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How left is Luiz Inácio Lula da Silva in economics?

Tondecades Once upon a time, when Luiz Inácio Lula da Silva was running for president, “it was as if a meteor was going to hit Brazil,” says Brazilian economist Percio Arida. (Pérsio Arida) recalled. The market “demonized” the leftist former president Lula. The currency, the real, lost 35% of its value and Lula had to write a letter to the Brazilian people promising that, if elected, he would not do anything rash. After he won, “the shooting star disappeared,” Mr. Arita said. Lula was fiscally prudent during his first four-year term in office from 2003 to 2006. After being re-elected for a second term, his Workers Party (point) The government used the commodity boom to help the poor. Lula’s policies were sometimes ineffective, and he expanded Brazil’s bureaucracy. But he is neither reckless nor aggressive.

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Now he’s running again. On October 2, Lula faced off against populist incumbent Jair Bolsonaro in the first round of the presidential election. Mr Bolsonaro is trying to rekindle old fears of Lula, and then some. He said the former president was “the devil who wanted to impose communism on Brazil”. Most Brazilians don’t seem convinced. Lula leads with 48% to 37% economistvote tracker (see chart). Reality is stable. “Businessmen know [what to expect from] A point government,” Lula told economistgushed about his accomplishments: average annual growth of 4.5 percent over his two terms; reduction of public debt from roughly 60 percent to 40 percent gross domestic product; inflation slowed from more than 12% in 2002 to just under 6% in 2010; an increase in the minimum wage; and 20 million Brazilians lifted out of poverty.

However, if Lula wins a third term, his job will be much more difficult than it was when he took office in 2003. Brazil’s fiscal situation is even worse: public debt at 78% of total debt gross domestic product 93% of the budget is spent on mandatory spending such as wages and pensions. The global outlook is worrying. While high commodity prices are helping the economy, inflation is hurting the poor. Political conditions were also more difficult. The Brazilian Congress is more greedy and less cooperative.

Lula likes to remind Brazilians how “happy” they were when he first took office. But he does not acknowledge that Brazil’s current woes began with his protégé and successor, Dilma Rousseff, point. When growth slowed, her government tried to stimulate the economy and shore up political support by borrowing more to spend. This led to a fiscal crisis from 2014 to 2016 and Brazil’s worst recession ever.

The third charm?

Lula is trying to convince the market that he won’t continue his unbridled spending spree. He has chosen as his running mate Geraldo Alckmin, a business-friendly centre-right former Sao Paulo governor. Lula has criticized some of Ms Rousseff’s policies, such as artificially low fuel prices and tax breaks worth more than 450 billion reais ($86 billion) to businesses (7.5 percent of the economy). gross domestic product).

But many economists are uneasy about the return of a leader who believes the country should be the engine of economic growth. “If the government doesn’t stimulate development, if the government doesn’t take the initiative, if the government doesn’t provide credit, then things won’t get done,” Lula said.

Many ordinary Brazilians have been dismayed by Lula’s refusal to take responsibility for the policies that led to the recession or apologize for it. pointrole in so-called corruption scandal car wash operation (“CAR WASH”). “this point Tired of apologizing,” said Lula, even though the party never actually did. Lula spent a year and a half in prison after being convicted of bribery, but his conviction was later overturned by the Supreme Court. He maintains his innocence , and said the real “violations” were the actions of prosecutors and judges.

meteor to medium

If Lula is elected, his priority will be helping the 33m Brazilians who live on less than 289 reais ($55) per month, the highest number since 2012. He says he would increase cash transfers, expand a social-housing scheme and introduce a debt – Forgiveness program. He called it “putting the poor back into the budget” and bet it would boost consumption and growth.

this International Monetary Fund The economy is expected to grow 1.7% this year thanks to stimulus spending ahead of the election, but only 0.7% in 2023. In August, Bolsonaro submitted a budget proposal to Congress that did not include a 143 billion reais budget. Promised social spending, including a current monthly transfer of 600 reais to 2.2 million of Brazil’s poorest households, and a promise to increase the wages of civil servants, whose salaries have been frozen since 2017.

Since 2016, Brazil’s budget has been capped by a constitutional spending cap that limits spending growth to the rate of inflation. But Congress recently suspended caps on funding covid-19 spending and stimulus to benefit Mr Bolsonaro’s campaign. As a result, it lost its strength as a fiscal backbone. Even Mr Bolsonaro’s pro-business government announced that if he were to be re-elected, he plans to replace it with a “more flexible” fiscal rule. Lula also wanted a new fiscal framework that would allow more short-term borrowing, while assuring the market that the debtgross domestic product The ratio will fall in the medium term.

Lula’s advisers say they will also move quickly on a reform that would increase taxes on the wealthy while simplifying a complex consumption tax that is a drag on growth.both point Economists and orthodox alike have emphasized the need for such a move.Some point Types also seek to increase government revenues by taxing dividends and even wealth; Lula did not rule that out. Other economists want fiscally neutral reforms that would impose higher income taxes on high earners and lower payroll taxes on businesses to incentivize formal employment. Either way, these changes seem unlikely. Every administration since 1965 has failed to implement tax reform because it involved difficult negotiations with states and interest groups.

Lula’s long-term growth strategy relies on expanding large public banks to finance infrastructure projects, with both public and private sector investments. Lula and his economists often cite U.S. President Joe Biden’s infrastructure law as a model. But while Brazil may need to invest, “the idea that the country knows where to invest is wrong,” said economist Bernard Appy, who left Lula’s government in 2009, becoming more vocal. interventionism. The key question, he said, is whether Lula and his team understand that for Brazil to grow faster it needs reforms to improve the quality of spending and the business environment, or whether they think spending alone will suffice.

BRASILIA, BRAZIL - SEPTEMBER 20: A man walks past the gate of presidential candidate Luiz Inacio Lula da Silva at Feira dos Importados on September 20, 2022 in Brasilia, Brazil banner. Brazilians will vote in polarized presidential elections on October 2.  (Photo by Gustavo Minas/Getty Images)

Lula’s election manifesto hinted at the latter. In addition to classic left-wing economic views, it advocates a lot of intervention, describing the “national food reserve policy”, the exchange rate as a “tool to reduce volatility”, and the need to “Brazilize” gasoline prices. “this [Brazilian] Workers are paid in reals. So why do you have to dollarize gas prices? Lula said. In other words, he wanted prices at Brazilian gas stations to be disconnected from world prices. He suggested that this could be achieved by building more refineries; indeed, it would certainly require price controls and subsidies.

According to Monica DeBole of the Peterson Institute for International Economics, “The program is a repetition of each point program dating back to 1989, [but] What you see on paper and what the president does are two different things. She and her colleagues compared dozens of manifestos to actual policy and found that in the office point Often more moderate than its campaign proposals.

wrestling with red tape

Lula has made it clear that his government will not privatize state oil company Petrobras or the largest public bank, Banco do Brasil. But he also said he would not reverse the recent privatization of state power utility Eletrobras, or the business-friendly labor reforms passed in 2017. A few months ago, Lula called labor reform the product of a “slave master mentality”; he has since taken a less combative tone and talked of “renewing” it by adding protections for gig workers .

Guilherme Mello, Economic Policy Team Leader pointThe public bank of the third Lula government will be very careful in choosing which projects to support, according to the official think-tank of . “The reality now is not one of national champions,” he said, referring to Ms Rousseff’s disastrous policy of extending cheap credit to a handful of companies in hopes of turning them into global giants, while most other Brazilian companies are struggling.

Instead, the focus will be on small business credit, clean energy incentives and stronger safeguards for private investors to protect them from red tape. Mr Melo also hopes Brazil’s new fiscal rules will create a “culture of evaluating public policy”.

Much depends on Lula’s economic team. He said he wanted a politician rather than an economist as finance minister, likely because he needed to persuade Congress to back reforms and loosen budgetary controls. Since Lula left office in 2010, the president’s discretionary spending has shrunk from 18 percent to 7 percent of the budget, with much of it diverted to individual lawmakers’ pet programs in their constituencies. In the past, the government would pay for pork in exchange for support for the president’s agenda. But a new amendment proposed by Mr. Bolsonaro makes the transfer almost automatic, ceding decision-making power to the speaker of the house of representatives and providing little oversight. Whoever wins the election “will be a prisoner to this system”, says Marcos Lisboa of Insper, a business school. Lula wants to get rid of Mr. Bolsonaro. Convincing Congress will not be easy.

Lula was pragmatic in the past and strives to appear to be the same today. He spoke of the need for “reindustrialization” in a speech to the São Paulo Confederation of Industries in August, lamenting declining car production and Brazil’s reliance on sales to China. He proposes solutions such as investment in technology and a green energy transition.

But not everyone is convinced. Lula did not talk much about reducing trade barriers or making public spending more efficient. His government is unlikely to pass a much-needed administrative reform that would tie public servants’ pay to performance and break the ratchet mechanism that means a high proportion of spending automatically rises with inflation. Businessman is worried. Billionaire Salo Davi Seibel, who attended Lula’s speech in August, said the risk for Brazil was not a meteor but “chicken flight” — a flight that flaps its wings, lifts off the ground and fails. economy.

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