Dilma Rousseff is cruising towards victory on the coat-tails of apopular president. But there is more at stake in October's election than meets the eye
On July 6th the campaign for October's general election formally kicked off. It will be the first presidential election since democracy was restored in the 1980s in which the name of Luiz Inácio Lula da Silva does not appear on the ballot. But Lula, Brazil's president since 2003, is nevertheless the dominant figure in the campaign.
For the past 18 months he has put all his efforts into trying to get Dilma Rousseff, his former chief of staff, elected as his successor. She is not an obvious presidential candidate: an efficient though notoriously bad-tempered administrator, she only joined Lula's Workers' Party (pt) in 2001. She has never before stood for elected office. But several more senior figures in the pt were forced out of politics by a corruption scandal during Lula's first term, and others have proved electoral flops. Barely known to the public at the outset, Ms Rousseff spent half of the past year recovering from lymphatic cancer. Despite all these handicaps, she has risen inexorably in the opinion polls. This month she overhauled the opposition's standard-bearer, José Serra, formerly the governor of São Paulo state, for the first time (see chart 1). The only other plausible candidate is Marina Silva, a long-time member of the pt who is standing for the small Green Party. Like Lula, she was born in poverty, but she fell out with him over what she sees as his government's failure to defend the environment.
The election has now become Ms Rous-seff's to lose. Her rise in the polls shows that Lula has been able to transfer his own extraordinary popularity to her. A former trade-union leader, Lula has a rapport with ordinary Brazilians that no other politician enjoys. But he can also point to solid accomplishments. He has presided over both a steady increase in economic growth which is now-conveniently—reaching new heights, and a sharp reduction in poverty. Even allowing for an expected slowdown, the economy will have grown by around 8% in the year before the vote.
The polls show that roughly 75% of Brazilians approve of the job Lula has done. Alexandre Marinis, a political consultant in São Paulo, notes that recent elections show a close correlation between the president's popularity and his candidate's success.
All this makes Mr Serra's job exceptionally hard. A minister in the government of Fernando Henrique Cardoso, Lula's predecessor, he trumps Ms Rousseff in political experience and has been an effective governor of São Paulo, the country's second-most-powerful job. His supporters are counting on his opponent to make gaffes. But Ms Rousseff is looking increasingly assured. And he is struggling to make his experience count in an election where most Brazilians-especially in the country's poorer areas—want continuity.
To see why, visit places like Jardim Igua-temi, afave\a (a self-built settlement) straggling over steep hills on the eastern extremity of São Paulo. Bordered by forest, it is an hour and a half's drive from the city centre. Mr Serra's state government built a big new school and a health clinic there. But it is the president who commands the sympathy of many residents. They credit Lula with Bolsa Família, a programme under which 12m of the poorest Brazilian families get a monthly stipend of up to 200 reais ($111), paid to mothers provided they keep their children in school and take them for health checks.
The government has cautiously allowed private investment in roads, railways and ports. But airports are run by an inefficient state body. Such mismanagement is a luxury Brazil can ill affbrd-if only because it will need to handle visitors to the football World Cup, to be held in the country in 2014. and the Olympic games, in Rio de Janeiro two years later.
Meanwhile, the government is spending more and more on pensions. Fabio Giambiagi, an economist at the National Development Bank (bndes), notes that although only 6% of Brazilians are of pensionable age, the country spends 11,3% of its gdp on them; in the United States, by contrast, the 12% of the population who are pensioners receive around 6% of gdp. Spending on pensions for private-sector workers in the formal economy has tripled as a share of Brazil's gdp since 1988. This is partly because the economy grew quite slowly (until recently), but mainly because of the generosity of the pension regime. Many affluent Brazilians retire in their 50s, and many pensions have risen steeply because they are tied to the minimum wage.
The result is that the federal government bails out the national pension system to the tune of 1.5% of gdp. Mr Giambiagi points out that the number of pensioners will grow by about 4% a year for the next ten years. Provided the economy grows at a similar rate and the next government slows the rise in the minimum wage, the pension burden will be just about manageable. But it reinforces Brazil's inequalities. Mr Paes de Barros notes that the government transfers ten times more money to pensioners than to children. He is advising the third candidate, Ms Silva, the only one who talks much about pension reform.
Banking on industrial policy
The government's critics also worry about the implications of a big expansion of the role of state banks (Brazil has three large ones). This came about partly as a result of the world financial crisis, when private banks temporarily cut back their lending. But the bndes, in particular, has become an important agent of industrial policy under Lula. Over the past two years the federal government boosted the bank's capital base with two long-term loans worth 180 billion reais. Its annual lending has reached 4-5% of gdp, and should be double its 2008 level by year's end. Its loans are mainly long-term (for up to 30 years), with priority for infrastructure, investment in industry and services and seed money for innovation. They cost around half of the Central Bank's benchmark interest rate.
The bndes has given big loans to state-owned electricity companies (revived by Lula) and to Petrobras, the government-controlled oil giant. But it has also financed takeovers by big private companies, both at home and abroad, creating national champions in businesses ranging from food to pulp and paper. Eduardo Giannetti, an economist in São Paulo, worries that all this involves big, but opaque, subsidies (of perhaps 8 billion to 12 billion reais a year, he thinks) while extending government influence over business.
Luciano Coutinho, the bndes's president (who is tipped to be finance minister if Ms Rousseff wins), insists that the bank deploys professional techniques of credit analysis and dismisses as a "conservative fiction" the notion that its loans are governed by political criteria. The bank's role is transitional, he says, until private capital markets develop long-term savings and lending instruments.
Ms Rousseff champions industrial policy—indeed her critics see her as more dirigiste than Lula, whose instincts are pragmatic. But Mr Coutinho says that this does not involve a return to the big Brazilian state and the high tariff protection of the 1960s and 1970s, as the critics charge. Brazil's economy is more open today. Mr Coutinho says his inspiration comes from Asian countries such as South Korea and China (though average tariffs are still higher in Brazil than in those countries).
This debate is most intense over how to develop the vast new oil deposits found deep beneath the Atlantic in 2007 Their discovery followed Mr Cardoso's decision to open up the oil industry to competition and subject Petrobras to market discipline (though the company continues to be controlled by the government, a majority of its shares are publicly traded).
Since Lula's administration thinks it clear that there is much more oil to be found, it wants to change the rules governing the industry. Instead of concessions under which oil companies pay royalties and taxes but keep the oil they extract, in any future fields the oil will belong to a new state company and Petrobras will be the sole operator (though it can team up with partners under production-sharing agreements). These changes are embodied in four laws, though only one-allowing the government to vest oil deposits in Petrobras as a way of increasing its capital-has so far been approved by Congress.
The government also hopes to create a national oil-supply industry. It is drawing up requirements that equipment, from tankers to service platforms and drilling rigs, should be mainly locally produced. Already Petrobras is doing much of its procurement locally, and officials point to a revival in Brazil's shipbuilding industry as an early success. Provided such restrictions are temporary, they may pay off for the oil industry. But there are risks. One is a repeat of the mistakes of the 1970s, when a government attempt to develop a computer industry by banning imports cut Brazil off from new technology. Another is placing too much strain on Petrobras, which has also been required by the government to build four new refineries.
This month Petrobras unveiled a huge increase in its five-year investment plan, to $224 billion (up from $187 billion). But the next day it abruptly postponed until September a planned share offering expected to be worth up to $25 billion. The price of the company's bonds has fallen recently because of fears that the accident at a bp rig in the Gulf of Mexico will add to the cost of deep-sea oil operations.
Oil now accounts for 12% of Brazil's gdp, a fourfold increase since 1997- It will climb as high as 20%, reckons Adrian Pires: an industry regulator under Mr Cardoso. The opposition's nightmare is that Ms Rousseff might use oil revenues to entrench the pt in power and that Brazil might go the way of other oil-rich Latin American states, such as Hugo Chavez's Venezuela or Mexico under the Institutional Revolutionary Party. But officials have other models in mind, such as democratic Norway, which has saved much of its oil revenues. "We want to use the oil wealth in ways such that it doesn't contaminate the rest of the economy," says Márcio Zimmermann, the energy minister.
Brazilians thus face a choice in October. Mr Serra would provide them with a strong but lean state, that would make room for more private investment and initiative and would tax its citizens less. Ms RoussefPs advisers think that Brazil has time to bring down interest rates and taxes gradually, and that the state should promote industrial development and redistribute income. After 16 years of stability and policy continuity under Mr Cardoso and Lula, neither candidate offers a radical change of course. What is at stake is the speed of the country's progress. ■
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