Prospect of big Lula win raises reform fears

Brazilians surprised many onlookers this month when they forced President Luiz Inácio Lula da Silva into a run-off election against Geraldo Alckmin.

Now, as the left-leaning incumbent prepares to face the candidate for the centrist PSDB in a decisive vote next Sunday, there are signs that the voters could deliver a second shock – one that could result in a significant shift in policy, with far-reaching implications for growth.

Instead of being re-elected with a slender majority – as seemed most likely after the October 1 vote – Mr Lula da Silva now appears to be heading for an overwhelming victory.

The key to his turnround has been a series of attacks on the privatisation record of Mr Alckmin’s party.

Apparently acting on the advice of leftwing figures likely to be prominent members of a second Lula administration, the president has portrayed the PSDB as a party of the far right, opposed to any state involvement in the economy.

The PSDB, Mr Lula da Silva said last week, “don’t know how to produce anything – they only know how to sell what others built up”.

The shift in tactics plays on sour memories of the PSDB government of Fernando Henrique Cardoso, which privatised large sections of the state-run economy, including telephone companies, electricity distributors, aircraft manufacturer Embraer and Companhia Vale do Rio Doce, the world’s biggest exporter of iron ore. Many of the companies have since achieved dramatic success, while consumers have enjoyed a revolution in the standards of services provided. But tariffs for telephony and electricity have risen sharply and privatisation remains deeply unpopular.

The president and his advisers are taking every opportunity to suggest that Mr Alckmin, if elected, would privatise icons of the remaining public sector, such as Petrobras, the oil group, Banco do Brasil and Caixa Econômica Federal, two popular banks, and the postal service.

No amount of denial from Mr Alckmin has been able to undo the damage. Two opinion polls last week showed Mr Lula da Silva widening his lead to at least 20 percentage points, after winning 48.6 per cent of votes in the first round against Mr Alckmin’s 41.6 per cent.

If the polls are to be believed, some 8m people have transferred their support to Mr Lula da Silva. The worst news for Mr Alckmin is that most of the migration has come from his core voters – middle-income earners in the more prosperous centre and south of the country.

Emboldened by the polls, the president and his advisers have begun playing down the need to cut public spending. There is near-unanimous agreement among economists that Brazil must cut spending to reduce its enormous tax burden and release money for investment in infrastructure and other drivers of growth.

But the government has recently announced pay rises for the public sector that will add about R$10bn (US$4.7bn) to the public payroll from next year.

“What Lula is saying is there will be no cuts at all,” says Luciano Días, a political consultant in Brasília. “The issue is not just one of spending. The issue is whether there will be a real adjustment in the relationship between the state and private sectors. Lula is saying there will not.”

Such is the pressure on Mr Alckmin that he said on Friday there was no need for reform of the bankrupt pensions system; on the contrary, benefits should be increased. This is heresy to most economists, who say pensions reform must be the first priority for the next government.

The danger of a resounding victory for Mr Lula da Silva, in the view of those who support economic orthodoxy, is that much-needed reform would be even less likely, leaving Brazil with little chance of growing more quickly than the average of 2.5 per cent achieved over the past 15 years.

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