By Mario Osava
RIO DE JANEIRO, Jan 2 2004 (IPS)

In 2003, the orthodox economic policies of Brazil’s leftist President Luiz Inácio Lula da Silva were successful in reducing inflation, stabilising the exchange rate, and balancing the external current accounts.

In his first year in office, Lula surprised his followers and foes alike by adopting conservative economic policies, involving even tighter fiscal and monetary adjustments than those demanded by the International Monetary Fund (IMF).

The financial market’s confidence in the Brazilian economy also rallied, as reflected by the recovery of foreign credit flows and the reduction of the country-risk rating to around 500 points, after it had climbed to over 2,400 on the eve of the October 2002 elections in which Lula, a former trade unionist, was elected.

Country risk rating is an index that purportedly measures the percentage points above the going interest rate for U.S. Treasury bills that foreign lenders demand of a given country as a premium for the ”risk” involved in extending that country a loan.

The turmoil that analysts predicted if Lula won the elections did not occur.

The government was able to overcome what it dubbed the ”wretched legacy” left by the prior administration of Fernando Henrique Cardoso (1995-2003): uncontrolled inflation, a sharp devaluation of the local currency, the real, and imbalances in the public accounts.

That triumph converted Finance Minister Antonio Palocci, a former Trotskyite, into the strongman of Lula’s economic team.

Despite the recovery of the real, which critics said was overvalued at the expense of exports, Brazil racked up an unprecedented trade surplus in 2003 of more than 24 billion dollars, while exports grew 20 percent, to more than 72 billion dollars.

That performance enabled the country to achieve a three billion dollar surplus in its current accounts, which measure trade in goods and services as well as investment flows.

But the government’s macroeconomic success was marred by economic recession in the first half of the year, when unemployment surged and the real income of workers fell 13 percent.

Nor did the growth announced by Lula for the second half of 2003 become reality. The low buying power of Brazilians kept consumption in check and made it difficult to invert the tendency, especially in a country where consumer credit carries an annual interest rate of more than 100 percent.

The year ended with just 0.2 percent growth of Gross Domestic Product (GDP), which meant a drop in per capita GDP, since the population is growing at a rate of 1.4 percent a year.

GDP growth of 3.5 percent is projected for 2004. But economists on the left say that level of growth is unlikely to be achieved if the government does not modify its economic policies, while others say that even 3.5 percent growth would be insufficient to bring down unemployment.

After Lula took office a year ago, unemployment rose from 10.5 percent to 13 percent, levelling off between 12.8 and 13 percent from May to October. In November it dipped to 12.2 percent, a reflection of the normal rise in consumption surrounding the year-end holidays.

Nevertheless, Lula remains popular. The latest survey by the daily newspaper Folha de Sao Paulo, carried out Dec. 8-15 nationwide, found that 42 percent of respondents rated his performance as ”excellent” or ”good”, and 41 percent as ”fair” – similar to the results found last March.

Only 15 percent said his administration has been ”bad” or ”terrible”, compared to 10 percent in March.

The president has demonstrated his ability to keep alive the hopes that he generated as a candidate in the 2002 election campaign.

In the last few days of December, he predicted that 2004 would be a much better year for Brazil’s roughly 177 million people, after a year dedicated to eliminating ”uncertainties” and showing the financial markets and investors that turbulence was far from inevitable under his leftist government.

But it is difficult to imagine a change in orientation by the Finance Ministry and the conservative Central Bank.

Since June, the Central Bank has slowly reduced its basic interest rate, month by month, after raising it to 26.5 percent in February to keep inflation from surpassing the target agreed with the IMF. In the last week of December, the rate was lowered to 16.5 percent, down from 17.5 percent in November.

Nothing came of the complaints of producers, especially industrialists who called for a faster reduction of interest rates to reactivate the economy.

Nor did the monetary authorities pay attention to economists who have argued since last April that interest rates should be sharply cut, since the recession and low buying power of consumers made a new rise in inflation unlikely.

Lula’s first year thus ended with recognition by economists and public opinion of the government’s achievements on the economic front, although critics continue to complain that Lula moved too far to the centre and too far away from the hopes generated by the rise to power of his leftist Workers’ Party (PT).

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