Something to Celebrate

Need cheering up? Here's a good news story. The world's fifth largest country--with a history of military rule and endemic corruption--holds a free and fair presidential election. All voters, even in remote villages, cast their ballots on high-tech electronic machines of a kind that make the conduct of elections in, say, Florida, look shamefully outmoded. The candidate who wins the most support in the first round of voting has made his name criticizing the nation's power elite. But the results are accepted by all, and the country begins a three-week campaign before the top two candidates square off in a second round.

Worth raising a glass to, right? But all last week's election in Brazil got from Wall Street was a Bronx cheer. The Brazilian currency, the real, continued a slide that, apart from a brief rally after an International Monetary Fund (IMF) rescue package last August, has gone on all year. In the markets, interest rates on Brazilian bonds (a proxy for the extent to which Wall Street regards investment in Brazil as a risk) are running more than 20 percentage points above comparable U.S. securities.

No prizes for guessing why the markets are jumpy. The winner of the first round, with 46.4% of the vote, was Luiz Inacio Lula da Silva--universally known as Lula--the candidate of the Workers' Party, which has in the past flirted with repudiating Brazil's massive external debt. Lula, 56, a former labor-union leader running for the presidency for a fourth time, is likely to defeat Jose Serra, the candidate of the governing coalition, in the runoff on Oct.27. Following the economic catastrophes in Argentina and Uruguay, American bankers fear that the commitment of Latin America to the Washington Consensus, the bundle of free-market policies that has been adopted on the continent since the late 1980s, may be in jeopardy. Given the exposure of U.S. banks and exporters to Latin America, that could translate into lost jobs and profits north of the Rio Grande.

As it happens, the man who coined the term Washington Consensus, John Williamson of the Institute for International Economics in Washington, is a longtime expert on the Brazilian economy. When I spoke with him last week, Williamson sounded a lot more relaxed about the prospect of a Lula government than Wall Street seems to be. After years of failure, says Williamson, the Workers' Party is now electable precisely because its policies have "converged on the middle ground." Whatever its program may have been in the past, the party now seems ready to accept the strictures of the IMF and U.S. Treasury, including tight government budgets and a commitment to pay off the debt. Given the economic constraints, a Lula government would be likely to concentrate on those areas that the Workers' Party has stressed when it has run state and local governments, especially expanding educational opportunities and improving health care.