Commentary: Latin America: Is Lula's Third Way Doomed?

His ability to bring reform to Brazil will be hamstrung by budget restrictions

By Geri Smith

Milton Braga, a 39-year-old São Paulo architect, voted for Fernando Henrique Cardoso in Brazil's last two presidential elections. But he has been disappointed: Nearly a decade of market reforms failed to produce robust economic growth. Instead, unemployment, crime, and inequality have worsened. So Braga figures it's time to try some fresh ideas. On Oct. 6, he voted for Luiz Inácio Lula da Silva, known to everyone as Lula. The leftist former labor leader has promised economic policies that deliver more growth and social justice, without jettisoning Brazil's hard-won record of fiscal prudence. Lula won 46.4% of the vote, enough to catapult him into a run-off election on Oct. 27 against the ruling coalition's centrist candidate, José Serra. "Cardoso had eight years to get Brazil's economy moving and it didn't work. Now it's time for a change," says Braga.

Braga is not alone. Across much of South America, disenchanted voters are yearning for alternatives to the Washington consensus, the free-market agenda promoted by the U.S. government, multilateral institutions such as the International Monetary Fund, and Wall Street. This restive electorate has already elevated left-leaning politicians like Hugo Chávez of Venezuela and Alejandro Toledo of Peru to power. What these voters want is a so-called Third Way--a middle path that weds free-market principles with genuine concerns about social welfare.

Politicians from Buenos Aires to Lima will be watching to see whether Lula can chart such a course. "If Lula shows he can manage Brazil's economy with a high degree of responsibility, but at the same time pursue an agenda of social justice and economic equality, it would mean a serious leftist party has emerged--the Tony Blair-ization of Latin America," says Peter Hakim, president of the Inter-American Dialogue, a Washington (D.C.) policy institute.

But the truth is that the Third Way is a hard, perhaps impossible, road to travel in Latin America. Even if Lula prevails in his fourth run at the presidency, the former metalworker will have very little latitude to pursue his version of European-style socialism. He will have to tread carefully to avoid further spooking Wall Street and other investors, who are leery of his leftist tilt and his ability to service Brazil's $260 billion net public debt. Besides, Lula's ability to enact sweeping reforms will be subject to the same budgetary restrictions that vex leaders throughout the region. Close to 90% of Brazil's budget is swallowed up by government salaries, pensions, and the national health service, leaving next to nothing for discretionary spending on new social programs. Furthermore, the next President will be bound by the strict fiscal targets mandated by the IMF as a condition for a recent $30 billion rescue package--an agreement all candidates pledged to honor. Last but not least, Lula would have to rule without the benefit of a congressional majority, a factor that makes radical reforms unlikely.

Other policymakers in the region have found their hands similarly tied. "You're going to have a rhetorical orgy for the next year or two about how the market model isn't working and how the market has to have a human face and more social spending," says Pedro Pablo Kuczynski, who heads Latin America Enterprise Fund Managers, a Miami private-equity firm. "But there's very little room to change things quickly." Kuczynski should know: He served as Peru's Finance Minister for just under a year before violent street protests against an electricity privatization plan he was championing forced him to step down in July.

Of course, a Lula presidency would feature some departures from the Cardoso formula. For starters, don't expect either labor market liberalization or more privatizations to figure high on the agenda. Also, look for Lula to adopt a more combative stance vis-à-vis the U.S. in negotiations towards a Free Trade Area of the Americas. That position could embolden nationalist politicians in neighboring Argentina, where an economic collapse has fuelled resentment over Washington's perceived abandonment of a longtime Latin ally. But Brazil would not likely risk a permanent rift with the world's only superpower.

The Latin Left would no doubt rejoice at a Lula victory. But anyone expecting seismic change is in for bitter disappointment.

Mexico City bureau chief Smith covers Latin America.

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