Brazil's new leader has big plans - but little money

Brazil's new president rings in the New Year with a herculean task ahead: to transform Latin America's biggest economy and introduce costly social reforms with virtually no money.

Inaugurated on New Year's day, Luis Inacio (Lula) da Silva was elected in a landslide in October promising land, jobs, food, and education for the country's poor. Now, millions hope he can deliver.

"I want to build a house with two rooms and pay for my kids to go to school," says Valter Reis, standing on a small plot of land he hopes one day to turn into a home. "But it depends on how much money I have. That's why we are putting so much hope in Lula. Under him, we hope for a better life."

Lula is already trying to temper the high expectations, repeating time and again that he has no miracle solutions to the problems facing the world's fifth most populous country. But analysts and business leaders say that his cabinet appointments and tough talk on free trade have started him off sounding the right note.

Lula's first decision after being elected was to create a special secretariat to fight malnutrition. And his Zero Hunger program, based partly on the US food-stamps program, is emblematic of his desire to provide every one of Brazil's 175 million people with three meals a day.

"Fighting hunger cannot be delayed," says Antonio Palocci, the campaign coordinator who was named finance minister. "Everything we do in the economic and planning fields will be done with social questions in mind."

But with the state of Brazil's economy, this will not be easy. Inflation is expected to be in double figures at the end of 2002, and with interest rates at 25 percent, growth is sluggish. Local currency has fallen by almost half against the dollar in the past 12 months, and outgoing President Fernando Henrique Cardoso leaves a burgeoning debt.

"From the outside things look bad," says Ines Pandelo, a state deputy for the area encompassing Paraiso de Cima. As a former Workers Party (PT) mayor who came into power with the coffers empty, she knows the challenges Lula is facing. "Once you get inside, you realize they are even worse. Lula is probably seeing things now that he never saw before," says Ms. Pandelo.

This year's budget is austere and few other sources of revenue are available. Raising taxes is not a viable option in a nation where one-third of the country's 175 million people live in poverty. Lula told his ministers they must cut to the bone to preserve money for the flagship social programs. Lula has vowed to save money by vigorously combating corruption and has asked private companies and nongovernmental organizations to assist him.

"The lack of money scares us all," Lula told reporters. "The budget sent and approved by Congress is the tightest for 10 years."

The business sector is cautiously optimistic about Lula's initial moves. His decisions to name Mr. Palocci as finance minister and former BankBoston president Henrique Meirelles as head of the Central Bank, were greeted with relief by investors who had feared Lula might install leftist idealogues. His plan to follow the example of the British Labour Party and make the Central Bank autonomous has been lauded, as has the decision to appoint former opponents and business leaders to prominent cabinet positions.

"I think [he] made very good choices," says Amaury de Souza, a political analyst in Rio de Janeiro. "It's easy to quote the names of appointees who raise hope as to the future direction of government."

Mr. De Souza says that reforming a social security system that grants retired civil servants generous pensions would give Lula a boost during his first year. Civil servants will fight tooth and nail to maintain the status quo, but the PT has other priorities and needs the money, he adds.

"If the PT carry out [social security reform] ... Lula will be reelected in 2006, because this is the bottleneck on the public sector, and the capacity to increase investment and therefore economic growth," de Souza says.

Brazil plans to play hardball in negotiations to create a Free Trade Area of the Americas (FTAA). Lula has criticized the United States for slapping tariffs on Brazilian products such as orange juice, textiles, and steel. He warned the US that his administration will take a tougher stance than its predecessors when negotiating international trade deals.