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[Mohamed A. El-Erian] Country of the future owes much to one man

Eight years ago, a newly elected president, Luiz Inacio Lula da Silva, faced the challenge of saving Brazil from economic and financial collapse.

Last Saturday, Lula passed the presidency to Dilma Rousseff having done much, much more than that during his two terms. In the process, he relied on four simple pillars that other leaders would be well advised to consider.

After winning a hotly contested presidential election in 2002, Lula overcame tremendous domestic and international skepticism to guide his country to a development breakout phase. As a result, he left the presidential palace last weekend with Brazil in a position to sustain high economic growth for many years, strengthen an already robust financial situation, and better meet the aspirations of the poorest segments of its society.

He inherited a country that was on the verge of economic implosion and default. Growth was languishing, international reserves evaporating, investors fleeing, and hyperinflation threatening. Markets for Brazilian sovereign debt were pricing an imminent and disorderly default.

Lula’s domestic challenges were compounded by unfriendly regional and global conditions. With Argentina having defaulted a year earlier in the midst of social unrest, a heavy cloud of doubt and pessimism hung over most of Latin America. Meanwhile, global growth was sputtering, undermined by the collapse of the tech bubble and a series of corporate scandals in the U.S., including the failures of Enron and WorldCom.

There wasn’t much of an international cavalry to ride to Brazil’s rescue. America’s focus was dominated by post-9/11 responses to terrorist threats. And no European country felt eager to fill the void in support of a newly elected president who for years had embraced extreme left-wing rhetoric.

Despite this, Lula managed to turn his country around. He did so in a manner that allowed it not only to navigate the 2008-09 global financial crisis but to emerge from it stronger in relative and absolute terms. In the process, he demonstrated the potency of his four pillars.

First, and from his first day in office, Lula recognized that there were no inherent contradictions among financial stability, economic growth and improved social conditions. His approach was to explicitly embrace all three within a well- defined multiyear framework and maintain appropriate flexibility with regard to sequencing and mid-course adjustments.

Second, he understood the imperative of clear and timely communication. He was open about the serious challenges facing Brazil and the sacrifices required. And he didn’t hesitate to reiterate his vision for how Brazil would overcome these challenges.

Third, after clearly setting the strategic economic vision, he delegated implementation to a carefully chosen set of technocrats. He intentionally didn’t rely on experienced policy makers, choosing instead new faces that quickly became credible economic spokesmen both within and outside Brazil.

Finally, he understood the importance of institutional integrity and clear accountability. This was most evident in his respect for the operational autonomy of the central bank. It was also crucial to promoting broad respect for fiscal responsibility.

As a result of all this, Rousseff has assumed the presidency amid great domestic optimism. Brazilians no longer joke that their country is the economy of tomorrow ― as in, always has been and always will be. Instead, numerous indicators point to record and once-unthinkable levels of economic self- confidence.

With unemployment almost cut in half during Lula’s term, many Brazilians now believe that they will be much better off than their parents, and that their children will do even better. This is noteworthy, given that Brazil’s trading partners in the West face discouraging unemployment trends, particularly for younger workers.

Both current and future generations of Brazilians will remember their popular president for far exceeding even the most optimistic expectations about what Brazil could achieve in terms of economic, financial and social progress. Thanks to its domestic strength, today Brazil also plays an increasingly influential role on the international stage, particularly when it comes to trade and reform of the multilateral system.

Yet Lula’s global legacy may be even larger, coming from the impact that his successful pillars could ― and should ― have on the thinking of many current and aspiring politicians in other countries. If this were to materialize, Lula’s presidency will end up benefiting many more hundreds of millions of people around the world.

By Mohamed A. El-Erian

Mohamed A. El-Erian is Pimco’s chief executive officer and co-chief investment officer, and the author of the book “When Markets Collide.” The opinions expressed are his own. ― Ed.

(Bloomberg)
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