Global Policy Forum

Facing a Financial Time Bomb and the War

By Roger Burbach *

As Luis Inacio Lula da Silva enters his third month as president of Brazil he enjoys popular approval ratings approaching eighty percent. His "Zero Hunger" program has begun with pilot projects around the country, and as promised in his electoral campaign, he has set up councils comprised of members of civil society to make recommendations on key policy issues.

But as Reinaldo Gonzalves of the Economic Institute of the Federal University of Rio de Janeiro notes, "Lula faces a financial time bomb that could explode at any time." While Lula is moving forward full throttle to change the country's social policies, he is already confronting serious economic problems that could undermine and even destroy his government.

The first crisis he faces is an essentially bankrupt social security system because of the policies of the previous government. According to Cesar Benajamin, a social policy analyst who is a leader of the Popular Consultative Movement, "former president Fernando Henriquez Cardoso's neo liberal free market policies undermined the country's stable work force, greatly expanded the informal sector, thereby curtailing the number of contributors to social security." The number of retired beneficiaries in major states like Rio de Janeiro now significantly exceeds the number of people who are paying into the system. And like the United States, there is no reserve because the social security payments that came in during the Cardoso years went out to cover other government expenditures, including the foreign debt.

Regarding the debt, Gonzalves states, "the government is facing a major fiscal crisis because of the skyrocketing debt, both internally and internationally. In the medium or long term it is unpayable." The debt burden expanded dramatically in terms of the national currency due to a significant drop in the international value of the Real before Lula took office. Now the debt is equal to 56% of the country's gross domestic product. To the dismay of many leading figures in Lula's Workers Party, the new government up until now has adopted fairly traditional measures to deal with the fiscal crisis. To help meet payments on the debt, the Minister of Economy has order the government to cut expenditures and to raise the expected budgetary surplus, excluding debt payments, from 3.75% to 4.25%. And to stop capital flight due to the country's financial woes the Central Bank has raised interest rates from an already astounding 25.5% to 26.5%. Senator Heloisa Helena from Alagoas, an impoverished state in northeastern Brazil declares, "the policies of the economic advisors will not work." The leadership of the party tried to discipline her, but it was forced to back off when many others in the party supported her statements and her right to speak out.

Lula enjoys the full support of the more progressive sectors of the Workers Party for one major financial reform he is proposing-- a restructuring of the country's tax system. At present tax revenues come overwhelmingly from a value added tax. This means that approximately 24% of the income of the poorest fifth of the population goes to pay taxes while the upper fifth pays only 12%. Lula is calling for a progressive income tax that would shift the burden away from the poor. But Congressional approval is needed to change the tax code. While some changes may be implemented, the fact that the Workers Party does not command a majority in either chamber of Congress means that there will not be a radical shift in the tax burden from the poor to the rich in a country with one of the greatest extremes of wealth and poverty in the world.

While criticizing the government's financial measures, the more militant sectors of the Workers Party remain fervently committed to Lula's social policies. Francisco Meneses, who is a member of the newly formed Council on Food Security that represents the interests of civil society, states, "Lula is aggressively dedicated to fundamental changes in Brazil's food and agricultural policies." The council decided to double the amount of food distributed to the poorer families in the country's schools in its first meeting on January 30th. Then in a meeting on February 27 the council agreed to direct the Ministry of Agriculture to transform its historic policy of supporting agribusiness interests. "The new objective is to support cooperatives, small scale agricultural producers, and to help people attain food self sufficiency at the local level," states Meneses.

The agricultural and anti-hunger policies will not face the immediate budgetary squeeze of other government programs because the UN Food and Agricultural Organization along with the World Bank see Lula's "Zero Hunger" program as a global model and are pumping around five billions dollars into Brazil to support the plan. But as Gonzalves notes, "this is only a temporary fix. These are almost exclusively loans that will add to Brazil's already enormous international debt."

The impending U.S. war with Iraq will only deepen these problems. It has already upset Brazil's financial markets. Even Lula's orthodox economic advisers recognize that the war will have a shock effect on the Brazilian economy, causing a drop in exports and adversely affecting the country's ability to deal with its debt and capital flows.

Lula has been outspoken in opposing the U.S. war. In a recent phone conversation with Chancellor Gerhard Schrí¶der of Germany, Lula declared he would weigh in with Mexico, Chile and Angola--three members of UN Security Council with which Brazil has historic ties--to vote against the new U.S. resolution for an Iraqi war.

In Brazil, as elsewhere, the war clearly hangs as an albatross over the country's future. Marcos Arruda of PACS, an independent research center, notes, "we have no idea what the war will mean. We could be thrown back to a period like the 1930s when all of Latin America was in a depression. It will minimally create new difficulties making it virtually impossible to continue paying the country's enormous debt."

As Francisco Meneses states, "sooner rather than later Lula and his economic advisers will have to break with the past. They have no choice but to come up with new strategies and alternatives. This may lead Lula to call for popular mobilization, and the formation of participatory councils at the grass roots community level to challenge the strangle hold of the domestic and the international elites over the Brazilian economy."

About the Author: Roger Burbach is director of the Center for the Study of the Americas (CENSA) and has written extensively on Latin America and globalization.

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