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CHALLENGES 2006-2007: Growth and Redistribution, Lula’s Big Tasks

Analysis by Mario Osava

RIO DE JANEIRO, Jan 2 2007 (IPS) - Brazilian President Luiz Inácio Lula da Silva began his second term in office on Monday, postponing the final answer as to whether he will successfully live up to the challenge of going down in history not merely as the former steelworker who won the presidency in 2002 and was reelected in October by a wide margin.

His goal is to usher in a lengthy cycle of economic growth, nearly doubling the average gross domestic product (GDP) growth rate of 2.6 percent posted in his first four-year administration. The magic number is five percent, a rate of growth that would generate more jobs and speed up the reduction in social inequality already begun this decade.

A package of measures with that aim, which was to be announced last week, was postponed to the second half of January. The new ministerial team, which will reflect a coalition government between Lula’s leftwing Workers Party (PT), the centrist Brazilian Democratic Movement Party (PMDB) and small leftist groups, will not be formed until February.

Budgetary constraints threaten the growth target for 2007.

Critics of Brazil’s mediocre economic performance over the last few years point to the lack of investment capacity of the public sector as the main obstacle. This is a consequence of the government’s high running costs, according to most economists. But leftwing economists blame high interest payments on public debt, which are among the highest in the world.

The obsession with GDP growth, exacerbated by comparisons with India and China, where growth rates stand between seven and 10 percent a year, has driven the search for the culprits of Brazil’s slow expansion.

The list includes everything from environmental “obstacles” to the overvalued local currency and the lack of infrastructure, as well as bank interest rates and the poor returns, in terms of quality, on public expenditure.

Environment Minister Marina Silva has come under fire, and there is speculation that she may be removed. Environmental regulations are seen by some as obstacles, for instance, to agribusiness expansion in the Amazon jungle region and to the building of hydroelectric and nuclear power stations, thus depriving the country of the energy it needs for “progress.”

These pressures alarm environmentalists, who fear a new increase in deforestation in the Amazon, after having managed to cut it by half in the last two years. It would be the obvious consequence of the advance of agriculture and dam-building, justified by economic targets, in the rainforest.

The arguments over the environment and economic growth will be even more intense during Lula’s second term.

But it is necessary to take the GDP mystery apart in order to investigate the supposed dichotomy between the environment and economic growth, says an almost lone voice, that of José Eli da Veiga, economics professor at the University of Sao Paulo.

GDP growth is bolstered by war and weapons production and by the destruction of nature, he has argued in several articles published since October.

GDP expansion should not be confused with development, he says. Disasters, like the 2006 plane crash in the Brazilian Amazon which killed 154 people, boost GDP because of insurance payments and other cash transactions, he gave as an example. And Indonesia secured “record increases” in GDP growth by destroying its forests, he added.

Recipes for growth also often run counter to rights that have been consolidated in recent years, such as in the 1988 constitution. Reforming the social security system and labour laws to reduce the deficit of the former as well as the cost of labour are examples of measures aimed at promoting strong economic expansion while weakening social coverage.

Former minister of finance Mailson da Nóbrega, who was in charge of the country’s finances from 1988 to 1990, blamed the 1988 constitution for making the country “ungovernable,” because of an excessive increase in public expenditure through the numerous rights it enshrined, such as retirement pensions for peasant farmers at 60 for men and 55 for women, even when they had not contributed to the pension system.

The dilemmas Lula will be facing include his decision to raise the minimum salary by 8.57 percent from April, a real increase over inflation, which stood at three percent in 2006. This move is considered another constraint on economic growth, as it will increase the social security deficit, because the pensions of 16 million retirees are pegged to the minimum salary in this country of nearly 188 million people.

Any increase in the government’s running costs requires either a reduction in public spending or tax hikes, when it is generally recognised that the tax burden has reached its limit in Brazil. At 38 percent of GDP, a proportion that is common in developed countries with an excellent standard of social well-being, it stands however at twice the level of many other nations in Latin America.

Brazil enjoyed rapid economic growth in the 20th century, up to 1980, with indices even higher than China’s present rate of growth in the early 1970s. But that was a different era, when Brazil was industrialising and public investment capacity was high.

At that time, the pension system basically only received contributions, as there were very few retired people. Dictatorial regimes ignored social rights, and cut salaries in order to increase competitiveness, much as China is doing today.

Returning to that past is out of the question. Therefore, the challenge for Lula is to open up new routes to development, respecting environmental and democratic boundaries, and with strong social participation encouraged by the rise of his leadership and that of the PT.

In the political arena, the president appears to be in a better situation, having obtained the support of the PMDB for a coalition that will give him a parliamentary majority without resorting to the illegal mechanisms used by the PT in the first three years of his previous administration.

That scandal of the “mensalao” or monthly bribes paid in cash to legislators allied with the governing party, in exchange for their votes on key bills, broke out in 2005.

Yet another challenge is to put forward an urgent political reform to stem the corruption scandals and the evident distortions that weaken the representativity of political parties and Congress.

During the current legislative term, which began in 2003, over one-third of the 594 deputies and senators have changed parties. Some have switched from one party to another up to seven times.