Lula loop: meeting Brazil’s presidential front-runner

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Hello and welcome to the Intelligence from the Economist in New York. I'm John Fassman. Every weekday we provide a fresh perspective on the events shaping your world. Germany's economy rests on two cheap energy from Russia and voracious consumers in China. But with Russian gas not flowing and the Chinese not buying, German industry may be in for a rough spell. And many visitors to Vietnam get an unwelcome wake up call. A loudspeaker blaring out public service announcements at an unreasonably early hour. Long gone from Hanoi, these speakers are, alas, staging a comeback. But first, This Sunday, people in Brazil will cast their votes for president. It's a stark choice. The incumbent, far right populist Jair Bolsonaro, is standing against the leftist form, former President Luiz Inacio Lula da Silva. Lula for short. And Lula is running ahead in the polls. He was a founding member of Brazil's workers Party, or PT. He served two terms as president between 2003 and 2010, before PT was implicated in a series of corruption charges. Lula himself spent more than a year and a half in prison before being released in 2019 following a Supreme Court ruling. Now his political comeback seems almost complete. Our Brazil correspondent, Sara Maslin has been to speak with Lula.

I interviewed Lula on a Sunday morning in Sao Paulo. He had a really busy day. He'd spent the morning in a campaign strategizing meeting. Lula's 76 years old, but still has a ton of energy. In his kind of traditional gruff voice. Lula made it clear to me that he's very concerned about the path that Brazil is on. I wanted to know how he would fix it if he gets selected into office again and how much of what.

He said was surprising to you. I mean, as you mentioned, he's been on the campaign trail for a year, and he served two terms in office, do we have a pretty good idea of what he'd do and what he stands for?

It's true that Lula has served two terms, but one thing that people here are talking about a lot is which Lula we would get if he were elected again. Would we get the first Lula, who was kind of fiscally conservative? Would we get the second Lula, who was more of a populace and spent a lot more to help Brazil through an economic crisis? Or would he govern more like his hand chosen successor, Dilma Rousseff, whose interventionist policies are blamed for driving Brazil into a really deep recession? As usual, Lula was really keen to go through the list of all of his economic and social achievements when he was in office. He said that Brazil grew by more than 4% a year, That he reduced the public debt to GDP ratio, that he brought down inflation. And he's also really proud of the fact that his government helped poor people, increasing the minimum wage by quite a lot and helping around 20 million people come out of poverty. These points that Lula makes are all broadly true. But on the other hand, Brazil is in a much more difficult position than it was when he first came to power in 2003. Public debt is much higher, the global outlook is much more fraught, and political conditions are worse. Congress is much more unreal than it was during Lula's first term. And so his ability to be a similarly effective president is much less certain this time around.

So given that uncertainty, what is his top priority in office? What does he say he wants to do first?

Lula told me that his priority above all will be to help very poor Brazilians, Especially the Brazilians who are struggling with hunger and high inflation. He says he wants to make sure that everyone eats breakfast, lunch, and dinner every single day. He wants to guarantee more job opportunities, which he sees as coming from building lots of infrastructure in a kind of a similar way to Biden's big infrastructure plan in America.

Sarah, that sounds very ambitious. How is he going to pay for it?

So Lula thinks that the only way that Brazil can get back on a sustainable growth path is if the government starts to spend a lot more. The first thing that needs to happen is sort of a change in the fiscal rules. Brazil has been restricted by this fiscal spending cap that was put in place in 2016 that restricts the growth of spending each year to the inflation rate. So Brazil can't spend any more than that, you know, slight increase because of inflation. And so that makes it really hard to introduce sort of expansive social programs. But on the other hand, more and more of the budget each year is eaten up by what they call mandatory spending on things like pensions and salaries. There's very little room for investment in social programs. So what Lula says is they need a more flexible fiscal rule, something that would allow for more short term borrowing and spending when Brazil is in a more difficult economic situation, while assuring markets that in the medium term the debt to GDP ratio will come down. He says that this rule could maybe be countercyclical, so Brazil would save more when the economy is growing.

Do you think that's feasible? Do you think his growth plans will work?

There's concerns about Lula's economic policies. The first is ensuring that he will be fiscally responsible. The reason he says he'll be able to be fiscally responsible is that he's going to implement policies that will make Brazil grow more, so there'll be more money to fund his programs. His long term strategy for growth relies heavily on expanding Brazil's public banks and funding infrastructure projects, both with private sector funding and a good dose of credit and guarantees coming from the public sector. He says that if the state doesn't provide credit and coordinate the kind of development projects that Brazil needs, then they simply won't get done.

So do you agree with this stance, with this assessment?

Well, I think the key question here is whether Lula and his team understand that in order for Brazil to grow faster and for expansion in spending to be effective, it needs reforms to improve the quality of spending and the business environment. You can't just spend. Spending by itself won't be enough. And whether he understands this is an open question. If you look at, for example, his campaign manifesto, it's a pretty classic leftist manifesto. It advocates for a heavy dose of intervention. But on the other hand, in speeches and in interviews, Lula portrays himself as much more of a moderate. He chose a center right. Former governor of Sao Paulo named Geraldo Alckman as his running mate, which is an effort to appeal to the business community. He also has suggested that he wouldn't reverse the recent privatization of Electrobrais, the state power company, or a pro business labor reform passed in 2017. Lula told me that it's unlikely that anyone running for president would promise to just get rid of the things that have already been done, so that sense.

Of continuity will reassure investors in financial markets. But what are ordinary Brazilians concerned about in this election?

When you talk to ordinary Brazilians, they're fine with the government spending lots of money on social programs. What they're concerned about is the legacy of corruption in the PT governments. Lula's own convictions for bribery charges ended up being overturned. But there was a massive corruption scandal involving his party, and I asked him whether his party owed Brazil an apology. His response was, the PT is tired of apologizing, Which a lot of people see as sort of insincere because the party has never actually officially apologized. Then he went on to say that actually the corruption wouldn't have ever been revealed in the first place if it weren't for his government's policies to increase transparency and strengthen the police. And he criticized Lava Jato, or Car Wash, the name for the anti corruption investigation, Saying that it went from an investigation intended to combat corruption to an investigation that was just concerned with combating politics and politicians, in particular him and the left. So that's a pretty typical Lula response when it comes to questions about corruption. He really hasn't done any sort of a mea culpa. Another thing that Lula has really come under scrutiny for is not being more critical of the left wing authoritarian governments elsewhere in Latin America. Leaders like Venezuela's Nicolas Maduro, Nicaragua's Daniel Ortega, who he was allied with in the past. This is really enhanced by Bolsonaro going out on the campaign trail and warning his supporters that if Lula became president, pretty soon, Brazil would just be another Venezuela communist country. I asked Lula about these leaders, and though he was very careful in his words, he was more critical than I've heard him in the past. He talked about how inspired he was in the 1970s to see the left wing revolutionaries in Nicaragua overturn a right wing dictator. But then he talked about how when the leader starts to lose himself, he's not obligated to continue to agree with this leader. He says he's not in favor of a single party staying in power. He's not in favor of a single leader staying in power, and that when someone starts to think of themselves as essential for a country, that something's gone wrong.

What did you learn from your conversation about what a Lula government would look like for Brazil?

Well, when it comes to the economy, Lula is saying a lot of the right things. He promises fiscal stability, modern solutions for growth like investments in technology, innovation, the energy transition. That said, I think there's a lot of warranted skepticism about his economic plans. He's not talking much about reducing trade barriers, making public spending more efficient. His government's pretty unlikely to pass a sorely needed administrative reform that would link public servant pay to performance and break this kind of ratchet. That means a high share of Brazil spending grows automatically with inflation. So business people are concerned. One told me that the risk is what they call here a volgigalinha or a chicken flight, an economy that flaps its wings and lifts off the ground and then flops, which we've seen quite a few times in the past in Brazil. That said, Bolsonaro hasn't been an outstanding liberal economic leader either. So I think while there are a lot of question marks about what Lula would mean for Brazil's economy when it comes to other issues of global importance, like the Amazon, which he has promised to protect much better than Bolsonaro has, and which Lula has a real history and good track record of protecting. And Brazil's own democracy, which we've been extremely worried about with Bolsonaro's coup mongering and rumors about fraud in the lead up to this election. I think on these issues we can be much more hopeful about a Brazil under Lula as president for sure.

All right, Sarah, thanks so much for joining us today.

Thanks very much, John.

With industries getting underway, the Germans have begun to provide themselves with jobs as well as with some needed goods.

From war shattered ruins through to the latter decades of the 20th century, Germany rebuilt and grew its manufacturing to become Europe's leading industrial nation. Its machinery and consumer goods have become renowned for quality and reliability. So have its cars. BMW boasted of creating the ultimate driving machine. Volkswagen once lamented if only everything in life was as reliable as its vehicles. And Audi lauded its progress through technology.

4 Sprungdorch Technik, as they say in Germany.

But now there are worrying signs that the foundations of Germany's industrial might are starting to weaken.

Germany is the world's fourth biggest economy and its third biggest exporter of goods. It's also, of course, Europe's biggest economy.

Vangelen von Bredo is our senior Germany correspondent.

It has a very large trading partner, China, which bought German goods worth about $100 billion last year, including, of course, Kaas, the biggest German industry, medical equipment and chemicals.

So what powers this economy? How is its business model organized?

Germany's business model relied until now very much on cheap natural gas from Russia. Russia's President Putin has now weaponized this dependency by Germany. And so dependence on Russian gas and the economic slowdown in China, all this in the wake of a pandemic, means that German companies are facing a very challenging test.

Let's talk about Russian energy first. How significant is Germany's reliance on it?

Germany used to get more than half of its natural gas 55% from Russia. It has now reduced that dependency to I think around 30%, but much less in any case. But of course that's still a lot. That gas comes to Germany mainly through The Nord Stream 1 pipeline, which Russia has essentially sort of shut off the gas supply through Nord Stream 1 and Nord Stream 2. The other pipeline that was built over the past years has never become operational. It's been mothballed and it's likely that it might never be used.

And so what has that done to electricity prices and the German industry more broadly?

Well, gas prices are of course very high, although they've somehow come down, but they are very high. And electricity prices for next year, they have increased 15 fold and the price for gas tenfold, according to the BDI, the association representing German business. That risks putting an end to some businesses because they're in particular in energy intensive industries, because they simply cannot pay those energy bills.

And so is this pain felt across German businesses, large and small companies alike?

Yes, although I think it's the smaller ones that are hurting more or are hurting more quickly. Many of the big companies have a little bit more of a cushion or they have operations in other countries where, where energy is not as expensive as in Germany. I mean, you can see dramatic effects. So in July, industry consumed 21% less gas than in the same month last year. And that was in part because firms used their energy more efficiently, but it was also because businesses just cut back production. So it's not the good news that it seems all this, all these worries are reflected in the share price. So German blue chips have suffered more amid this stock market turmoil than counterparts in other countries. So the boss of the bdi, Siegfried Rusvolm is his name, has described this as a toxic situation and that could spread to the rest of the industrialized world because of course Germany is very connected to other countries, very connected to other European countries in particular, particular, and they rely heavily on German manufacturers.

You mentioned a minute ago that larger companies, ones with production facilities in other countries, are hurting a little bit less. Have we started to see production shift out of Germany to other countries?

Not yet. And in particular smaller companies, smaller Mittelstand, you know, the famous mid sized companies have all the production here and you cannot just from one day to the next move an entire plant. But it's something that is likely to happen unless the prices of energy come down next year, or at least there's hope that they'll come down next year or in 2024. But at the moment the forecast is that only by 2027 we are going to go back to previous levels or something close to previous levels. And until then, German companies will have to compete, even though they have to pay far higher energy prices than companies in other countries.

Now, there are probably only a couple of things that those of us who are less immersed in the world of German business than you are know about German business. One is the companies that make up the Mittelstand that you just mentioned. The other is the country's very powerful unions. And the annual tough wage negotiations that always take place, those are coming up. How are things looking for companies and unions?

Wage talks will be very tough because inflation is high, more than 8% at the moment, and it's likely to remain high next year. So the biggest union, the Igu Metal, has already said that they will accept basically Nothing lower than 8% in terms of wage increases. And that of course comes at a very, very difficult time for carmakers, but for basically most businesses in Germany.

So input costs are rising, output costs are rising. Are German companies likely to pass these rising costs on to consumers?

Well, they already have if they can, but there's only so much wiggle room that they have otherwise customers will just buy their goods anymore. So for instance, there's Hackler, a maker of toilet roll and that has fired for insolvencies. Then ArcelorMittal, a steel giant, has announced plans to close down two mills in northern Germany and put employees on Kurzarbeit. You know, that's furlough. Then there's Stickstorferke Pisteritz, that's Germany's largest producer of ammonia and urea. And these are two very important chemical outputs. And they shut down their ammonia factories in Saxony Anh. And this has actually already triggered a shortage of AdBlue, and that's a product for cleaning exhaust emissions from diesel engines.

So Wendelind, do you think there's a real risk of deindustrialization? And if that does happen, what will it look like both for Germany and for the world?

Germany is unlikely to face large scale de industrialization, but some deindustrialization might be the consequence of this very acute energy crisis. So I spoke to the chief economist of Baank, a German private bank, and he thinks that 2 to 3% of German industrial companies might go abroad. I mean, that's painful, but manageable.

All right, Wendelin, thanks so much for joining us today.

It's been a pleasure. Thank you.

Hanoi is an extremely loud city. A tide of motorbikes and SUVs flood the streets every day, their ever blowing horns competing with pneumatic drills, babbling markets and squawking chickens for attention.

Chris Humphrey writes for the Economist from Hanoi.

And this cacophony never ceases. But now city officials are calling for the return of Hanoi's loudspeakers.

That word return is intriguing. Chris, what's the backstory here?

So they're known as Loa Fawn, and the speakers themselves, they have a checkered history. During the Vietnam War, they played a great crucial role in warning Hanoians of incoming bomber raids by American planes and shared optimistic updates from the front lines. But as far back as the late 1990s, one Hanoi resident remembers hearing the speakers name and shame those who had not yet paid their taxes. Another recalls a song broadcast Every Saturday at 6:30am encouraging people to clean their neighborhoods, followed by a list of households yet to clean the street in front of their homes. There was even a hygiene song promoting the importance of brushing one's teeth twice a day. But then, in August 2017, former Hanoi chairman Nguyen Duch Chung announced a plan to gradually remove the city's loudspeakers and refocus on communications to digital devices. The speakers, Chung said, had completed their mission.

So what are city officials proposing now, exactly? And how is it being received?

So they plan to reintroduce them to every ward and commune of the capital by 2025, bringing the voice of the government back into every home. But residents say that this makes little sense in an era of smartphones and rampant noise pollution. And a recent poll reportedly found that 70% of the city's population are against the loudspeakers. One Hanoi based editor even described a plan as idiotic.

Do you think that hits the mark? Is the plan idiotic?

Well, officials argue that they have been useful recently, especially during the pandemic. They used them to remind citizens of virus prevention protocols and blasted out a propaganda style song at 7am each morning, which said, citizens, let's join forces in this fight. So Covid disappears. And one local architect and political analyst that I spoke to notes that the loudspeakers may feature a new kind of technology involving artificial intelligence, which means that the authorities may have to replace the entire system. But he adds that the project comes with a large budget, which is likely an incentive for officials to deploy the speakers despite the inconvenience they may bring to people's lives.

So are they going to press ahead with their plans?

Well, in the face of public criticism, city officials remain defensive. Nguyen Thi Mai Huong of Hanoi's Department for Communications and Information said in a recent press conference that the loudspeakers are in fact used across more than 20 provinces and she denied that Hanoi had ever stopped using them. Whereas Zachary Abuza of the National War College in Washington says the decision to reintroduce the speakers was made by the scandal plagued Hanoi Party Committee, he thinks that the people who made the decision are trying to demonstrate to the Communist Party chief Nguyen Fuchong their ideological purity and commitment to the party's more traditional values rather than the abject corruption that now covers them. The Hanoi Party Committee is an important gateway to higher office in the country. So Abuza says that this plan to bring back the loudspeakers is simply careerism.

Chris, thanks so much for joining us today.

Thank you.

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