The Center for Latin American Studies University of California, Berkely Rio Branco Forum on Brazil Challenges Facing the New Brazilian Government A lecture by Paulo Paiva January 31, 2003

Challenges Facing the New Brazilian Government Election Results The Challenges: –Promote economic growth with stability –Conciliate macroeconomic stability with growing social demands –Build a Coalition with the National Congress –Maintain an equilibrium between the representative democracy and the “new corporatism” –Deal with the international agenda Public Opinion Poll

Election Results

Presidential election First Round (Thousands) % Lula 39,443 (46.7) Serra 19,700 (23.3) Others 25,347 (30.0) 84,490(100.0) Run Off Δ (Thousands) % 52,793 (61.3) 13,349 33,371 (38.7) 13,670 86,164 (100.0) 27,019

Senate (81 seats) PFL1719PT814 PSDB1411PDT55 PPB21PSB34 PMDB2419PL13 PTB53PPS21 PSD-1 TOTAL6253TOTAL1928 Change: 9 seats (11.1%) Cardoso’s Coalition Opposition's Coalition

House (513 seats) PFL9885PT5891 PSDB9471PDT1621 PPB5348PSB1622 PMDB8774PL2226 PTB3326PPS1215 PCdoB1012 Others1422 TOTAL362304TOTAL Change: 61 seats (11.9%) Cardoso’s Coalition Opposition's Coalition

Major Challenges Promote Economic Growth with Stability

Major Challenges Promote Economic Growth with Stability Option to maintain the same macroeconomic policy Symbolic Actions Effective Actions Economic Challenges Decisions of Macroeconomic Policies

Major Challenges Symbolic Actions Visited the Presidents of Argentina and Chile Visited President Bush Announced in DC the name of the Finance Minister Met with the WB and IDB Presidents Met with the Managing Director of the IMF

Major Challenges Promote Economic Growth with Stability Option to maintain the same macroeconomic policy Symbolic Actions Effective Actions Economic Challenges Decisions of Macroeconomic Policies

Major Challenges Effective Actions Named a Financial Market Executive to be President of the Central Bank (Henrique Meireles) Maintained the previous board of directors in the Central Bank Announced a new project of law sent to Congress to increase the autonomy of the Central Bank (Monetary Responsibility Law) Adopted the structural reforms program of the previous government (social security, tax, and labor reforms)

Major Challenges Promote Economic Growth with Stability Option to maintain the same macroeconomic policy Symbolic Actions Effective Actions Economic Challenges Decisions of Macroeconomic Policies

Major Challenges Decisions of Macroeconomic Policies Maintained fiscal policy of austerity, expected primary surplus of 3.75% of GDP in 2003 or even higher Did not accept to discuss the renegotiation of agreements between federal and state governments (renegotiation of state debts) Inflation-targeting policy. Price stability as main goal of monetary policy. Economic growth due to lower interest rates more difficult Maintained floating exchange rates Commitment to honor existing contracts and agreements Maintain the agreement with the IMF First monetary decision of the Central Bank: increased annual interest rates from 25% to 25.5%.

Major Challenges Promote Economic Growth with Stability Option to maintain the same macroeconomic policy Symbolic Actions Effective Actions Economic Challenges Decisions of Macroeconomic Policies

Major Challenges Economic Challenges Restart economic growth in the short run Approve the structural reforms: Social Security Reform – total Social Security deficit (private and public) is around 5.1% of GDP Tax Reform – current tax burden is around 33% of GDP. If tax reform is not approved this year, the government must propose the maintenance of a) the taxes on checks (CPMF – Temporary Contribution on Financial Transactions) and b) the DRU (Elimination of ear-marked federal tax revenues) Labor Reform

Major Challenges Promote Economic Growth with Stability Conciliate Macroeconomic Stability with Growing Social Demands

Major Challenges Conciliate macroeconomic stability with growing social demands Social Expenditures Conciliate macroeconomic stability with growing social demands

Social Expenditures Social Expenditures increased 39% from 1994 to 1999 Source: IBGE (1991 and 2000 Census) 14% of GDP 11% of GDP

Major Challenges Conciliate macroeconomic stability with growing social demands Social Expenditures Conciliate macroeconomic stability with growing social demands

1. To conciliate macroeconomic stability with growing social demands 2003 budget - primary surplus 2.8%(GDP) -discretionary expenditures: 2.1%(GDP) distribution of discretionary expenditure: social development 72% infrastructure 13% production 5% defense 2% administration 5% environment 1% knowledge and information 1% others 1% TOTAL 100%

Social demands minimum wage increase of civil servant's salaries Fighting Hunger Program Risks on the economic sideon the economic side No compliance with fiscal Targets Higher inflation Debt default on the social sideon the social side Unable to meet social demands and expectations

Major Challenges Promote Economic Growth with Stability Conciliate Macroeconomic Stability with Growing Social Demands Build a Coalition with the National Congress

Major Challenges Coalition with Congress Senate 2003 House of Representative 2003 Strategy to built a majority

To build a coalition in the national congress Senate seats Seats missing to: Simple majority (50%) 41-31= 10 Approve constitutional reforms (2/3) 54-31=23 PFL19PT14 PSDB 11 PDT5 PPB1PSB4 PMDB19PL3 PPS PSD 1111 PTB3 TOTAL50TOTAL31 Opposition Lula's Coalition

Major Challenges Coalition with Congress Senate 2003 House of Representative 2003 Strategy to built a majority

Seats missing to: (7 seats: independent) Simple majority (50%) = 4 Approve constitutional reforms (2/3) = 89 PFL77PT91 PSDB63PDT18 PPB43PSB29 PMDB70PL PTB PPS19 PCdoB12 Others9 TOTAL253TOTAL253 House of Representatives seats Opposition Lula's Coalition

Major Challenges Coalition with Congress Senate 2003 House of Representative 2003 Strategy to built a majority

Major Challenges Strategy to built a majority Composition of the Cabinet Composition of Congressional Committees and election of Presidents of Senate and House of Representatives Alliance with conservative regional leaderships: José Sarney and Antonio Carlos Magalhães In the National Congress, regional leaders have great influence Elected politicians changing parties common practice in Brazil) Majority will need to be built for each important project

Major Challenges Promote Economic Growth with Stability Conciliate Macroeconomic Stability with Growing Social Demands Build a Coalition with the National Congress Maintain an Equilibrium Between the Representative Democracy and the “New Corporatism”

Major Challenges Maintain an Equilibrium Between the Representative Democracy and the “New Corporatism” Potential Conflicts between Representative Democracy and Direct Democracy Neo- Corporatism

Major Challenges Neo-Corporatism Composition of the Cabinet Economic and Social Development Council subordinated to the Federal Government

Major Challenges Maintain an Equilibrium Between the Representative Democracy and the “New Corporatism” Potential Conflicts between Representative Democracy and Direct Democracy Neo- Corporatism

Major Challenges Potential Conflicts between Representative Democracy and Direct Democracy Representative democracy versus direct democracy Need to Strength Institutions (Congress, Political Parties, Judiciary, etc.) Conflict between Representative Democracy and the practice of direct dialogue between the Executive Branch and the population Popular Support – For example, trip to Northeastern States To use organizations of the civil society (councils, for example) to lobby and pressure Congress

Major Challenges Promote Economic Growth with Stability Conciliate Macroeconomic Stability with Growing Social Demands Build a Coalition with the National Congress Maintain an Equilibrium Between the Representative Democracy and the “New Corporatism” Deal with the International Agenda

Major Challenges Deal with the International Agenda Strength the Brazilian leadership in Latin America Strength the democracy and peace in Latin America FTAA A timeframe from 2003 to 2005 Co-presidency Brazil/USA Mercosur - Rebuilt it within an environment of economic instability European Community – Negotiations on barriers to agricultural goods

Public opinion results from recent poll Country’s Satisfaction Index 0ct.02: 24.3% Jan 03: 56.6% Social Economic Satisfaction Evaluation: 34.0% (last 6 months) Expectation: 63.6% (next 6 months) President’s Performance Approve: Oct 02: 34.7% Jan.03: 83.4% Disapprove: Oct 02: 53.9% Jan.03: 6,8% (CNT-Sensus: Jan. 19 to 23, 2003)

Expectations regarding Lula’s Government Promises will be fullfilled: 69.9% It will be a good government: 92.6% Priority to Zero Hunger: 87.3% Unemployment will decrease: 78.2% Inflation will decrease: 63.9% Interest rates will decrease: 61.4% New minimum wage: R$

Major Reforms (Priorities) Labor Reform:44.0% Land Reform:11.5% Social Security Reform:11.2% Political Reform: 10.3% Tax Reform: 4.1%

Mercosur and FTAA Importance of Mercosur: 62.3% FTAA: in favor:30.8% against :38.9%