Lula's mid-term blues

Brazil

Jun 2nd 2005 SÃO PAULO
From The Economist print edition

Problems familiar to his predecessors are dogging Brazil's left-wing president

SCANDAL, receding popularity and sagging economic growth are not the best preparation for an election. For the moment, at least, Brazil's president, Luiz Inácio Lula da Silva—who hopes to win a second term in office in a vote due in October 2006—is suffering all three. His government is fighting a losing battle to suppress a probe by Congress into corruption allegations. Figures released this week showed that after months of rising interest rates the economy grew a mere 0.3% in the first quarter of 2005, its slowest quarterly rate since 2003. Unsurprisingly, Lula's popularity, though still high, is slipping.

This dose of bad news is not in itself fatal to the president's electoral prospects. But it threatens to cripple his government, an ill-tempered coalition of left-wing, centrist and conservative parties.

Last month, Veja, a weekly magazine, published excerpts from a videotape showing a manager of the federal postal service taking a bribe. He claimed to belong to a bribe-collecting network headed by Roberto Jefferson, the boss of the Brazilian Labour Party (PTB), a member of the governing coalition. Mr Jefferson denies wrongdoing. The bribe-taker has since recanted. But allegations keep coming. Federal police are investigating charges that the state-owned reinsurance monopoly has funnelled money to a brokerage headed by a friend of Mr Jefferson.

Veja likens Mr Jefferson to a “human bomb” under the government. If so, he has not yet detonated. But Lula has reasons to worry. His own Workers' Party (PT) cannot avoid looking sordid by association. Many governments in Brazil have had to depend in Congress on rent-a-parties such as the PTB, which seek to reward followers with state jobs and pork-barrel spending. But milking public companies is a graver matter. People expected better of Lula's government. In opposition he righteously demanded inquiries into lesser scandals.

This time he has tried, but so far failed, to smother the inquiry. That is the latest in a string of congressional defeats inflicted not only by his coalition partners but also by rebellious members of the PT itself. In the lower house, 14 of the PT's 91 deputies signed the measure authorising the inquiry, along with nearly 80 others from supposedly allied parties. The government is now challenging the inquiry on constitutional grounds. If that fails, it will hope to guide its course.
Some damage has already been done. According to Sensus, a polling firm, Lula's approval rating has fallen to 57.4%, down from 66% in February. More than half the respondents—“a very high number for such a specific question”, in the view of the pollster, Ricardo Guedes—knew about the scandals. The government's approval rating slipped, too, to 40%. At 30%, pundits say, Lula's re-election would look dicey.

So the last thing he needs is a buckling economy. The central bank's battle to contain inflation by raising interest rates has chilled investment, already feeble, which dropped 3% in the first quarter. São Paulo's powerful industry federation warned of an “imminent risk of recession.”

That is unlikely. The government has agreed a generous rise in the minimum wage, lifting other salaries and pensions linked to it. Public spending, unusually slow in the first four months of 2005, will probably quicken. There has been good news, at last, on inflation: an index that blends retail and wholesale prices dropped 0.22% in May, stirring hopes that the central bank will stop raising rates. A healthy trade surplus is partial protection against a rise in American interest rates, which could send the real tumbling and inflation shooting up again.

Even so, the government is likely to remain at bay in Congress. A cabinet reshuffle might help. Coalition partners complain that the PT has shared too little power, while the PT's left wing harangues the government for pandering to conservatives. Aldo Rebelo, the government's embattled political co-ordinator, claims that it has an “almost consensual agenda”. This includes simplifying taxes, a reform of trade unions, and changes to regulatory agencies. Congress-watchers doubt much of this will get through. “As far as the major legislative agenda, this government has already ended,” says Sérgio Abranches, a political analyst.

That is disappointing rather than dire. Investment, and thus economic growth, may remain stunted. But the government is unlikely to abandon fiscal and monetary caution, which has spared the economy a full-fledged crisis. There is little sign that Lula plans reforms to correct the flaws in the bureaucracy and political parties that lead to political appointees pocketing bribes. Rather, he seems to be hoping that by the time the election comes, voters will have forgotten about them.

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