State’s role plays big factor in Brazilian election

Luiz Inácio Lula da Silva, president of Brazil, has made it no secret he wants voters to see October’s presidential election as a plebiscite on his eight years in power.

As the most popular president in Brazilian history he hopes his own success will be transferred to Dilma Rousseff, his chief minister, whose candidacy was endorsed at the weekend by his Workers’ party (PT).

But the election seems to be taking shape as a plebiscite of a different kind: on whether the state should take a bigger or smaller role in the economy.

Both Ms Rousseff and Mr Lula da Silva have played down suggestions they are preparing for a big increase in the state’s role.

“There will be no going backwards, no adventures,” Ms Rousseff said at the PT’s annual conference at the weekend.

But Mr Lula da Silva, while warning the opposition would brand her as a “statist”, supported a bigger role for the public sector.

“They’re going to say Dilma is a statist,” he told the conference. “Be prepared. Not that that’s a bad thing. It’s good. Obviously you won’t want to nationalise tyre repair shops, bars and pizzerias. But [about] things that are strategic, that aren’t working and need to be put to work better, we must not be afraid of taking decisions that are important for our country.”

Jim O’Neill, chief economist at Goldman Sachs and one of Brazil’s most vocal champions on financial markets over the past decade, sees no problem with some of the government’s more leftwing policies.

By the end of this year the Lula administration will have created about 100,000 new public sector jobs. This, says Mr O’Neill, helps secure “buy-in” for the administration’s more orthodox economic policies.

And the proposed creation of powerful state companies in telecommunication and energy – a reversal of policies in the 1990s – could help secure investment in infrastructure that the private sector could not undertake alone.

But an overall expansion of the state’s role in the economy? “That won’t work,” he says. “A bigger state will crowd out the private sector. If you want lower real interest rates you have to reduce the role of the state.”

When Mr Lula da Silva was approaching victory in the 2002 election, Brazil’s borrowing costs rose sharply as investors worried a leftwing government would push public spending to unsustainable levels.

But Mr Lula da Silva kept in place the orthodox pillars of Brazil’s newfound macro-economic stability introduced by Fernando Henrique Cardoso, his predecessor: a floating exchange rate, steady reductions in public debt and inflation targeting managed by the central bank.

Now, many investors feel that such policies are so firmly entrenched that it hardly matters who wins in October. That, says Mr O’Neill, is a mistake.

“It worries me that people think this election doesn’t matter,” he says. “People are getting carried away.”

Mr O’Neill is famous as the man who coined the acronym Brics – for Brazil, Russia, India and China – which he believes will dominate the global economy by the middle of this century.

He remains firmly optimistic about Brazil, which he reckons could grow by up to 7 per cent this year, compared with a market consensus of 5.5 per cent.

But he stresses his predictions for the Bric countries are a matter of “could” rather than necessarily “will” and that success depends on governments choosing the right policies.

As he told the FT during a seminar to launch a Brics Policy Centre in Rio de Janeiro this week, he had no view on who would make the best next president of Brazil, so long as that person ensured macro-policies stayed in place.

The opposition centrist PSDB has yet to declare its candidate. José Serra, the PSDB governor of São Paulo, is its most likely choice. He is expected to argue for a smaller, more efficient state.

But he has frustrated many in his party by refusing to say whether he will run before next month. He is a high-profile former minister and has led opinion polls since last year. But Ms Rousseff has been steadily closing the gap.

Until the opposition shows its hand, she will have the debate over the role of the state to herself.