POLITICS-BRAZIL: The Economics of Re-election

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Jun 14 2005 (IPS) - The political crisis sparked by allegations of ruling party corruption has heightened uncertainty over the Brazilian economy, but the government will continue to steer economic policies towards promoting the re-election of President Luiz Inácio Lula da Silva, experts say.

Economist Antonio Marcio Buainain, a professor at Campinas State University in southern Brazil, calls the monetary policy adopted by the Central Bank a "political strategy," without the flexibility needed to manage the economy.

The tight monetary policy imposed by the Central Bank since last September will likely be relaxed as of August or September, in order to spur greater economic growth next year, when presidential, congressional and state elections will be held, Buainain told IPS.

For his part, Celso Ming, a columnist with the conservative daily newspaper O Estado de Sao Paulo, also believes that the Central Bank’s decisions are based on a strategy aimed at concentrating the effects of high basic interest rates between late 2004 and the next quarter, to "create relief and euphoria" a few months before the elections, scheduled for October 2006.

But the recent accusations of corruption in the government and Congress have complicated matters, provoking greater uncertainty, noted Buainain.

Deputy Roberto Jefferson, president of the Brazilian Labour Party (PTB), alleged last week that the governing left-wing Workers Party (PT) had bribed lawmakers to ensure their support in Congress, setting off a scandal that implicates Chief of Staff José Dirceu.

Jefferson decided to denounce the government’s alleged cash-for-votes scheme after being caught out in a previous scandal that erupted a month earlier, involving the use of the state-owned postal service to illegally obtain funds for the PTB.

A congressional investigation commission was set up to look into the post office scandal, while another is being created to address Jefferson’s claims regarding monthly "allowances" purportedly paid to lawmakers from the Liberal Party and the Progressive Party, two conservative forces allied with the PT.

The government is attempting to "ignore" the economic effects of this crisis, arguing that the economy is less vulnerable today and inflation is dropping. But if the crisis worsens, this strategy will fall apart, predicted Buainain.

The political crisis is likely to drive up inflation, triggering fears about the future, purchases of foreign currency and the subsequent devaluation of the real.

The congressional investigation commissions have the potential to stir up turmoil in the second half of the year, which would force the government to maintain high interest rates, since a reduction could lead to a loss of control over the economy and endanger Lula’s chances of re-election, said the economist.

But Carlos Lessa, a professor at the Federal University of Rio de Janeiro, takes a different view of the situation. He believes there is a strong likelihood of an economic slowdown in the months prior to the elections, which would work against the current government.

Lessa, an economist with close ties to the PT, stepped down in November from the presidency of the National Economic and Social Development Bank, a powerful state-run instrument for promoting productive investment, because he disagreed with the government’s economic policies.

The potential electoral fallout of the economic situation became even more alarming with the announcement that gross domestic product (GDP) for the first quarter of this year had grown only 0.3 percent over the previous quarter and 2.9 percent over the same period in 2004, reflecting a major slowdown in productive activity.

More troubling still was the drop in investment, down 3.9 percent in the last quarter of 2004 as compared to the previous quarter and three percent in the first quarter of 2005. The underlying cause was the rise in basic interest rates, according to Antonio Olinto of the Brazilian Institute of Geography and Statistics.

The Central Bank began raising its basic interest rate last September, gradually increasing it from 16 percent to the current rate of 19.75 percent, despite repeated protests from the business community, trade unions, and even Vice President José Alencar.

This monetary policy "is nothing new," noted Lessa, adding that it has been sporadically implemented since the 1980s, promoting brief spurts of expansion followed by downturns in economic activity and "mediocre average growth rates."

The policy of setting inflationary targets followed by the current government "does not permit more than three or 3.5 percent GDP growth," and higher growth is "punished" by raising interest rates and curbing the economy to keep prices down, he told IPS.

High interest rates attract speculative capital and increase the value of the national currency, with a consequent negative impact on the country’s balance of payments.

This was seen in 1994 and 1998, and is happening again, he said. "The neoliberals never learn," stated Lessa, alluding to the fact that the same economic policies have been maintained despite the left-wing PT’s arrival in power in 2003.

Given these factors, there is every chance of an economic slump becoming most acute just prior to the elections, noted Lessa. This is bound to hurt the PT and Lula at the polls, given that the president refused to incorporate "populist changes" in the country’s economic policies, believing his government would achieve strong economic growth that would prove the "pessimists" wrong.