed some margin for moving toward lower rates. Yet [the country's] attractiveness to foreign capital is harmed by its uncertain economic environment and the fact that economic activity is shackled by high rates."
Add to this the "revaluation of the Brazilian currency, the real, in recent months," she says. "The real has reached a level that is too high. This has provided a disincentive to exports and to investments, but it has not managed to stimulate imports because of the paralyzing environment [of high interest rates]. I believe that a more intense and accelerated drop in interest rates is urgently needed."
According to Theotonio dos Santos, an economics professor at the Federal Fluminense University (UFF) in the State of Rio de Janeiro, strong pressure from society, politicians and the business world to cut interest rates will be effective. "The President needs to re-focus on economic growth, or he will not be reelected. Even if rates drop to 14%, they will still be extremely high. In reality, they should drop to below 10%," says dos Santos, adding that, if interest rates drop, the country will achieve the strongest possible growth, including "an adjustment in the process of revaluing the real. That could lead to a slight drop in the real, which would mean greater growth in the GDP. Depending on how much interest rates drop, we could reach 5% or 6% [GDP growth] in 2006."
Lula's Probable Reelection
Some analysts expect Palocci to be dismissed before the end of the year, even suggesting that his likely replacement will be Aloizio Mercadante, the leader of Lula's Workers' Party (the PT) in the Senate. Nevertheless, Kon and Malamud don't believe that this will provide any short term relief. "Unless some catastrophe occurs, I do not believe that Palocci will be removed from office, because he can count on Lula's support," notes Malamud.
Nor does it seem likely that Palocci will leave his post during the first six months of 2006. According to Kon, despite accusations of corruption, Palocci has responded skillfully to his critics. "Neither the government nor most of the opposition has any interest in having Palocci leave his post, because the country's economic situation would wind up being even more uncontrollable and unsustainable. Substituting Mercadante [for Palocci] would not solve that problem. The goal is to convince and pressure Palocci so that he becomes more flexible in his economic policy and decides to restart economic activity, beginning with a rapid drop in interest rates." In addition, dismissing Palocci "would not help to silence talk of corruption, which was fueled by other politicians in the PT party, by other parties in the current government and by the opposition. Palocci is not really the one who is most responsible for corruption in the country."
Nevertheless, the parliamentary commissions looking into the corruption charges could force Palocci and others directly related to Lula to come before the Senate. Other people who could make an appearance include Lula's brother and Paulo Okamoto, who has admitted that he used money from the PT to pay off a personal loan from the President. In addition, it is quite possible that José Alencar, Brazil's vice president, will have to show up at one of the hearings to explain the delivery of a million reais (about $450,000) by the PT to a textile company that he owned. Malamud predicts that the resolution of the corruption crisis "will depend on the declarations made by those who appear at the commission hearings. The dismissal of Dirceu is proof that [Senate members] are ready to get to the bottom of things," he says. However, it will not be easy because "the government is going to try to shield Lula from every sort of attack."
Despite this situation, "it is quite likely that the President of the Republic can be reelected," suggests dos Santos. "It is especially likely if economic policy is relaxed, which would involve cutting interest rates and increasing public spending. If that happens, the country's economic situation could improve, and the Lula government could leverage that to its advantage in the electoral campaign." Malamud is also optimistic about Lula's reelection. The President "has enough time to recover his lost credibility provided no more corruption scandals are uncovered. He needs a quiet period where nothing much happens ... and other topics are on the agenda."
According to dos Santos, even if Lula is reelected, he won't be able to put aside all the corruption problems on the national agenda, which could make his second administration almost unviable. "It would also seriously damage the economy; what we are seeing now is only an advance look at what could happen over the next four years."
Roberto Romano, professor of ethics and political philosophy at Unicamp, the state university of Campinas [the Brazilian state], considers Lula a unique figure. "Lula has shown that he has very rare survival skills. It's not often that you see a president with his ability to recover from a hard blow. The technique he uses is this: He escapes, and one of his aides falls."