The inauguration of Lula (Luis Inácio Lula da Silva)—a trade unionist and one of the founders of the grass-roots Workers Party—as President of Brazil on January 1 of this year marked a watershed in the history of both Latin America and Brazil. Since the early 1980s, when democracy was restored in Argentina, Brazil, and Uruguay, Latin America has been suffering its gravest crisis. The years following that restoration combined relative political stability with a deep economic trouble, marked by high levels of external debt and inflation. In the late 1990s this situation deteriorated sharply. Colombia has been torn apart by civil war; economic chaos in Argentina has led to political chaos; the Chávez adventure in Venezuela triggered a logic of mobilization and counter-mobilization, sending that country to the brink of civil war.

The current mix of economic and political upheaval has had a profound and disturbing impact on future prospects in the region. One measure of the danger comes from the Latinobarometro—a nonprofit organization that has conducted polls in Latin American countries since 1996. A recent survey showed that support for democratic government dropped from 60 percent to 48 percent between 2001 and 2002. Moreover, the number of people who think that democratic and authoritarian governments are the same increased from 17 percent to 21 percent. In 2002, 68 percent of Latin Americans distrusted those in charge of political affairs.

In Latin America democracy itself is now under challenge. Brazil under President Lula, with his promise of economic recovery and a traditional left platform for social reform, has emerged as the great test case for democratic possibility and democratic commitment.


Through the 1990s Brazil managed to escape the worst aspects of the region’s economic crisis. Four factors distinguish Brazil from other Latin American countries and help to account for its relative success.

First, the size and diversity of its internal market meant that Brazil had greater capacity than other countries in the region to deal with the debt crisis of the early 1980s. In particular, the nature of the internal market meant that it could continue for a longer time with an economic strategy of “import substitution”—of shifting from imported manufactures to domestically produced goods.

Second, because the Brazilian public sector was more efficient and productive than its Latin American counterparts, particularly in Argentina and Mexico, Brazilian society was more resistant to neoliberal policies of privatization and reduced public spending, which were introduced selectively during the presidency of Fernando Henrique Cardoso (1994–2002). Today the Brazilian state still owns Petrobras, considered one of the more efficient oil companies in the world, and Banco do Brasil, which is first in the ranking of Brazilian banks. In addition, the state developmental bank, BNDES, has more resources than the multilateral Inter-American Development Bank, and the size of its resources has permitted the state to retain some control over industrial policy.

Third, Brazil has a more organized society, from trade unions to middle-class associations to opposition parties. A dense civil society, as students of democracy from Tocqueville to Robert Putnam have emphasized, fosters better politics. Because of the high levels of association Brazil was less vulnerable to such political disasters as the Chávez adventure in Venezuela.

Finally, the Brazilian right was discredited by the impeachment of President Fernando Collor de Mello in 1992. Collor was forced to leave office on grounds of massive personal corruption; his resignation put the conservative sectors on the defensive and pushed them into an alliance with Cardoso, a political centrist. As a result, Brazilian neoliberalism was more moderate and therefore less disastrous in comparative perspective.

These differences help to account for the course of the Cardoso presidency. Cardoso’s 1994 election was the result of a decade-long crisis of Brazil’s traditional conservative sectors—a crisis that followed the collapse of military rule. Established after a 1964 military coup, the Brazilian authoritarian regime was different from the dictatorships in Chile and Argentina: it did not close Congress, and it had a party (the Arena) to support it. Still, by the mid-1980s the political forces behind the dictatorship were substantially discredited. And with the end of military rule and the 1984 campaign for direct presidential elections, the Arena imploded, creating the PFL (Party of the Liberal Front), which became the most important bastion of Brazilian conservative sectors. However, the PFL itself was badly wounded by the Collor impeachment and sought to escape its troubles by allying with Cardoso’s Brazilian Social Democratic Party (PSDB). Despite early opposition from prominent members of the PSDB, the alliance with the PFL allowed Cardoso to win the 1994 elections against Lula.

Between 1994 and 1997 Cardoso’s government took advantage of a favorable international situation (including a strong U.S. economy) to stabilize the currency, introduce the real (Brazil had two currencies between 1986 and 1994, the cruzado and thecruzeiro), and pursue neoliberal economic reforms: privatizing large companies such as Vale do Rio Doce, the Brazilian steel-mining company; breaking the state monopoly on oil production; and privatizing telecommunications and part of the state-run electricity sector. Some troubling signs appeared even with this first wave of reforms—economic growth was slower than the government had envisioned; it was associated with a sharp process of deindustrialization, particularly in the state of São Paulo, where the number of unemployed grew steadily from 1994 to 1997, rising to more than one million.

With the 1997 Asian economic crisis, Brazil’s situation grew significantly worse. The Brazilian real was under speculative attack for all of 1998, when Cardoso ran for reelection. Within weeks of his second inauguration, in January 1999, Cardoso fired the Central Bank president and devalued the currency. In one month the Brazilian real devalued around 80 percent, leading to a similar increase in the government debt, which was heavily indexed to the U.S. dollar. A political crisis followed, marked by doubts about the government’s capacity to service its debt. Those doubts were fueled by the fact that neither tax revenues nor inflation were significantly altered with the devaluation. The IMF, which was already working with the Cardoso government, proposed that the Brazilian state respond to the growing debt by running a 3 percent “primary fiscal surplus” (fiscal surplus less interest payments). Cardoso’s government was hostage to the primary fiscal surplus from that point forward. Combined with the crisis of the Brazilian electric sector, this sharply limited economic growth during Cardoso’s second term (1999–2002).

The crisis of the electric sector is a good example of the drawbacks of Brazilian neoliberalism. Brazil’s electric system is based on hydroelectric power. Between 1960 and 1990 the country built one of the world’s most cost-effective systems of electric-power generation. Energy from Brazilian dams cost around $7 a kilowatt, whereas in Europe the price is around $70. In addition, hydroelectric power is renewable, and the entire Brazilian system is already paid for. When the Cardoso government decided to privatize electricity it took two contradictory steps: first, it broke up an integrated system of generation and distribution of energy and kept only the less-profitable component in public hands (moreover, the distribution companies in Rio de Janeiro, São Paulo, and the south of Brazil were sold before the devaluation, and the government signed contracts indexing their remuneration to the U.S. dollar); second, the IMF, seeking to boost privatization, included government companies in the fiscal surplus target. Thus, the government could cut investments in electricity and oil and the money saved by these companies would be accounted as state fiscal surplus. This strategy meant sharp cuts in energy generation investments, and by the beginning of 2001 Brazilians were paying a huge amount of money for energy and facing shortages in the major cities. The government responded by rationing electricity, which reduced economic growth, investment in the economy, and the entrance of foreign capital.

The crisis of the electric sector damaged the economy and, perhaps more importantly, shook the country’s belief in neoliberal economic policies. Neoliberals in Brazil, as in Latin America more generally, argued that privatization would bring greater efficiency and planning to the economy. But Brazilians saw the opposite: the population as a whole was paying more money for the same or less service, and investments were shrinking. The final blow came in December 2001, when it turned out that the contracts the Cardoso government had signed with the power companies required a price adjustment in case of declining consumption. Thus, the reduced energy consumption in 2001 simply meant that Brazilians would have to pay more for energy in 2002. The energy crisis changed public opinion about privatization, which now looked bad in terms of distribution, growth, and competence.


Lula appeared on the Brazilian political scene in the 1970s as a metalworker and trade unionist who insisted on trade-union autonomy from the state. Under the authoritarian regime the ministry of labor was allowed to interfere with the affairs of unions and labor courts to decide wage disputes between workers and owners. In 1978 and 1979 Lula led the two largest challenges to the regime’s policies. In the latter case the government intervened in the São Bernardo Trade Union and arrested Lula for violating the National Security Law. These experiences convinced Lula and the São Bernardo group that the interests of Brazilian workers required a new political party. Also in 1979, an amnesty brought back to Brazil a number of exiles, including left-wing militants such as Jose Dirceu (now Lula’s chief of staff) and church militants such as Herbert de Souza (Betinho).

Formed in 1980, the Workers Party (PT) brought together union activists, base militants of the Catholic church who saw the need for a new political project, and left-wing militants, in particular those who had returned from exile. In 1982 Lula ran for governor of São Paulo and won roughly 10 percent of the votes. On the national level, however, PT performance was poor, and in most states electoral support ran under 2 percent. In the second half of the eighties, PT electoral performance improved, and in 1988 it won elections in several capitals, among them Porto Alegre and São Paulo. These early signs of electoral viability were confirmed the following year, when Lula made it to the final round of presidential elections against Collor de Mello. The Brazilian elite responded by using all means at their disposal, from the police to the media. Two astonishing events took place the weekend of the election. First, police broke into a hiding place where a kidnapped São Paulo entrepreneur was being held; the next day they released photos of the kidnappers wearing PT t-shirts. Then, Brazil’s largest TV network, Globo, edited for its prime-time news the last debate between Lula and Collor—though it was clear that Lula lost the debate, no one considered his performance to be as poor as Globo tried to portray it. Together, the two maneuvers were enough to untie a tied election.

During the nineties the PT built on earlier electoral successes by developing a strong record of administrative competence at the local level. Porto Alegre, the capital of Rio Grande do Sul, was the PT’s first great administrative acheivement. In 1990 the PT municipal government introduced “participatory budgeting,” a form of public deliberation on budget priorities with more than 20,000 people participating annually, which quickly emerged as an effective approach to distributing basic public goods—roads, sewers, clean water—at the local level. Participatory budgeting was extended to 103 cities in 1997, and it has been adopted as policy by other political parties in Brazil. In 1994 Cristovam Buarque, the newly elected PT governor of the Federal District, introduced a program called Bolsa Escola, a sort of minimum-revenue policy for poor families with children who attend school. In 1996 participatory budgeting won the United Nations Habitat Award, and Bolsa Escola has also won several international awards.

The PT also established a strong record in parliament. This record was closely linked with the anticorruption struggles of the nineties, from the Collor impeachment to several issue-oriented campaigns against corrupt practices that tend to be generalized in the Brazilian parliament, including the employment of members’ relatives in parliamentary offices and secret and illegal contributions to electoral campaigns. The PT constructed a strong parliamentary record by distancing itself from those practices and leaking information about illegal conduct to the press and courts.

Still, Lula lost the presidency to Cardoso twice in the 1990s: in 1994 he was defeated by the success of the currency stabilization plan introduced shortly before the elections; in 1998 Cardoso managed to convince Brazilian middle-class sectors that the economic crisis had an international component which only he had the expertise to handle. Until the currency devaluation of 1999 and the electricity crisis, many sectors of the Brazilian middle class were still well-disposed to a neoliberal program.

The election of 2002 began with a split in the ruling alliance that supported Cardoso’s two electoral victories. Cardoso chose as the candidate for his succession José Serra, his strong-tempered health minister, whom liberals considered unacceptable. The liberals picked Roseana Sarney, governor of the northeastern state of Maranhão and daughter of former president José Sarney (1985–1990). In early March she was running high in the polls when the Brazilian federal police, having bugged her office, broke in to discover a safe packed up with 1.3 million reais (approximately $500,000). Within a week she had offered three different explanations of how the money got there, and her campaign was all but dead.

Because of the shadow cast by traditions of corruption and clientelism, the Brazilian right had no candidate, which made it all the more surprising that Serra’s candidacy did not benefit from Sarney’s fall. Instead, Lula’s candidacy started to grow, for three different reasons. First, Serra’s campaign was in trouble in part because of divisions within the ruling alliance of liberals and Social Democrats—the liberals were unhappy with Cardoso and Serra about the police seizure of their electoral office. Second, the ruling coalition lost support from a strong group of entrepreneurs who became distrustful of neoliberalism. For example, Lula’s candidacy had support from Gradiente, a maker of electronics equipment in São Paulo. Gradiente saw its 2001 sales fall close to zero during the period of electricity rationing. Other São Paulo industralists followed Gradiente’s lead between the first round of elections and the runoff. Even FIESP, the strong federation which gathers São Paulo’s largest industrialists, and Bovespa, the stock exchange company, expressed neutral or supportive attitudes toward Lula at the beginning of October. And third, Lula picked José Alencar—owner of an extraordinarily successful textile firm and member of a small conservative party—as his running mate and, unlike 1994 and 1998, the PT itself ran on a center-left political platform which departed from issues such as defending a large state-run sector or making explicit its trade-union support. The PT chose instead to speak about support for the Brazilian poor and state reform.

With Lula in the lead, the Cardoso-Serra group played the fear card. Brazilians were tired of neoliberalism, IMF-imposed fiscal surpluses, and near-zero economic growth for two years in a row. But an even greater fear haunted Brazilians in 2002: would they face the fate of Argentina, whose financial system collapsed, leading to a GNP fall of almost 15 percent? In May, Serra and other leading members of the Cardoso government began to suggest, in public and private, that Lula’s election would put Brazil on the same path as Argentina, whose fiscal irresponsibility and high level of foreign debt lead ultimately to default. The remarks had nearly disastrous consequences. While the Brazilian public seemed increasingly supportive of Lula, a ruling coalition trusted by the markets argued that a Lula victory would turn Brazil into Argentina. International markets responded badly.

In July 2002, short-term investors and international lenders fled Brazil, and the country’s risk indicator jumped from around 800 to 2,000 points. With the economy on the brink of collapse Cardoso called the IMF, which responded with a Sword of Damocles: Brazil would get a new credit line of $30 billion, but only $6 billion would come that year. The rest would arrive in 2003, provided that all candidates supported its measures, including an increase in the primary fiscal surplus, tight inflation targets, and friendly policies toward international financial markets. The PT issued its declaration of support on August 22, in what became known as the Carta de Brasilia. Lula pointed out that the speculative attack against the Brazilian real, the risk of outright default, and the lack of credit for Brazilian companies required the acceptance of the IMF conditions.


In early August 2002, in an interview in Folha de São Paulo, George Soros said that “in ancient Rome only the Romans voted. In modern global capitalism, only Americans vote. Brazilians do not vote.” Soros was right about the power of international financial markets in determining Brazilian economic policy, but wrong to think that the United States could impose Serra on Brazil.

On October 26 Brazilians voted, and Lula was elected president with more than 60 percent of the vote. The PT also won the largest number of seats in the Brazilian Congress, allowing it to choose the president of the lower chamber. The following day, Lula announced in a press interview the two main axes of his presidency: an economic policy founded on an autonomous central bank headed by a market-friendly central bank president— Henrique Meirelles, a Harvard graduate and former president of BankBoston—and an ambitious campaign against hunger which he called Fome Zero (Zero Hunger). In one of the most unequal societies in the world, with millions suffering from starvation, Fome Zero would mean extraordinary change. Can Lula’s government succeed with Fome Zero if his government sticks to the current economic policy? And what political risks does Lula face if he moves away from economic orthodoxy?

Lula’s economic group is composed of Antonio Palocci, a close political adviser, longtime member of the Workers Party and PT mayor; a group of economists from the Getulio Vargas Foundation in Rio de Janeiro (a conservative economic think tank); and Henrique Meirelles. This group is betting that, if they abide by the international rules, they can decrease the country’s risk indicator from 2,500 points to less than 700 (as of May 2003, most of this drop had already occurred), and decrease the exchange rate of the real (the value of the dollar in Brazil has fallen 15 percent in 2003). If these plans succeed, interest rates will fall (the current Central Bank annual interest rate is 26 percent, and it has been above 16 percent for two years), and, they hope, reignite economic growth and permit the government to reduce its fiscal surplus.

So far this strategy has been working: a recent issue of bonds by the Brazilian government was well received by financial markets. But continued success is uncertain. Brazil was helped by a flight of speculative capital from Turkey after the Turkish parliament refused to authorize the United States to use its military bases against Iraq. Moreover, it is widely agreed that the markets had exaggerated the country’s risk because of the political events in 2002.

But a nation that has suffered three speculative attacks on its currency in the last five years cannot rely on short-term attraction of capital. In addition, Brazil will have to pay back the IMF in 2004, which means that it will also have to face the possibility of a currency crisis for at least the next 18 months. Thus, the issue of establishing some form of control on movements of speculative capital will remain on the agenda for the next year. But most PT economists are remaining silent on this option, holding it as a last resort, and betting on a favorable evolution of the market’s view of Lula’s government.

The most pressing problems that Lula will face are related to social programs. Brazil has a mixed social policy structure. In two areas of social policy—basic education and public health—access is provided for all Brazilians. The pension system has nearly universal access. In contrast, several policy areas have more targeted benefits, including programs to fight hunger and to subsidize kitchen gas access.

Lula’s Fome Zero would provide a universal approach to hunger by ensuring that poor Brazilians have three meals a day. (Although many Brazilians would not qualify as suffering from starvation, they do lack seguranca alimentar—food security—which means that they cannot afford three meals a day.) Fome Zero now lies at the heart of PT social commitments: the Brazilian World Cup team wears Fome Zero shirts, a combination of public and private resources have been lined up, and large debates are underway about how best to implement it (through in-kind or cash grants, by new agencies or existing bodies). Other social projects that may assume similar relevance in the medium term are Bolsa Escola—school fellowship, which guarantees minimum revenue for poor mothers who put their children in school—and some form of democratization and accountability of the federal budget-making process may also be introduced.

There are already some economists within the government who are proposing to scale down the universal access programs. These pressures are likely to create more conflict within the PT than the adhesion to an orthodox economic policy. The government proposal of pension fund reform, for example, shows the kind of constraint that Lula’s government will face. The Brazilian pension fund system is a mix of different aims. On one hand, middle class and state employees bend a few rules to acquire enormous pensions and deplete state funds. (Thus, for instance, military personnel pay very small contributions and collect full benefits, which sometimes can be bequeathed to a single heir; members of Congress collect full benefits after two mandates (eight years); and members of the judicial system can accumulate benefits as they advance in the court.) On the other hand, the system provides minimal welfare for old and poor Brazilians. In the northeast and rural areas, the country’s poorest regions, more than six million people receive benefits. State pensions are often the only source of income for poor families in small cities of the northeast.

In addition, because of Brazil’s inequality, life expectancies vary greatly. The pension fund system used to have a very low age requirement for retirement (55), which used to be the average life expectancy in the country. However, with modernization and urbanization, life expectancy of middle-class sectors increased to more than 75, whereas it is still around 55 in rural areas. Such an imbalance allowed the middle class to rent seek the system. Thus, pension system reform faces three problems: the government’s willingness to withdraw privileges from strong interests to make the public system fair; how to increase the age requirement without making it impossible for the poor to retire; and the legal matter of the legitimacy of retroactive measures.

Lula’s government’s first test has not gone well: its pension fund reform will impose a contribution on retirees (which seems rightly tough but legally problematic) and increase age requirements, without gutting some of the most outrageous privileges. It probably will result in conflicts with the courts and public employees and will make retirement more difficult for the poor population. In addition, it will be unclear how much the government will save until the courts decide on the legality of the changes.

The large bet within the PT is that the government will be able to invest in innovative social programs, thus preserving Lula’s enormous political capital and perhaps easing the move toward economic orthodoxy by providing some real benefits to the poor. Yet, if pension fund reform is any indication of how Lula will handle social policies, his government may eventually alienate many of the PT’s constituencies.

The path between social innovation and economic constraint will be difficult to navigate, and there seem to be three broad possibilities for the first year of Lula’s government. In the first and most optimistic scenario the economic situation in the Southern Cone region improves, the Brazilian currency suffers no further attack, and the country manages slowly to export its way out of the economic crisis that began in 1997. As the economy improves, the government manages to reduce its primary fiscal surplus and ensures that Fome Zero and other social policies have the resources they need. This rosy scenario will require a very favorable environment in which everything that has gone wrong since 1997 turns around, including the willingness of speculative capital and foreign investors to have an enduring commitment to Brazil. Lula’s economic team seems to be working with this scenario, and they have had some early successes. Still, it is hard to believe that everything will continue to go as well.

In a second, more realistic scenario, the post–1997 pattern of currency decline and flight of speculative capital will continue and Lula’s government will need to adopt some capital controls—either controlling exit, deepening the current process of import substitution, or combining both types of measures. The pursuit of this strategy, however, will likely draw strong reaction from the IMF and the U.S. government, among others. The negotiations for the Free Trade American Area (FTAA) are also likely to interfere here. Brazil ran high external deficits from 1994 to 1998, in part because of the pegged currency and an indiscriminate opening of its markets. One of the bright spots of the recent two years is precisely the reversal of the deficits, which neared zero with last year’s devaluation. Lula’s government will have to pursue a double-edged strategy vis-à-vis the IMF and the FTAA negotiations. If too many concessions in the area of technology and services are made with the FTAA, it could lead to renewed deficits. Yet some kind of concessions will have to be made in order for the IMF and the United States to accept measures designed to halt currency devaluation and promote a new path of sustainable economic development. With this second path PT can preserve its social policies and implement a program that its grass-roots constituents have hoped for.

The third scenario—combining economic deterioration and orthodox response—is more complicated and more risky. Here the response to currency devaluation and capital flight would be to impose further cuts on social policies and further constraints on the poor. A document is already circulating in the Economics Ministry that challenges the universalization of social policies and proposes that Brazil needs to move to more targeted policies in all areas in order to generate a larger fiscal surplus. This position may become stronger if the economic situation deteriorates. If the PT moves in this direction it may lose both the political capital Lula has acquired and the PT’s social base: Lula would look like a Brazilian version of Argentina’s Fernando de la Rua. This is the largest risk that Lula and the PT face today, and it may require that they put a halt to orthodox economic policies at some point. At precisely what point this is no one in Brazil knows, yet most people believe that it will come.

The first two scenarios would allow Brazil to address the current political crisis in Latin America and show the capacity of democracy to provide economic solutions that work for broad national benefit. If Lula and the PT face the third scenario, the democratic project that has dominated Latin American politics for the past 20 years would be in danger. Latin Americans today look to Brazil for an alternative to the current troubles in Argentina, Venezuela, and Colombia. They are counting on a grass-roots party, with a leftist tradition, to reinvent the processes of economic and political development that have been thrown into question by neoliberalism, and, in the end, to vindicate the promise of democracy itself.