BE RADICAL, LULA
By Alvaro Vargas Llosa
Peruvian journalist and co-author of Guide to the Perfect
Latin American Idiot, Alvaro Vargas Llosa is a senior fellow
at the Independent Institute and working on a book on Latin American reforms.
He speaks with a lisp, hes missing one finger, and there are those
who argue he is also missing one screw since his days as a metallurgical
plant worker and fiery agitator. But if the markets have not been able
to prevent him from winning in a second-round landslide, Brazilian President-elect
Luiz Inacio Lula da Silva must have a point. Is
it the same point he articulated during his campaign?
The orthodox view claims that Brazil was on its way to prosperity, thanks
to free-market policies. However, the truth is
that market-based reforms were actually just more political cronyism with
little or no change in true liberalization and privatization for the masses.
As a result, the economy grew only by an average of 2.6 percent a year,
while capital accumulation, a key long-term indicator, experienced a shy
2.3 percent rate of growth. The human toll speaks for itself: 60 million
people live in poverty today, marginalized by a concentration of power
that gives 10 percent of the population, mostly of European descent, control
over 80 percent of the wealth. Upon this already bleak situation something
akin to the seven plagues of Egypt suddenly descended
in the last few months. Due to loss of investor confidence, Brazils
currency lost a third of its value, interest rates reached levels of 40
percent, and the public debt skyrocketed to $260 billion. Default did
not occur because the International Monetary Fund (IMF) stepped in with
a $30 billion guarantee, but the whiff of default is still in the air.
Many voters were scared of Lulas radical past, his lack of managerial
experience, his critique of globalization and his skepticism about the
Free Trade Area of the Americas, which President George W. Bush wants
to have under his belt by 2005 (Lula accuses the United States of double
standards by placing barriers to steel, sugar, citrus fruits and other
products Brazil wants to export to the U.S. market). Now it is Lula who
should not be afraid of radical change.
But that change should not mean undoing the reforms of the 1990s, going
back to the kind of 1930s corporatism Brazil still suffers from, or to
1950s and 1960s industrialization through import-substitution and foreign
investment protected from incoming competing goods, or to the bogus pro-market
policies of the 1970s under military rule.
Those policies, on top of an economy of coffee-plantation enclaves dating
back to colonial times and the Brazilian governments hindrance of
small- and mid-scale agriculture in the 19th century, have made Brazil
what it is: a two-tier society in which the modern government-connected
elite creates wealth and millions of people simply survive in the underground
economy, invade land or vegetate in the mammoth federal or regional public
If Lula is radical about breaking the vested interests of regional power
barons, ending the special-interest cartels created by government power,
slashing government spending well below the current level of 40 percent,
ceasing to trade exclusive property rights for political support and vesting
the masses of the people with private property and capital, Brazil will
take off. And the countrys financial turbulence will be over because
the real public deficit of 4 percent will be turned into a surplus, interest
rates will come down, and the debt will take care of itself.
Will Lula face ferocious pressures from his two big political constituencies,
government employees and blue-collar workers? Yes. So it is time to give
the vast numbers of disadvantaged people who voted for Lula a real chance
by vesting them with property ownership. It can be done by turning social
security, which consumes $20 billion of the peoples wealth, into
a private system that allows every worker to build a personal savings
account. It can be done by empowering the masses with individual stock
ownership of mammoth government-controlled companies, like Petrobras.
It can be done by creating an employment-friendly environment through
slashing the burdens of labor taxes, loosening firing restrictions or
reforming sector-based collective bargaining. It can be done by granting
property title of government land to 5 million peasants who have spent
the last 20 years in clashes with big land owners.
So, what if Lula pursues a path of orthodox, left-wing state-socialism?
Despite the economic hardship it would cause, it may still be a better
deal than the president-elect not being radical at all, because if Lula,
as is feared, hikes the minimum wage and raises the level of spending
through intense government house-building without touching the structure
of the state, Brazil will be forced to default Argentina-style and the
radical populist option will be dead. If, on the other hand, Lula, paralyzed
by the competing pressures of his constituencies and Wall Street investors,
becomes a moderate, happy to steer a sinking ship,
then an imminent collapse of the country will only be postponed and by
then a more truly radical populist option will have surfaced, accusing
Lula of selling out to big business and the United States.
So, here are the three options in order of preference: Lula can be truly
radical and empower his people with freedom, property rights and access
to capital. He can be the state-socialist and send Brazil down the drain,
perhaps paving the way for a truly radical president of the right kind
at a later date. Or he can simply engage in no reform, thereby allowing
the current inertia of the government-dominated economy to drag him and
the country toward default and provoking the emergence of another leader,
crazier than the panicky markets have feared Lula to be.
(c) 2002, Global Economic Viewpoint. Distributed by Tribune Media Services
For immediate release (Distributed 11/11/02)