Election Dysfunction

Only four months before the presidential elections in Brazil,
mega investor George Soros told a reporter that, "in modern global
capitalism, only Americans get to vote, Brazilians don't."
Are the markets the supreme voter in a globalized economy?

Leda Beck

Serra or chaos: The alternative to a victory by the government candidate, José Serra, in the coming Brazilian presidential elections would be nothing less than chaos. "It's a self-fulfilling prophecy," explained mega investor George Soros to the Brazilian reporter Clóvis Rossi, during an informal dinner in New York.

According to Rossi's reporting, published on June 8^th in a major Brazilian daily newspaper, Folha de S. Paulo, the markets believe that Luiz Inácio Lula da Silva (the leftist candidate, of the Workers Party, or PT, who is well ahead in the polls) will default on the debt payments if elected. Thus, says Soros, the markets are already betting against Brazil, specifically against the Brazilian currency, the real. If Lula indeed wins in the two rounds of the elections, scheduled to happen on October 6 and 27, the financial situation would be so dramatic that he wouldn't have any option other than defaulting on the debt.

Faced with the intrinsic totalitarianism of such prophecy, Soros acknowledged it, and added: "In Ancient Rome, only Romans voted. In modern global capitalism, only Americans vote, Brazilians do not."

He went further: "Laissez-faire (or absolute market liberalism) is based on the same mental structure as Marxism. Both were born in a moment with supposed scientific certainties about the world, a totalitarian vision that impacted both ideological trends of the 19^th century." The financier also forecasted that a win by Serra would reassure the markets, because global capitalism wouldn't risk destabilizing a country like Brazil, "the honor student" of the hegemonic economic model.

In his article, Rossi points out that "honor student" was a praise largely used for Argentina in the past. "But the honor student was left to fend for herself," Rossi wrote. And what would Soros solution be to avoid the crisis? He suggested a direct intervention by the US Treasury to relieve the Brazilian debt. "But the Treasury does not seem interested," he said.

Big trouble

Under the headlines "Investor compares American power to the Roman Empire's - Soros says US will impose Serra, Lula would be chaos," the publication of the interview inspired a chorus of protests from the left to the right, beginning with Soros himself. Approached by Brazilian reporters in London, a few days later, he denied having given such interview to Rossi. "He [Rossi] listened to private conversations during a meeting of the Council on Foreign Relations, and those meetings are confidential," Soros told Valor Econômico, a Brazilian business newspaper, and Agência Estado, a Brazilian news agency.

Rossi had indeed been invited to New York by the Council on Foreign Relations to attend a seminar about terrorism, and Soros was there, at a casual dinner, just after the inaugural session. "We talked for about 15 minutes, face to face, and I clearly introduced myself as a journalist," Rossi recalls. Besides, being a very tall man, he is sure that his nametag must have been right in front of the financier eyes.

The mega investor regretted the use of his "reflections" in the Brazilian presidential campaign, but it was too late. Even the beneficiary of such comments, José Serra, wasn't pleased: "It was an untimely, inconvenient opinion." The government candidate has since been trying to put out a fire that was actually started by President Fernando Henrique Cardoso himself. Even before Soros controversial comments, Cardoso said in mid May that "Brazil risks becoming an Argentina if the next administration is incompetent."

Obviously, an elected incompetent would "Argentinize" any country in the world (provided he gets a little help from the International Monetary Fund, of course). But at the time of Cardoso's statement, the government candidate was trailing in the polls, while Lula, a blue-collar worker who graduated as a turner in technical middle school, was over 40 percent of voters' preference.

Many political commentators immediately attached the adjective "incompetent" to Lula, while others, like Rossi himself, denied the intention of demonizing an adversary. It may be controversial if the intention was present when Cardoso spoke, but the fact of the matter is that the result was widespread demonization of Lula as an incompetent that would bring the country to shambles.

Lula and the PT did their best to reassure the markets without compromising on some of the Party's fundamental principles. On June 30^th, Lula announced that, as president, he would keep the inflation targets and the debt agreements untouched, respecting the markets and reducing interest rates. He also assured the public that signed contracts "will be honored," and that his government will try to negotiate new contracts "on more favorable terms." Cashing in on the controversy, the PT also invited Brazilians to choose between "Brazil and Lula, or Soros and Serra."

Killing the messenger

A renowned Catholic bishop, Dom Demétrio Valentine, misunderstood the whole affair and wrote a newspaper article attacking Soros and the US. He went as far as to suggest that Brazilian voters hold a sign adapting a famous Roman expression: "Hail, Bush, those who are about to die salute you!" In Rio's daily Tribuna da Imprensa, the journalist Sebastião Nery also published a misguided critique of Rossi's story, defined as a "heedless three- word 'interview' ('Serra or chaos') extracted from the mega usurer George Soros in a dinner, and blown out of proportion in a whole page." Nery indeed shot the messenger: "Rossi has no right to lend his name to the nefarious terrorism of international usury."

Killing the messenger, be it Rossi or Soros, will not eliminate the message itself. "Soros acted as a doctor who looks at a patient's X-rays and points out the problem and the prospects," says Rossi. That is right. The perversity of the diagnosis will not be reversed by election marketing, aggressive oratory, or its outright denial. As a matter of fact, in June, in spite of having won the soccer World Cup for a record fifth time in the history of the championship — a feat that was expected to have very positive economic results for the country —, Brazil has seen an increase in economic instability: the dollar reached R$ 2.98 (on July 20^th it was already down to R$ 2.86) and, on June 14^th, Brazil passed Ecuador to become third in the ranking of countries world investors fear the most.

The investment bank Goldman Sachs created then what came to be known in Brazil as a "Lula meter," or a measure of the risks of investing in the country which is inversely proportional to Lula's performance in the polls (in late July he was favored by 38% of the voters, followed by José Serra, with 20%, and Ciro Gomes, with 18%). In the meantime, the government has accepted an extra US$ 10 billion from the IMF, and substantially reduced interest rates.

The "Lula Risk"

The roller coaster is not over yet. However, at least two well-respected economists have recently denied the existence of a "Lula risk," namely the Nobel Prize Joseph Stiglitz and Morris Goldstein, of the Institute for International Economics (IIE) of Washington, DC. Goldstein thinks Lula is not the problem, nor Argentina is. If these two factors were the problem, he argues, withdrawing a little more money from the IMF would have been an instant solution.

The key issue in Brazil is the midterm dynamics of the debt, said Goldstein to the daily Valor: "What really scares foreign investors is the debt, both the domestic and the foreign debts. It is much larger than what would be manageable. No matter who is elected president, he will have to roll on an enormous debt, particularly in 2003." Indeed, the domestic debt alone is above US$ 250 billion, roughly equivalent to 55% of the Brazilian GNP.

Goldstein believes that an increase in the privatization program, in the primary surpluses, and in the exports might be helpful. "Besides that, I don't see much that could be done," he adds. "Perhaps authorities might avoid making statements that get people more nervous."

As for Stiglitz, he puts it bluntly: "There's no such thing as a 'Lula risk.' Brazil is merely paying the price for having exposed its economy too much to the international markets." In the long interview he recently conceded to the business magazine Dinheiro, he warned that "a deregulated financial market is far more dangerous than Lula or any leftist party." He also admonished that highly indebted countries do lose political autonomy to a certain degree. The resulting "foreign voters" change their minds too quickly and may destabilize a country, he said. Nonetheless, in the long term, he added, "democracy always brings better results than the policies dictated by the IMF or by investors like George Soros."

It remains to be seen if a formal democracy plus a free market, in the terms of the Washington consensus, and a developing country do not compound the recipe for one single powerful vote that may decide the future of the nation: the vote of the markets, the supreme voter.

Leda Beck - ledabeck@pacbell.net - is a seasoned Brazilian journalist, a US correspondent in Silicon Valley for Brazilian and Latin American publications since 1993.

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