The Lula of 2003 and the Lula Of 2023: From Pragmatism to Populism
In this report, we compare the objectives and the motivations – economic and political – underpinning the fiscal policy in two Lula administrations. The first (Lula 1), starting in 2003, was marked by an acute crisis of confidence, prompting Lula to be temporarily pragmatic, unconditionally accepting an economic model based on the “macroeconomic policy tripod” (inflation targets, floating exchange rate and primary surplus targets), whose rules had been established under the FHC government. The second (Lula 3), has been marked by a chronic lack of economic dynamism and waning popularity, despite the efforts of his finance minister, trying to convince him of the need to slow the growth of the debt/GDP ratio. But Lula has decided to maintain the targets for growth of primary spending, without worrying about slowing the growth of the public debt.
We show that in the first case, the referred acute crisis had the characteristic of a “dual equilibrium”, i.e., it could either result in a “bad equilibrium”, culminating in debt default, or a “good equilibrium”, with an abrupt decline of the risk premiums, accompanied by an appreciating exchange rate and lower inflation, opening a path without costs to resumed growth together with control of inflation. What prevented the bad equilibrium were the decisions made during the FHC government, whose economic team negotiated a stand-by agreement with the IMF and convinced Lula’s team, headed by Antonio Palocci, that due to the rapid (and cost-free) convergence to the good equilibrium, the government would reap a huge political gain. The supposed pragmatism of Lula in that episode turned out to be a successful example of his political opportunism.
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