Which Lulanomics?

Brazil: Brazil’s new president, Dilma Rousseff, has promised to follow the policies of her predecessor Luiz Inacio Lula da Silva. But it’s unclear whether she’s talking about Early Lula or Late Lula. For investors, the former would be preferable to the latter.

When Lula was elected in 2002, markets trembled, worrying that he would increase Brazilian public spending excessively, leading to default. However his first finance minister, Antonio Palocci, reassured markets, keeping tight control on spending. Lula’s main first-term initiative, costing about 0.5 percent of gross domestic product, was the Bolsa Familia system of transfer payments to poor families. This gave a stipend of 22 reais ($12) monthly per child attending school, to a maximum of three children, for families earning less than 140 reais per month. The United Nations attributes the program with helping to reduce Brazil’s GINI inequality index, on World Bank figures, from 59 in 2001 to 55 in 2008.

As Brazil’s economic position and credit rating improved after his 2006 re-election, Lula loosened controls on public finances, with a major surge in spending both directly and through state-controlled companies and the development bank BNDES. While Rousseff has pledged to keep Brazil’s primary surplus above 3.3 per cent of GDP, that figure will only be achieved in 2010 by counting a one-off transfer from Petrobras and by keeping much infrastructure spending off the books.

Since 2008, Lula has also fiddled with property rights, re-nationalising oil concessions and extracting large additional royalty payments from Petrobras in the large Tupi oil deposits. Investors widely attribute Petrobras’ huge investments in the low-margin, but high job creation, refining business to government pressure. Vale’s increase in steel production appears to have been similarly motivated by government interests.

Lula’s early policies stabilized the economy and made important gains against Brazil’s worryingly high inequality. Those policies, not the state aggrandisement and overspending of his latter years, are the ones Rousseff would be wise to emulate.