Until recently, the reelection of Luiz Inacio Lula da Silva as president of Brazil seemed a sure thing because the serious corruption scandals that rocked his government more than a year ago were on the back burner. At the time, the Mensalão campaign scandal, which involved buying votes in Congress to get approval for Lula’s projects, had damaged the leadership of the president. However, Lula had managed to distance himself from charges of corruption, and his popularity had survived a series of accusations against him and his government. Other ministers and leaders of the Workers’ Party (PT) were forced to abandon their posts, including Antonio Palocci, the minister of economics.


A few days before the first round of the elections, another scandal wound up complicating Lula’s road to reelection. This time, accusations surfaced that the PT had commissioned a false report to implicate candidates of the opposition Social Democratic Party (PSDB) for their supposed involvement in a corruption scheme. The police found 1.75 million reais (about 651,200 euros) in a hotel room with two PT members. The funds were to be spent on the document, which contained accusations against Geraldo Alckmin, the PSDB’s candidate for president, and Jose Serra, its candidate for governor of the State of Sao Paulo. New firings and resignations followed, including that of Lula’s campaign chief, Ricardo Berzoini.


Lula’s campaign suffered two other blows, first from Lula’s failure to participate in televised debates with the opposition, and then as a result of a leak to the press of photos of money seized in the corruption case. Carlos Malamud, chief researcher in Latin America for the Elcano Institute, says that Lula’s absence in the debates stemmed from his belief that he would benefit more from not appearing [than from appearing] because he would not become the target of his critics. “Nevertheless, the only thing that this achieved was that Lula dropped down in the polls, the way it happened to Lopez Obrador, the candidate in the recent Mexican elections,” says Malamud.


At the same time that the corruption scandal broke, there was a new flare-up in Brazil’s relationship with Bolivia following the nationalization of energy sector decreed on May 1 by Bolivian President Evo Morales. One segment of public opinion in Brazil demanded that Lula take a hard line against the conditions established by Bolivia for Petrobrás, the state-owned Brazilian oil company. For many people, explains Malamud, this event made it clear that “Lula was not a leader on a continental scale.” Nevertheless, both Malamud and Leonard Barreto, professor at the University of Brasilia’s institute of political science, believe that this issue has not played a decisive role in changing the vote of the electorate.


According to Barreto, Lula has succeeded by choosing the path of negotiation and diplomacy. “Bolivians, and even Evo Morales himself, would prefer that Lula take a harder line in his rhetoric because it’s traditional in those countries for presidents who have popularity problems to seek a foreign enemy.” In addition, he adds, “Lula has done the appropriate thing in choosing the path toward diplomacy. To me, it’s important for Brazil to stop playing the same game as Morales, which is all about boasting and giving speeches that have no content. I believe that the [Brazilian] government and Petrobrás are following the correct path.”


All of these events struck a firm blow against Lula’s image, however. Only a week before the October 1 vote, analysts had expected that Lula would win 52% of the vote, but he only won 48.61% of the votes. In contrast, Geraldo Alckmin, the opposition leader, enjoyed a spectacular resurgence, moving beyond 30% to reach 41.64% of the total. On October 29, Lula and Alckmin will square off again in the second round.


Cards Held by Lula


Despite everything, Lula has some strong cards up his sleeve. For Valeriano Costa, professor of political science at the University of Campinas (UNICAMP), the key to Lula’s popularity is the “great sense of identity that he has established among the poorest voters” thanks to such social programs as his Family Grant program, which provides subsidies for 11 million poor people. His successful social policy is a component of his image – “a humble, poor person, who rose up and became a great politician who is internationally known. All of this has been a source of satisfaction to the poorest segment of voters in the North and Northeast, and they have closed ranks around Lula.”


Barreto agrees that the government’s social policies have been a total success. However, he says that the programs themselves have been less successful. He calls them “a wide-ranging marketing success.” In his view, the programs have raised expectations among the country’s poorest social classes that they will make even more progress during Lula’s second administration.


On the other hand, Barreto explains, the opposition parties’ negative marketing strategy regarding the Brazilian government’s scandals has backfired. “The critics have undermined the image of Lula and of the entire political class.” However, if everyone is viewed as corrupt, then people “use other criteria for choosing” politicians, Barreto adds. Besides, during Lula’s administration, the number of poor people in the country has declined, according to reports by major institutions.


Anita Kon, an analyst at the Econolatin Network in Brazil and professor at the Pontifical Catholic University in Sao Paulo, notes that most of the public policies enacted by the Lula government had their origin in earlier governments. However, the achievements took place in this government’s legislature, including the stabilization of inflation. During the current election year, says Kon, the top priority has been “adjusting the minimum salary to higher inflation rates and readjusting salaries for specific categories of public-sector workers.” In addition, getting control of inflation has improved the buying power of low-income workers. Finally, “they managed to liquidate part of Brazil’s foreign debt, thanks to the favorable accumulation of international reserves and to the [upward] revaluation of the currency [the Real].”


Bright Spots and Dark Spots


During Lula’s first term in office, the bright spots have been these social improvements, along with a pragmatic economic policy, control of inflation, appreciation of the currency and the trade surplus. However, the low level of political ethics and the failure to create sustainable growth have cast a shadow on the administration. With the arrival of Lula, many Brazilians were expecting Brazilian politics to meet a higher standard of morality. They anticipated that “our institutions would be perfected,” says Barreto. For many people, the government has failed in that respect.


Generally speaking, says Costa, this is really about administrative mismanagement. At the beginning, he says, “The internal battle within the PT impeded the approval of specific measures that required a higher quorum.” The corruption crisis has its origins in the difficulty of mobilizing the government’s base. “The topic of the Mensalão scandal is related to the way legislators have been behaving in Congress for quite some time, and to how the government wound up getting involved in behavioral patterns that favored corruption.” There is “a fierce competition for power within the government coalition, and this has created a serious administrative problem,” adds Costa.


Nor has the economy of Brazil met expectations. Although the government has managed to put a stop to inflation (which was 5.69% in 2005), using extremely high interest rates (14.25%), Kon believes that “it has maintained its policy of high interest rates for too long, and that has been a disincentive for investment, and for modernization and expansion of manufacturing. It has thwarted new job creation and led to annual growth rates that are not very meaningful compared with the country’s needs and with the global economy, especially compared with other developing countries.” With its population of 180 million, Brazil is considered one of the four big emerging economies, a group known as the BRIC. The other members of the group are Russia, India and China.


Forecasts call for the BRIC nations to eventually share global leadership within decades, but Brazil’s economic growth rate of about 3% has not been brilliant, especially if you compare it with the 11.3% rate in China. Barreto notes that the Lula government “has not managed to carry out the necessary reforms that would permit us to enter a cycle of greater economic growth.” In his opinion, this is nothing new. Brazil, he says, has structural problems and it needs a whole series of reforms. Among them, the following stand out: “Tax reform, a reduction in the size of the State, cost reduction and the establishment of more appropriate regulation for certain sectors of the economy.”


When it comes to high unemployment, which is at 10.7%, Kon believes that the programs created from 1995 onward to support the youngest workers have produced very unsatisfactory results, despite the fact that these programs were well funded. In his view, this proves that there has been widespread mismanagement, and that the various players have been unable to join forces effectively.


State of the Economy


Barreto compares the Brazilian economy to a very strong horse “that has a great desire to go galloping around but is chained by some very heavy weights. The best that the horse can manage is to go a short distance every year. What’s weighing the horse down is the State [the government].” Today, more than ever, Barreto says, “The Brazilian government needs to reformulate the State in order to develop itself. In this sense, the main bottleneck is the tax system. What’s insane is the size of the tax burden that exists in Brazil and its complexity. This is what makes businesses often spend millions and millions of reais just to understand how this system works.”


The second factor, in his opinion, is the shortage of the sort of education and intellectual training that enables sustainable growth. The third factor is infrastructure. “It’s not just about roads, superhighways, ports and airports. The energy problem is very important. Brazil has guaranteed energy sources but only until 2010. After that date, things are uncertain.”


The fourth factor is a crisis of confidence in the State, reflected in insecurity about investments and saving. The size of the State is very large. There are now more than a half million federal bureaucrats, breaking all previous records. These days, Barreto notes, “We collect about 40% of the Brazilian GDP [in taxes], which is one of the highest [rates], even compared with developed countries. Nevertheless, when it is time to manage those funds, we do so with an injustice that is brutal. This is possibly one of the greatest causes of poverty and misery.” Barreto also calls attention to corrupt legal procedures in public-sector projects. “The absence of oversight makes these projects veritable financial sinkholes.”


Within the social security system, he notes, “The largest portion of funds collected are used to sustain absolutely unreal retirement pensions. That means that 80% of social security funds are going to the 20% of retirees who have retirement funds of 30,000 and 60,000 reais… No one contributes enough to have a right to pay for this kind of retirement. The money spent for paying these [retired] officials exhausts the capacity for investment. Everything is used to pay for a bureaucracy that is large and inefficient.”


Finally, he notes, there is a shortage of planning. “We don’t have any priorities in our investments.” Although Brazil had a financial crisis during the 1980s, when it did not have money to invest, the current crisis is about mismanagement. “There is money, and there are financial resources, but there are no efficient plans for spending it.”


Prospects for the Medium and Long-term


According to Kon, high economic and social costs cannot sustain this model over the medium and long term. Prospects for the next government are that “costs incurred by these public policies will bring about a considerable expansion in the government deficit without bringing about a corresponding level of revenues. This will mean even more of a reduction in the opportunities for growth and for generating new jobs. This will have the effect of compromising low-income groups and their chances for social advancement.”


For Barreto, the prospects are from fair to good. In his opinion, Brazil has not taken advantage of the window of opportunity that resulted from growth in the global economy, which is now experiencing its first symptoms of weakness. He believes that reforms will only bear fruit over the long term. If the country undertakes the reforms that are needed — something very hard to do because of the complexity of negotiating in Congress – “this process will be a very long and painful one, and it will require several years to carry out. For Brazil to achieve structural conditions that are ideal for achieving growth, we are talking about a period of 30 or 40 years without any positive results after we make the actual reforms. No matter which candidate wins [the second round on October 29], we are not going to experience a period of strong, sustainable growth, at least over the medium term.”


Costa also paints a gray picture of the future. “The trend toward higher costs is making the government much more rigid. It is going to be very complicated for them to confront the problem of reducing costs and increasing the surplus. This is a trap that no one knows how to get out of.” Nevertheless, prospects are not all that negative over the long term. “They created a sort of implicit agreement for maintaining certain minimal conditions for the functioning of the government. Despite all the renunciations of corruption, the way things are being managed has basically stayed the same as ever. The only changes have been those involving style — changes in the way the machine operates and in the political uses of the machine. However, the overall model – which involves financial adjustments, surpluses, export promotion, modernization of the economy, creation of mechanisms for incentives and development – all of these things are starting up again slowly. People are awaiting a resolution of their macroeconomic problems so that these mechanisms for providing incentives are fully used.”


Hard-fought Second Round


Things don’t look good for Lula. Experts agree that no one knows which candidate would win a second round if it were held today. Malamud explains that the two politicians are separated by only seven percentage points. This is because “Alckmin has figured out how to concentrate all the useful anti-Lula votes.” On the other hand, the useful leftist votes have moved toward Lula but he has not achieved the goal of an absolute majority. These votes have come from the candidate of the PSOL (the Party of Socialism and Liberty), Heloisa Helena, who won 6.8% of the vote despite expectations of around 9%. During the second round, “we’ll have to see if Alckmin manages to attract more voters who are unhappy with Lula. We’ll also have to see whether those who voted for Helena will abstain, or whether they will vote for Lula.”


According to Malamud, the upcoming election will be something totally new. “Alckmin is in a very strong position, and Lula will have to be very nervous.” This time, he will have to attend the debates. If not, warns Malamud, “He will fail an important test.” Whoever wins, concludes Malamud, “the president will have to call for an agreement because it will be a weak government.”