assumes presidency with new economic team
On 1 January, Luis Inácio da Silva (‘Lula’) from the Brazilian Worker’s
Party (PT, Partido dos Trabalhadores) was sworn in as president. Lula had
won a comfortable victory in the second round run-off election on 27
October over his challenger José Serra, from the incumbent president
Cardoso's Brazilian Social Democratic Party (PSDB, Partido da Social
Economic policy foundations to remain unaltered
The new president has pledged to remain committed to the sound
macroeconomic policies adopted by his predecessor Fernando Henrique
Cardoso. This would imply that the cornerstones of the economic policy are
upheld, among them the current floating exchange rate regime, inflation
targeting and rigorous fiscal discipline. Furthermore, the Lula
administration has endorsed the terms of the country’s current US$ 30
billion stand-by loan agreement signed with the International Monetary
Fund (IMF) in August.
Finance minister known for responsible economic policies.
The president’s economic team reflects his
desire to break from his past left-wing orthodoxy in favour of a more
pragmatic approach to economic policymaking. The new finance minister,
Antonio Palocci, is a former medical doctor and PT mayor of the city of
Ribeirao Preto in São Paulo state. While governing in Ribeirao Preto,
Palocci’s governing approach was marked by his commitment to responsible
economic policies. The new finance minister was one of the key developers
of Lula’s electoral economic programme and is known for his desire to
maintain fiscal discipline and contain inflation. The new finance minister
also hopes to ease political control over the Central Bank, trim the
existing pension benefits for civil servants and reform the current
state-run system for collecting the value-added tax.
Central Bank president demands fiscal discipline.
The new Central Bank president, Henrique Meirelles, a former executive at
FleetBoston Financial Corp and elected congressman from the PSDB has
explicitly endorsed the previous government’s inflation targeting as a key
guideline for monetary policy but has suggested that the timeline of the
current inflation targeting scheme may be extended. The new chief has
stated that the key to lowering interest rates will be the government’s
ability to abide by fiscal discipline and implement economic policies,
particularly tax and pension reform, that help lower Brazilian risk
Foreign minister advocates freer trade.
The incoming government is also not expected to reverse existing trade
policy framework significantly in favour of a more protectionist approach.
The foreign affairs minister, Celso Amorim, is a career diplomat and
former Brazilian ambassador to the World Trade Organisation (WTO). The
development, industry and trade minister, Luiz Fernando Furlan, is a
former executive of one of the country’s large meat producers and is a
strong advocate of freer trade.
Governance complicated as Lula’s party lacks majority in Congress
However, the new president’s political party, the centre-left PT, has only
91 of the 513 seats in the Chamber of Deputies and 14 of the 81 seats in
the Senate. Even though the PT currently enjoys the support of most
smaller left-wing parties, the president will not have a working majority
in Congress and effective governance will depend on forming alliances with
one of the larger centrist parties, such as the Liberal Front Party (PFL,
Partido da Frente Liberal) or the Brazilian Democratic Movement Party (PMDB,
Partido do Movimento Democrático Brasileiro). The government’s leverage in
regional governments is also weak with only three of 27 governorships,
which could prompt opposition governors to band together to block policy
initiatives from the central government.