Brazil is back | World Finance

They tried to bury me alive, and here I am,” President-elect Lula told jubilant crowds in São Paulo as the vote count confirmed his victory in the Brazilian presidential runoff. The moment marked a historic comeback for the veteran politician, whose career and reputation were seemingly ruined when he was convicted of accepting bribes in Brazil’s watershed ‘Operation Car Wash’ corruption probe. Sentenced to 12 years behind bars, the former president was forced to watch the 2018 election from his jail cell. After serving 580 days in prison, his conviction was annulled, and Luiz Inácio Lula da Silva – known mononymously as Lula – re-entered Brazil’s political fray, finding his way back to the top job just three short years after his release from jail.

Despite the throngs of euphoric voters that filled the São Paulo streets as the election results poured in, Lula’s victory was by no means a landslide. After a divisive and bitterly fought election campaign, Lula defeated his far-right rival Jair Bolsonaro by the tightest of margins, winning 50.9 percent of the vote to the incumbent’s 49.1 percent. The knife-edge election was Brazil’s most closely fought contest since the end of its military dictatorship in 1985, reflecting a deeply divided and politically polarised society.

The Brazil that Lula now inherits is very different to the one he left

When he officially takes office in January 2023, Lula will be tasked with reuniting a fractured Brazil. The world’s fourth-largest democracy remains an extremely unequal country, with severe economic, social and geographic disparities that continue to hamper progress and slow growth. Many voters will hope that Lula can build on the successes of his first two terms, which saw 20 million Brazilians lifted out of poverty. But the Brazil that Lula now inherits is very different to the one he left when he last departed the presidential palace in 2011. COVID-19 dealt a hammer blow to the public purse, while stubborn inflation is eroding wages and pushing people back into poverty. In realising his vision for a better Brazil, Lula certainly faces an uphill struggle – but as his momentous comeback has shown, he doesn’t shy away from a hard fight.

Brazil’s own son
Politics can be a fickle game. Public support is hard-earned and easily lost, and longevity is by no means guaranteed. Few world leaders remain popular throughout their time in power, and fewer still are able to leave a lasting legacy once they have left office. Lula, however, has already succeeded on both counts.

Dubbed “the most popular politician on Earth” by former US president Barack Obama, Lula enjoyed tremendous support during his first two terms, leaving office in 2010 with an approval rating of nearly 90 percent. And it isn’t hard to see why Lula proved so popular among his peers and compatriots. Under his tenure, the country experienced rapid economic growth, while Lula’s commitment to anti-hunger programmes saw millions of people propelled out of poverty. In returning once again to Brazil’s highest office, Lula is putting his remarkable legacy on the line – in the hope that he can replicate his past successes.

A lifelong champion of the poor, Lula’s humble beginnings are central to his enduring appeal in Brazil. Born in the historically poverty-stricken north-eastern region of Brazil, Lula had to work from an early age to help to support his family, shining shoes and selling peanuts on the city streets as a young child. By his late teens, Lula had found employment as a metalworker in an industrial suburb of São Paulo – a physically demanding job that saw him lose a finger in a workplace accident when he was 19.

It was during this time as a factory worker that Lula developed an interest in advancing workers’ rights. At the encouragement of his union-activist brother, he joined the Metalworker’s Union and quickly rose through the ranks, becoming president in 1975.

In protest of the poor working conditions and routinely low salaries among Brazilian factory workers, Lula led a series of historic strikes between 1978 and 1980, spending a month in jail when the country’s military regime declared the strikes unlawful.

But a month in a prison cell couldn’t quash Lula’s newfound passion for social and economic justice. Shortly after his release, Lula founded the Workers’ Party, a progressive, left-wing political party that brought together a diverse array of union activists, academics and intellectuals.

From humble beginnings in the midst of Brazil’s military dictatorship, the Workers’ Party grew into an unstoppable political force in the decades that followed, with Lula eventually elected President of Brazil in 2002. For many Brazilians, Lula’s election marked the first time that they saw themselves represented in the country’s highest office. Unlike any other president in the nation’s history, Lula came from working class origins.

His lack of formal education and years spent toiling in high-risk, low-pay industries endeared him to millions of voters who had endured the same hardships over the course of their lifetime. But in order to keep the Brazilian people on his side, Lula had to make good on his bold election promises to eradicate hunger and bring an end to poverty. And in a nation rocked by economic crises and persistent inequality, this was certainly no small task.

A global powerhouse
When Lula first took office in 2003, the Brazilian economy was in something of a sorry state. The nation was weighed down by an immense debt burden, while the outgoing administration had failed in its promises to generate jobs and narrow the social divide. Many anticipated that Lula’s election would herald the end of neoliberalism in Brazil, ushering in an era of radical interventions and drastic revisions to economic policy. But this revolutionary approach did not materialise. Upon taking power, Lula surprised both his supporters and critics by adopting a much more conventional economic plan than had been anticipated.

Renewing all of the agreements that the previous administration had signed with the International Monetary Fund (IMF), Lula was prudent in his early policy-making, prioritising fiscal responsibility as he looked to calm jittery markets. This was ultimately a wise move. Brazil’s financial outlook rallied in the months following Lula’s victory, with his success in stabilising the economy allowing him to turn his attention to more radical social reform.

In a fortuitous turn of events, Lula’s election coincided with a surge in global demand for commodities. Driven largely by China and other emerging markets, the early 2000s commodities boom saw resource-rich Brazil enjoy a period of rapid economic growth. Boasting abundant supplies of foodstuffs and raw materials such as oil and iron ore, the South American nation was well-positioned to meet the demands of resource-hungry importers.

This country needs peace and unity. This population doesn’t want to fight anymore

Thanks to the skyrocketing demand for Brazilian products, Brazil saw its annual trade with China grow from $2bn at the turn of the century to $83bn in 2013. China became the country’s largest trade partner, with this lucrative relationship helping to drive down debt and boost growth. Lula successfully channelled the trade surplus of the commodities boom into help for the nation’s poor.

With the public purse now looking remarkably healthy, the state had the freedom to invest intensively in social programmes and poverty relief schemes. This included the expansion of the internationally lauded Bolsa Família cash transfer scheme, which was launched early in Lula’s first term. A radical programme targeted towards those living in extreme poverty, the Bolsa Família provided direct cash payments to poor families, on the condition that they would keep their children in school and take them to receive their required vaccinations.

According to the World Bank, 94 percent of Bolsa Família funds were directed towards the poorest 40 percent of the population, making it one of the most effectively targeted aid programmes in history. In directing windfall trade profits towards effective anti-hunger and anti-poverty programmes, Lula oversaw a historic rise in living standards among working class Brazilians, cementing his position on the global political stage and re-establishing the nation as an exciting ‘economy to watch.’

After years of underperformance and sluggish growth, Brazil was booming. By the end of Lula’s second term as president in 2010, the nation was something of a global powerhouse – both economically and culturally. Selected to host the 2014 World Cup and 2016 Olympics, the country had established itself as a significant player on the global scene, open for business, open for investment and open for visitors. Eternally cast as ‘the country of future,’ it seemed that, at long last, the future had arrived for Brazil.

From boom to bust
Brazil’s post-millennium boom was ultimately not to last. Over the past decade, the South American giant has been rocked by a series of economic, political and social crises that have destabilised the economy and left the country bitterly divided. In 2016, Lula’s successor Dilma Rousseff was impeached for supposedly manipulating government accounts. Around the same time, Lula’s own Workers’ Party became embroiled in the sprawling ‘Operation Car Wash’ corruption scandal, ultimately leading to the former president’s conviction and imprisonment.

As China’s appetite for imports cooled during its 2015 slowdown, the commodity boom that had fuelled Brazil’s growth also came to a shuddering halt. The nation entered a crippling and long-lasting recession in 2015, with the fall in commodity prices prompting the country’s deepest economic decline since records began. Once regarded as one of the fastest growing economies on earth, Brazil suddenly found that its fortunes had been reversed. For the first time in a decade, poverty began to rise and GDP began to fall. In 2018, discontented voters chose the far-right populist Jair Bolsonaro as the next president of Brazil, bringing an end to almost two decades of left-of-centre rule.

But a dramatic change in political leadership didn’t repair Brazil’s ailing economy. The 2015–16 recession had left deep scars, with a slow and fragile recovery leaving the country fiscally exposed. Then in early 2020, after six years of slow and oftentimes negative economic growth, COVID-19 arrived, and Brazil was plunged into yet another crisis. At the beginning of 2020, Brazil’s unemployment rate already stood at 12.6 percent, with the ongoing aftereffects of the recent recession continuing to affect both job opportunities and incomes (see Fig 1). The pandemic pushed joblessness to a record high, while an estimated 485,000 families were plunged into extreme poverty. As President Jair Bolsonaro publicly downplayed the severity of the virus, Brazil’s largely uncoordinated pandemic response saw it become one of the worst affected countries in the world. Recording in excess of 4,000 deaths on its darkest days of the pandemic, the nation suffered a simply catastrophic loss of life.

Despite the progress made during Lula’s first two terms, the pandemic further exacerbated the deepening inequality that has blighted Brazilian society over the past decade. A 2019 report by the United Nations found that the wealthiest one percent of Brazilians possess almost one third of the country’s entire income, with women, black Brazilians and the rural poor most severely affected by the inequality epidemic. Since the political-economic crisis of 2015, Brazil has pursued stringent fiscal austerity measures in an attempt to address the nation’s sizable deficit.

Significant cuts have been made to the social safety net that was created during the Lula administration, with the internationally admired Bolsa Família programme ultimately axed in November 2021. While perhaps the best-known in international circles, Bolsa Famiília is not the only Lula-era scheme to find itself on the chopping block – under Bolsonaro, a host of anti-poverty schemes and food security programmes have been cut at a time when they are needed most.

These austerity measures – coupled with the far-reaching impact of the pandemic – have had a devastating effect on the nation’s poor and vulnerable. Over half of the Brazilian population are now experiencing food insecurity, while a staggering 33 million are officially classed as hungry.

In little over a decade, Brazil has gone from a global powerhouse to a nation in severe social and economic decline. Once lauded as a future superpower, the country has instead become an international pariah, its reputation in tatters after years of pandemic mismanagement, environmental maladministration and fiscal chaos. Rebuilding Brazil will be a challenge of immense proportions – but it may just be the fight that Lula has spent his whole career preparing for.

Deep divisions
“Brazil is back!” President-elect Lula told euphoric crowds in São Paulo as he made his triumphant victory speech. “This country needs peace and unity. This population doesn’t want to fight anymore.” Many will share Lula’s desire for unity after what was a contentious and divisive election. Emotions ran high on both sides of the political spectrum in the lead-up to the presidential run-off, with misinformation and false accusations marring the election campaign. Left-wingers claimed that Bolsonaro was a cannibal, while right-wing bolsonaristas accused Lula of practising devil-worship. It was this fierce political polarisation that Lula sought to calm in his victory speech. Vowing to serve all Brazilians, and not just those who voted for him, Lula has made it clear that he intends to usher in a new era of social and political stability, bringing an end to the polarising politics of the outgoing administration.

Despite Bolsonaro’s insistence that “only God” could remove him from power, it now appears that Brazil is heading for a peaceful transition. Lula will assume office on January 1, 2023, and will inherit a daunting economic in-tray. With COVID-19 coming hot on the tails of Brazil’s worst post-war recession, the nation’s finances are in a very poor state. Inflation, while falling, is currently sitting at 6.5 percent, pushing the prices of everyday goods out of reach for many vulnerable Brazilians. Poverty is on the rise, particularly in the country’s rural northeast, and the growing national debt pile now stands at around 77 percent of GDP.

Against this challenging fiscal backdrop, Lula has promised to boost welfare spending and scrap the constitutional cap on government expenditure. What isn’t yet clear, however, is how Lula will achieve his ambitious campaign pledges in what remains a very limited fiscal space. There are echoes of his first two terms in his promises to eradicate hunger, build more affordable housing and improve living standards for the rural poor. He has also vowed to undertake a series of state-funded infrastructure projects, in addition to ushering in tax reforms and an increase in the minimum wage. Admirable goals, certainly, but Lula is likely to find that the public purse won’t stretch as far as it did during the 2000s commodities boom.

To make matters even more challenging, Lula also faces a congress largely dominated by Bolsonaro allies. The former president’s right-leaning Liberal party holds the largest number of seats in both the lower house and the Senate, potentially making life very difficult for leftist Lula. In order to find a way through, Lula will need to reach out to those in the centre ground – and compromise may become the order of the day.

Rising from the ashes
It is true that immense challenges lie ahead. Lula is set to inherit a deeply troubled country, against a decidedly gloomy global economic backdrop. But there may yet be some cause for cautious optimism. Lula’s post-millennium rise to power coincided with a worldwide commodities boom that saw resource-rich Brazil profit from an increase in demand for its exports.

Over the past 18 months, commodity prices have yet again been on the rise, with the COVID-19 recession and the ongoing Russian invasion of Ukraine causing severe supply chain bottlenecks and a globalised increase in demand for goods. Some market analysts have suggested that we may be at the beginning of a new commodities super cycle – with Brazil well-placed to capitalise on a sudden surge in prices.

Indeed, the nation’s agribusiness sector is booming thanks to the current sky-high prices of foodstuffs. A world leader in food supply, last year saw Brazil post a trade surplus of $61.2bn – the largest in its history. However, commodity prices are famously cyclical in nature, and prone to booms and busts. With experts predicting a short, sharp super cycle, Brazil may have a narrow window in which to capitalise on this uptick in prices – but it could provide the kickstart that the economy so desperately needs.

Lula oversaw a historic rise in living standards among working class Brazilians

On the international stage, meanwhile, Lula’s election has been warmly welcomed. ESG-conscious investors largely shunned Brazil during Bolsonaro’s presidency, in protest of the populist leader’s destructive environmental policies and controversial remarks. Lula’s promises to restore environmental protections and aim for zero deforestation are much more palatable to international investors – many of whom will also welcome the President-elect’s eagerness to pursue clean growth. If Lula is able to make good on his pledge to “reposition Brazil in the hearts of international investors,” the country could prove well-placed to attract significant foreign investment in the clean energy space. A shrewd negotiator and an experienced statesman, Lula may be able to soon restore Brazil’s reputation on the global stage – and an injection of foreign cash could well follow.

Significantly, financial markets are yet to be overly spooked by Lula’s early commitments to social spending. The nation’s GDP forecast for 2023 continues to rise, and despite some initial skittishness during the campaign trail, many in the financial world trust the returning president to take a pragmatic approach to government spending. Lula unexpectedly prioritised fiscal responsibility during his first term as president, and is expected to take a similarly realistic and practical approach to balancing the books when he assumes office in January.

When Lula was last in power, he achieved the seemingly impossible: maintaining fiscal discipline while boosting social spending and improving the lot of millions. Now returning for his third and supposedly final term, Lula’s priorities include fighting some familiar foes – hunger, extreme poverty and rampant inequality.

“If by the time I finish my term, every Brazilian is eating breakfast, lunch and dinner, I’ll have fulfilled my life’s mission once more,” the veteran politician said in a recent speech. If anyone can be counted on to achieve this noble goal, it may well be Lula.