Challenge to Cardoso a bad omen
New rivalry could jeopardize future of Brazil's economy

Miami Herald
August 10, 1999

RIO DE JANEIRO -- They've always been unlikely allies: the suave, left-leaning negotiator and the brusque right-winger. For five years, though, President Fernando Henrique Cardoso and powerful Senate President Antonio Carlos Magalhaes have worked together to keep Brazil's economy on track.

Now it appears that all bets are off.

Just as Cardoso is trying to marshal his weak political forces to enact needed but highly unpopular economic reforms, Magalhaes, with an eye on next year's nationwide municipal elections and the 2002 presidential race, has openly turned against him.

In a colorful conversion, Magalhaes, a burly 71-year-old supporter of Brazil's military dictatorship of 1964-85, has begun quoting Raul Seixas, a dead leftish rock star; badgering a Cardoso minister; and insisting on more government spending for the poor.

Analysts in Brazil and New York say Magalhaes' opposition doesn't appear to threaten government compliance this year with strict budget-cutting targets, a condition of a $41.5 billion bailout by the International Monetary Fund. But they say the shift jeopardizes the future health of the Western Hemisphere's largest economy after the United States and Canada.

Magalhaes, who many believe is Brazil's most powerful politician, already has forced the president to open government coffers, winning a $400 million federal loan package recently to help Ford Motor Co. open a plant in his poor northern state.

Now he has turned against what he calls Cardoso's ''bitter measures'' to cope with economic crises. In an interview in the Folha de Sao Paulo newspaper Monday, he said Congress is no longer willing to approve such measures, as it did earlier this year after a big devaluation of the currency, the real.

''Not just because we're close to a municipal election. And then a presidential election. Not just for that,'' he said. ''It's also because we're conscious that a lot went right, but other things, including the social policy, didn't.''

Magalhaes' attacks on the government ''may play well in Brazil, but they aren't warmly received in New York,'' said Paulo Leme of Goldman, Sachs in New York. ''It's far too early for him to be positioning himself for 2002, with evident costs on the reform front. Brazil still has a lot of homework to do.''

Cardoso's chances to get that homework done, and finally get control of the whopping $65 billion federal budget deficit, seem to be dimming. His popularity ratings are at their lowest point ever, just when he needs support for difficult cuts in Social Security, the biggest government outlay.

On Sunday, Cardoso abandoned efforts to get Congress to approve minimum ages for private-sector retirees (60 for men and 55 for women), judging the measure could not pass, according to Edmar Bacha, a former Cardoso adviser who is president of BBA Securities in New York.

''The game all the politicians are playing is that Cardoso is on a tightrope, and they're all shaking it to see who can get him to fall,'' said Alexandre Barros, a political consultant in Brasilia.

Last week was the first of the new congressional term, during which Cardoso had hoped to get on with not only the Social Security reforms, but also a tax reform plan and a ''fiscal responsibility'' measure to control spending by local governments. In preparation, he reshuffled his cabinet last month, hoping to shore up sagging support in his four-party governing coalition.

Cardoso says the best way to help Brazil's tens of millions of poor people is first to get control of the government's chaotic spending. Brazilians are no longer buying that argument.

''People compare his message to that of the church; that is, suffer now so as to achieve paradise later,'' Barros said. ''And they're not willing.''

Magalhaes last week proposed a dramatic switch in direction, calling on Congress to create a fund for the poor of up to $4.5 billion from existing government coffers and new taxes, including on ''luxury'' sales such as tobacco and alcohol and on the incomes of rich individuals and businesses. He is trying to get Congress to vote on the plan this week.

There's plenty of justification for a war on Brazilian poverty. The nation of 162 million, with the world's eighth-largest economy, has what World Bank economists say is the planet's widest income gaps. More than half its people live below the poverty line of $77 a month.

Cardoso himself, during his first inauguration speech in 1995, called ''social justice'' the ''No. 1 objective'' of his administration. And his supporters say he did much toward that goal by beating back chronic hyperinflation in his first term.

Since then, busy with his reforms and buffeted by global economic turmoil, he has had little success in narrowing Brazil's income gap.

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