Lula: The End of Latin American Populism?

Whether authoritarian or democratic, rightist or leftist, populism has been the most pervasive political ideology in Latin American politics for nearly a century. Yet populist leaders, while extremely effective at attracting mass support, have also contributed decisively to the region's failure to develop economically and politically. Populism, especially when practiced by undemocratic leaders, has been one of the biggest impediments to the adoption of policies that these countries need to meet their peoples' aspirations for well-being and social justice. Populist leaders exhibit an eloquent, charismatic and unlimited capacity to promise a better life for their people simply by wishing for it--never as the result of discipline, thrift and hard work. In practice the populists' expansionary policies have usually delivered short-lived prosperity, immediately followed by painful financial collapse. This reality, coupled with the socially divisive rhetoric loved and employed by populists, has sometimes led to violence and opened the door to even worse authoritarian regimes.

Interesting Evolution

Before this year, Luiz Inacio "Lula" da Silva had campaigned unsuccessfully for Brazil's presidency three times, each on a populist platform. Consequently, when polls showed him to be practically undefeatable in this year's election, it should have come as no surprise that foreign and Brazilian investors became anxious, with the real depreciating 33% in just four months and interest rates increasing over levels already devastatingly high. (The markets' overreaction to Mr. da Silva's electoral popularity was also a spillover effect from Argentina's irresponsible default on its foreign debt last December.) In one respect at least, polls and markets were both right: Mr. da Silva was elected by a huge margin. The question now is whether the usual tale of populist failure will repeat itself this time around. The short answer is no. I sincerely believe that, paradoxically, the president-elect will prove both the skeptical markets and his now-enthusiastic grass-root supporters wrong. And he will disillusion his abundant populist fellows throughout Latin America who feel redeemed by his election.

To begin with, Mr. da Silva has already shown that in spite of his pre-2002 rhetoric he is far from a traditional die-hard populist. They usually stick to their guns to the end, disconnected from the harsh demands of reality. During his campaign and certainly since his election, da Silva has shown a remarkable capacity for rapidly endorsing policies that he had not so long before vigorously opposed. I submit that in addition to being a charismatic politician he has evolved into a responsible one. My guess is that his sense of duty has led him to recognize how challenging his country's situation is.

Brazil's public debt is huge in proportion to its GDP and is either denominated in foreign currency or has floating interest rates that adjust at the (usually nervous) pace of the market. Every time there is an erosion of confidence, the real is devalued and domestic interest rates rise. When that happens, both the cost and the domestic currency value of Brazil's public debt increase. Investors' fears of default, or at least of forced restructuring, will grow exponentially until these vicious debt dynamics are reversed.

Facing a Serious Dilemma

Growth in the debt must be halted or a full crash is inevitable. But the debt explosion can only be halted by sound policies that boost confidence, thereby strengthening the real and reducing interest rates. Should da Silva fail to do this quickly, he will be faced with further devaluation of the real, higher interest rates, a massive run on the banks, capital flight, cancellation of foreign credit lines, forced suspension of payments, widespread bankruptcies, ruinous levels of inflation and dramatic increases in unemployment and poverty, as well as social and political unrest.... Quite simply: hell.

To be honest, though, the alternative is not heaven. To restore confidence and put Brazil's economy back on a path to growth-- necessary if social demands are to be met--Mr. da Silva will have to implement policies that will be anything but popular. He will have to further slash government expenditures, even in socially and politically sensitive areas; raise tax revenues; provide formal and effective autonomy to the central bank; and accelerate structural reforms to make the economy more competitive. These changes will displace powerful and long-standing vested interests. Frankly speaking, Mr. da Silva must dose his country with even more bitter medicine than that prescribed by the International Monetary Fund in August. This strategy will erode his popularity in the short term, but the alternative--the populist road, whose destination is meltdown--would be far worse socially and politically. If the new president takes the path of prudence, my bet is that his popularity will recover well before the end of his four-year term. If he does not, his current wealth of political capital will be wasted and unrecoverable.

Consider a fascinating corollary to the president-elect's dilemma. If da Silva follows his old populist ideas, Brazil's crisis will surely become so awful that the populist dictates will be severely discredited. If, however, he does what it takes to save Brazil from this nightmare and return it to healthy economic growth, populism will also be disgraced. The international community, especially the U.S., must help President Lula--with generous financial support--to become the unwitting hangman of Latin American populism.