Leftist Landslide in Brazil

GWEN IFILL:

Now, big political change in Brazil. Spencer Michels begins.

SPENCER MICHELS:

They were dancing on Copacabana Beach in Rio de Janeiro last night, and in Sao Paulo and across Brazil as well. The revelers were celebrating the landslide presidential victory of Luiz Ignacio da Silva, popularly know as "Lula." His workers' party was right at home on the beach.

WOMAN:

It's a hope that we have. We have defeated the fear and the hope has won.

WOMAN:

I will dance until the morning.

SPENCER MICHELS:

Da Silva, a former union leader, will become Brazil's first working-class president when he takes office January 1.

LUIZ IGNACIO LULA DA SILVA, President-elect, Brazil (translated):

Our victory is the result of the hopes that we have had for many years in our country.

SPENCER MICHELS:

Da Silva was born to a poor family in Brazil's northeast. The former shoe-shine boy and factory worker with a grade school education rose to become a union firebrand, creating his worker's party in 1979. After four unsuccessful runs for president, da Silva landed more than 60 percent of the vote yesterday, defeating rival Jose Serra of the ruling Brazilian Social Democratic Party in the second-round presidential election. He received more votes than any democratic leader in history, except for Ronald Reagan.

As Brazil's next president, da Silva is faced with pulling the world's ninth largest economy, and Latin America's largest, out of a recession. During his campaign, da Silva promised to create more jobs for Brazil's nearly 175 million people. 50 million of them live in poverty. Brazil's currency, the real, has lost some 40 percent of its value this year.

MAN ON STREET (translated):

It's driving us all crazy, I'm terrified, the currency just keeps going down, down.

SPENCER MICHELS:

And the country is saddled with more than $230 billion of foreign debt. Da Silva has often been critical of Brazil's current free-market policies, privatizing various industries. He objected to conditions attached to loans from the International Monetary Fund. The IMF provided the country with a $30 billion loan in August, a loan all presidential candidates agreed must be paid back. Da Silva has also expressed opposition to a free trade agreement for the entire western hemisphere pushed by the U.S. The pact calls for a free trade zone across the western hemisphere by 2005. Da Silva's anti-globalization stance during the campaign rattled Brazil's stock market and sparked fears of a Brazilian default on its loan. In his first speech as president-elect, da Silva vowed to continue the current government's policy of trying to lower inflation rates.

LUIZ IGNACIO LULA DA SILVA (translated):

We are going to confront the actual vulnerability of the Brazilian economy, a crucial factor in the financial turbulence of the last months, in a safe way. As we said during our campaign, we are going to honor all the contracts set up by the government, and we will not take our eyes off controlling inflation. The tough challenge that Brazil faces will need austerity in the use of public money, and also a hard fight against inflation.

SPENCER MICHELS:

Da Silva is expected to assemble an economic team this week.

GWEN IFILL:

Margaret Warner takes it from there.

MARGARET WARNER:

For more, we turn to Paulo Sotero, Washington correspondent for the Brazilian newspaper o Estado de Sao Paulo. Kristin Forbes, a former deputy assistant treasury secretary in the Bush administration and now a professor at the Sloan School at M.I.T., and Tony Avirgan, international policy coordinator at the Economic Policy Institute in Washington. Welcome to you all.

Why, Paulo Sotero, did Lula de Silva win this so handily?

PAULO SOTERO, O Estado de Sao Paulo Newspaper:

Well, he expresses I think a desire for change in Brazil, Brazil is a very unequal society. Here you have a former metal worker that has organized, revolutionized the trade union movement in Brazil in the 70s, that has organized the political party in Brazil, that has tried to be president of Brazil three times before, and that has finally given the chance.

There is a great desire for change to give the representatives of the people an opportunity to run the country. The irony and the challenge of this is that he represents change. But he does not necessarily represent repudiation of the many things, many progresses that have been achieved in the last 10, 15 years in terms of democratization and economic reform in Brazil.

MARGARET WARNER:

Mr. Avirgan, many observers at least in the North here have looked on his growing popularity as representing the Brazilian public's repudiation of a lot of these reforms, the free market policies and so on of both the IMF and his predecessor, is that correct? Should we read them that way?

TONY AVIRGAN, Economic Policy Institute:

Definitely it's correct. The unemployment in Brazil is enormous; there's 20 percent in Sao Paulo and 50 percent in the forest area of the country, the northeast. It has about the worst, the second worst now economic distribution in the country, where the top 10 percent of the population takes about 60 percent of the gross domestic product. And it's just a terrible situation. And I think people are showing that they're upset with it, they want change.

MARGARET WARNER:

But are they saying that Cardoso and those policies didn't deliver —

TONY AVIRGAN:

They certainly didn't deliver; they certainly didn't deliver. The situation has gotten worse. Unemployment has risen. And people need jobs, they need to work in order to make a living and to improve the country.

MARGARET WARNER:

Kristin Forbes, tell us how the international financial markets are responding to this, and also explain why it is important how Wall Street sees him.

KRISTIN FORBES, Massachusetts Institute of Technology: Well, the international financial markets initially were very concerned when it looked as if Lula would win the election. The past few days, however, has been a step back in the financial markets. The markets have improved somewhat for Brazil. And right now there's almost a bit of a honeymoon period. The markets have sort of taken a step back and they are waiting to see what Lula's next move is. In particular they're waiting to see who he will appoint as president of the central bank, and as the chief economist in the finance ministry.

MARGARET WARNER:

But when you say the markets and the markets are giving him a honeymoon, what does that really mean, explain to someone who doesn't understand why the international markets are so important to Brazil.

KRISTIN FORBES:

The markets are so important to Brazil mainly because of Brazil's public debt structure. Brazil has a tremendous amount of public debt outstanding, about $260 billion. And much of that debt is linked to interest rates, about 40 percent of the debt is linked to interest rates in Brazil. And therefore the cost of servicing that part of the debt fluctuates with interest rates in Brazil, and then about another third of the debt is linked to the value of Brazil's currency. Therefore, every time investors begin to worry about Brazil and sell the currency or sell investments in Brazil, interest rates go up and the currency, the real, depreciated; both which increase the value of the debt and make it much harder for Brazil to just continue day-to-day service of its debt.

MARGARET WARNER:

So Mr. Sotero, what are the promises he made in this campaign that he really has to deliver on or risk alienating the people who voted for him?

PAULO SOTERO:

Well, his promise for more economic growth, greater, the more jobs, higher paying jobs, more opportunity for people, and immediately to attack the problem of bad nutrition, hunger, in some forms of Brazil. Now, he has done this very realistically. Lula has during the campaign at the final stages of the campaign saying our first year is going to be very difficult.

Today in his speech in Sao Paulo, he said that you should not expect miracles, and he reaffirmed the basic tenants of the policy he ran against. Basically one, inflation low, fiscal responsibility — which is something by the way that his party, the workers party, has done very well in the states and in the 190 cities that the workers party manage in Brazil — and also honoring contracts, with the IMF, with the international banks and also internal contracts. In addition to that, Lula has said that he is going to pursue some reforms, structural reforms of the economy, fiscal reform, Social Security reform, labor laws reform that are absolutely fundamental for stability, progress and economic growth in Brazil.

MARGARET WARNER:

All right, Mr. Avrigan, if we just take the really big promises, they all sound like they involve spending money. Can he deliver on those promises without violating the requirements of this — for instance, this IMF loan that he agreed to abide by in the summer?

TONY AVIRGAN:

Well, what we can do is look, as just mentioned, at the cities that the workers party already has been running, some of them for 15 years. And if you, the group that we work with in Brazil has put out this book that highlights the studies, the economic and social conditions, and if you look city by city, the cities that are run by the workers party have the top, the best performance in every category. And there's a lot of things that don't cost money, there's things like in Port Olegre in Brazil, they have a participatory process where people in the neighborhoods actually determine the city budget.That doesn't cost anything. Those kinds of things can be done.

And there's ways, Brazil is a potentially very rich country, it has a terrible tax collection system. There could be reforms of the tax system to actually bring in revenues, even if they adopted the U.S. tax system, which is criticized by leftists, even if they adopted something like that, it would provide an enormous amount of money for things like education and nutrition and worker training, and that's possible, Brazil is rich enough.

MARGARET WARNER:

Ms. Forbes, what's your view of that of whether he can deliver without spending the kind of money that he's promised not to spend now?

KRISTIN FORBES:

I'm not as optimistic. I think the first priorities for Lula are going to be getting the economy in shape and convincing investors he will not spend too much and that he will stick to the very tight fiscal surplus promise to the IMF in order to keep the finances from the IMF flowing. And that means it's going to be very, very difficult to increase spending on a lot of the public works projects that Lula did talk about in his election campaign. The one reform that was just mentioned that I think is promising, though, is reforming the tax structure. I think by simplifying the tax structure there is room to not substantially reduce revenues, but promote growth.

MARGARET WARNER:

Mr. Sotero, another thing he really laid out, a position very different from the U.S., which is on this idea of a free trade for the Americas, and he essentially said that could amount to annexation by the United States, critical of the fact that the big industrialized countries seem to want countries like Brazil to open their markets, but don't open their markets in return. What do you think, what position do you think he's going to take on that?

PAUL SOTERO:

Well, again, he announced today that Brazil will be at the table, Brazil is going to negotiate — is going to negotiate very, very hard, as the current government would. The fact is that if the United States and the industrialized countries do not open up its markets to Brazil, in areas that we are competitive, there is not going to be an FTA. And that is not with Lula, with any government from the right for left, and Brazil would be the same.

One of the greatest things that's happening in Brazil today, Brazil is a democracy. We have a congress. We have people to consult. The president of Brazil cannot do what he wants. He will have to negotiate, like the president here, in consultation with congress. So if the United States doesn't walk the walk of free trade, only talks about it, there is not going to be an FTAN. In the meantime, Brazil will be at the table, and Lula said today we'll negotiate.

MARGARET WARNER:

All right. Mr. Avirgan and Ms. Forbes, briefly before we go, what's at stake for the United States in his ability to deliver here in his success?

TONY AVIRGAN:

Well, I think if the United States took an enlightened position and realized that as long as there's such economic disparity in Latin American countries there's going to be instability in the region, if they took that position, then the United States has a lot to gain by what might happen in Brazil over the next few years but unfortunately I don't think that too many people in this government take that position.

MARGARET WARNER:

Ms. Forbes, explain the stake the U.S. has in all this.

KRISTIN FORBES:

From an economic viewpoint, U.S. companies have invested billions of dollars in Brazil. Your standard American companies from Coca-Cola to McDonald's have taken losses already in Brazil. Major U.S. banks such as Citibank and Fleet Bank Boston have significant exposure to Brazil. So if the situation in Brazil continues to deteriorate, that's going to hit the bottom line of a number of large U.S. companies.

MARGARET WARNER:

All right. Ms. Forbes, gentlemen, thank you all.