Brazil's Lula Turns to the Economic Left

With one eye on posterity and the other on the ballot box, Brazilian President Luiz Inácio Lula da Silva has been tacking sharply left. Brasília is spending public money with abandon, hiking pensions, public-sector wages, and the minimum wage all at a rate way above inflation—exactly the brand of checkbook populism that Lula had previously avoided and that has kept so many Latin nations in the minor leagues. In a bid to tighten control over the economy, he has called for the state to take over drilling operations in the vast new offshore oilfields and publicly threatened to interfere in Vale, a privately run mining conglomerate. Now, in a heavy-handed message to the markets, the finance ministry has slapped a 2 percent tax on foreign investment in an attempt to stop the surging Brazilian real, up 27 percent against the greenback this year.

The head winds from Brasília are something of a turnaround for a nation that sailed through the worst of the world economic crisis with barely a bruise thanks to a legacy of sober economic policies, fiscal discipline, and hardheaded structural reforms forged by two governments over the past 15 years. Lula's new tack has sent mixed signals to allies and investors alike, and raised doubts over whether the developing world's giant can convert its glory into clout and consolidate its ascent to global prominence.

His hardening attitude is fueled partly by hubris, partly by frustration. A former union man who rose through the minefield of Brazilian politics by cagily gauging his opportunities, Lula knew intuitively that capitalism was the only way to lift his countrymen economically, but he was never entirely comfortable with it. Throughout his years in the presidency, Lula has gritted his teeth and toed the line, paradoxically leveraging his everyman charisma to demand the patience and sacrifice required to stabilize the accident-prone economy. He knew from the start that Brazil's good standing rested on "no tricks, no magic" economics. His longest-serving aide, tellingly, is Central Bank chief Henrique Meirelles, a monetary hawk, who has kept Brazil's lending rates among the highest in the world. Lula now collects laurels as an economic conservative.

Still, from time to time, his roots have shown, and never more so than now. In the thick of the economic downturn he accused First World financiers—"white-skinned, blue-eyed bankers"—and free-market fundamentalists of precipitating the financial crisis. Now that the worst of it has passed, he seems to have dropped his guard entirely. With an election coming up in 2010, Lula wants his chief of staff, Dilma Rousseff, to succeed him. So he is stumping the country with Rousseff in tow to inaugurate grand public works, and loosening government purse strings. Public spending, easy money, and tax exemptions are ballooning.

Brasília defends such largesse as "countercyclical" stimulus to fight the global downturn, but because these involve fixed costs that cannot be easily reversed, critics warn that the government is mortgaging stability for a populist quick fix. In fact, Lula now seems to be on an outright mission to redeem the state. With a potential 80 billion barrels of oil buried off Brazilian shores, he wants to scrap the current concession system, which encourages competition by awarding drilling contracts to the highest bidder. In its place he proposes production sharing, where bureaucrats pick the winners. State-owned Petrobras is to be the exclusive operator in deep-water wells, and Brasília would hold veto power over all drilling contracts. Most recently he threatened to discipline Vale—a private company, in which Brasília is a major shareholder—for laying off workers during the recession, exporting raw materials instead of finished goods, and not investing enough in Brazil, fueling rumors that Vale's entire board would be sacked and the whole company subordinated to official orders.

Lula's critics note that Vale has multiplied its market value sixfold since it was privatized in 1997. That same year, Brazil ended its oil monopoly, a move that forced the lumbering Petrobras, once tarred as "Petrosaurus," to compete with the best in the oil business to survive. Petrobras is now one of the most profitable companies in the industry, and last year brought this chronically energy-hungry nation to the point where it became self-sufficient in oil.

For now, foreign investors are unlikely to be deterred by the changes coming out of Brasília. The nation offers opportunities in natural resources and infrastructure that are probably just too good to pass up. For Brazilians, though, the stakes are much higher. A populist jag may hold back a nation that is just now stirring to its potential. Not long ago, Lula might have acknowledged these risks himself. But that was then.

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