A Carnaval of Disillusion in Brazil

Brazilian politics is once again involved in a scandal. It was revealed
that the coordinator between the office of the President and
the legislative branch extorted funds from underworld figures.
None of this is terribly shocking to observers except that it shows
that the PT is not unlike the other Brazilian political parties.

Richard Hayes

As Brazil approaches the weeklong lull during which Carnaval is celebrated, attention is focused on Brasília more than usual. The decision of COPOM, the Central Bank's monetary committee, to maintain the basic interest rate at 16.5 percent came as no surprise. If rates had been lowered, the Central Bank would have been perceived as yielding to political pressure.

As it turned out the usual noisy complaints of business people and consumers have been drowned out by controversy over the situation of Lula's most trusted and influential advisor and long time collaborator, José Dirceu.

Last week, weekly magazine Época published photos and an article showing that Waldomiro Diniz, who had been serving as the coordinator between the office of the President and the legislative branch, extorted funds from underworld figures that were used to help finance the campaign of three PT governors. This happened in 2002.

Until last Friday when he resigned, Diniz reported directly to José Dirceu. Dirceu, a long time friend of Diniz with whom he once shared an apartment in Brasília, was president of the PT at the time Diniz collected bribes in exchange for influence. Diniz was serving as head of the lottery in Rio de Janeiro at the time of his indiscretion. Dirceu was responsible for Diniz' appointment as the then governor of the State of Rio de Janeiro, Antonio Garotinho, was allied with the PT before he broke away and decided to run for president.

The reaction of the PT (Partido dos Trabalhadores—Workers' Party) government was swift. Diniz was fired and Dirceu stated that because this incident happened in 2002 before the PT came to power and that since investigations by the Federal Police and the Ministry of Justice were ordered, the affair was over. The fact that he had a crook working very close to the seat of power in Brasília evidently is not important to Dirceu. It is highly unlikely that a man as experienced and streetwise as Dirceu did not know of Diniz' questionable moral qualities.

The opposition, mainly the PSDB (Partido da Social Democracia Brasileira—Party of the Brazilian Social Democracy), has called for a parliamentary inquiry. So far the necessary votes have yet to be collected. Since Congress is in recess now until after Carnaval, I doubt if a formal CPI (Comissão Parlamentar de Inquérito) will ever get off the ground. The parties that nominally support Lula and his government are divided on the issue, as is the PT.

It seems as if there is evidence that Diniz had further contacts with these same people that are involved in bingo games and the illegal numbers racket known as jogo do bicho, due to the symbols of animals that appear on the tickets. Big money is involved as well as possibly money laundering and connections with the Mafia. If further evidence of wrong doing since January 2003 when the PT took over the government appears in the media, it may be difficult for Dirceu to stay in his position. He apparently has offered to resign but up until now, Lula has not accepted his offer to step down.

None of this is terribly shocking to observers except that it shows that the PT is not unlike the other Brazilian political parties. The PT has always strived to appear to be above scandal and corruption.

This latest disclosure plus the still murky circumstances that surround the murder of the PT mayor of Santo André make if difficult for Duda Mendonça, the publicity agent for the PT, to burnish the image of purity.

Palocci Rises

There is a positive angle to this lowering of prestige of José Dirceu. With his influence possibly diminished, perhaps that of Antonio Palocci, the sensible Minister of Finance who has managed to gain a degree of confidence in Brazil's economic policies domestically and abroad, will increase. Before the Diniz affair surfaced, Lula stated categorically at an informal dinner party among journalists, that Palocci enjoyed his unrestricted support. This is important, as Palocci's accomplishments are the only visible signs of competence demonstrated so far by this administration. The rest has been all talk, propaganda and the establishment of task forces.

The sad part of the Diniz episode, which is far from over as the press continues to delve into the matter, is the disillusionment on the part of sincere intellects that believed that Lula was different and could make the changes required to point Brazil in the direction of a more just society and better living standards for its people. His popularity had already waned a bit of late and this type of publicity that puts in question his judgment in his choice of advisors will not help bolster it. Inflation is not dead and unemployment, crime and violence, high interest rates and excessive taxation continue to be serious concerns of the population. The banks' profits have never been higher.

Due to the municipal elections in October, the chances of accomplishing much during the legislative period were already slim. Now with the Diniz affair dividing the members, it is doubtful if any serious work will be realized. The congressmen and their staff have already pocketed the estimated R$ 50 million (US$ 17 million) it cost taxpayers for the special session during January and February. So they are in no hurry to examine the several proposals for reform that should be studied.

These include finishing up the social security reform, enacting tax legislation, beginning a reform of labor and union practices and changing bankruptcy laws. The idea of central bank autonomy has not been mentioned as a possibility even though it is part of the IMF agreement.

It remains to be seen to what degree this political confusion will alter the confidence exhibited on the part of foreign lenders and passive investors. Market reaction has been negative this week. The Diniz/Dirceu affair may blow over in time or it may erupt into a full blown institutional crisis. Lula has characterized Dirceu as the "captain of the team". As Lula's right hand man, Dirceu has been a vital factor in the functioning of the PT government. Without his presence or with his prestige badly damaged, it is difficult to predict what the future holds.

Not much of note will happen until after March 1. This is a period of celebration for many and rest for others.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br

February 20, 2004