11/11/02

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, he’s 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, Brazil’s 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 Lula’s 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 government’s 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 sectors.
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 country’s 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 people’s 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 International.
For immediate release (Distributed 11/11/02)

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