The Center for Latin American Studies University of California, Berkely

1. 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

2. 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

3. Election Results

4. Presidential election Run Off Δ (Thousands) % 52,793 (61.3) 13,349 33,371 (38.7) 13,670 86,164 (100.0) 27,019 First Round (Thousands) % Lula39,443 (46.7) Serra 19,700 (23.3) Others 25,347 (30.0) 84,490 (100.0)

5. Senate (81 seats) Cardoso’s Coalition Opposition's Coalition Change: 9 seats (11.1%)

6. House (513 seats) Cardoso’s Coalition Opposition's Coalition Change: 61 seats (11.9%)

8. Major Challenges Promote Economic Growth with Stability

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

10. 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

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

12. 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)

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

14. 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%.

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

16. 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

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

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

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

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

21. 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%

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

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

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

25. To build a coalition in the national congress Senate 2003 81 seats Opposition Lula's Coalition Seats missing to:  Simple majority (50%) 41-31= 10  Approve constitutional reforms (2/3) 54-31=23

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

27. House of Representatives 2003 513 seats Opposition Lula's Coalition • Seats missing to: (7 seats: independent) • Simple majority (50%) 257-253= 4 Approve constitutional reforms (2/3) 342-253= 89

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

29. 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

30. 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”

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

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

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

34. 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

35. 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

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

37. Public opinion results from recent poll (CNT-Sensus: Jan. 19 to 23, 2003) 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%

38. 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$ 266.00

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

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