Brazil: Lula’s Balancing Act in Domestic and Foreign Policy

Brazil: Lula’s Balancing Act in Domestic and Foreign Policy

June 8, 2023, Covington Alert

Executive Summary:

• President Lula da Silva is trying to balance his administration’s economic agenda and what it describes as a democracy-strengthening agenda. Both require congressional action but have different chances of approval in a National Congress controlled by conservative and pro-business blocs and with a strong opposition linked to former President Jair Bolsonaro.
• President Lula is also trying to balance his administration’s foreign policy priorities in a context of increasing great power competition between the United States and China, which diminishes the efficacy of a strategy based on soft power and focused on multilateralism and multipolarity.
• The 2003 playbook President Lula seems to be applying to both domestic and foreign policies has limits as both Brazil and the international system changed substantially in the past two decades. Using the same strategy risks poor results and paralysis.

Analysis:

Domestic Policy Priorities

President Lula was elected in October 2022 for his third term with the narrowest margin of votes since Brazil’s return to democracy in 1985. Despite defeating the incumbent, then President Jair Bolsonaro, the 1.8% additional votes Lula received to win were a clear symptom of Brazil’s polarization.

The new administration’s domestic priorities have largely encompassed two objectives. First, to reignite economic growth and job creation with a particular focus on promoting gender equality, social inclusion, and environmental sustainability. Second, to curb what the administration perceives as threats to Brazilian democracy by the far right.

The economic agenda is anchored on three key goals. First, the establishment of a new fiscal framework (that requires a congressional vote) to stabilize public debt and create an incentive for the Central Bank to reduce the benchmark interest rate, set at 13.75% since August 2022. Second, eliminating tax loopholes and strongly enforcing tax rules, through both legislative and administrative action, with an aim at increasing government revenue. Third, to get the National Congress to approve a major tax reform to simplify the Brazilian tax system at the federal, state and local levels -- an initiative that requires amending the Constitution.

In parallel, the administration has sought to introduce or support legislation that it perceives as key to strengthening Brazil’s democracy. Since April 2023, it has been backing a move by the Speaker of the House of Deputies to get a controversial “Fake News Bill” approved. The bill introduces a new regulatory framework for social media, instant messaging, and search engine companies. The administration has also been discussing, both internally and with the President’s Workers’ Party, proposals to curb the role of military personal in civilian administration, to create a new National Guard to protect the federal government and reduce its current reliance on state-level law-enforcement agencies, and to reduce the role of the Armed Forces in operations to guarantee law and order. The Armed Forces and law-enforcement agencies are seen as strong supporters of former President Jair Bolsonaro.

In a Congress dominated by parties in the center and the right, and with a strong opposition linked to Bolsonaro, particularly in the Federal Senate, President Lula will have to continually balance the administration priorities. The proposed economic agenda has a reasonable chance of approval in a fiscally conservative and pro-business Congress. On the other hand, the conservative majority will likely oppose or, at least, substantially water-down the political agenda the President says is focused on democracy strengthening as it perceives the administration’s proposals as censorship and political revenge by the left.

Foreign Policy Priorities

When it comes to foreign policy, the new administration seems to be prioritizing the reestablishment of Brazil’s soft power projection into global affairs, in particular with its key trade and investment partners -- the United States, China, Europe (in particular France, Germany and the United Kingdom), Japan and Argentina. In the nine-month period since the election, President Lula held high-level meetings with the heads of government of these countries.

In addition to that, President Lula seems to be pursuing two more goals. At the global level, an effort to frame Brazil as an interested, neutral and relevant stakeholder in an eventual peace process between Russia and Ukraine. And at the regional level, the leader of South American economic and political integration, with Venezuela’s participation. These goals pose risks to Brazil as what the president perceives as neutrality towards China, Russia and others can be seen by key Brazilian partners as veiled support for regimes with poor human rights records and no democratic credentials.

These initiatives are seen as a pre-requisite for the administration’s long-term goal of reviving multilateralism and promoting a multipolar international system. Brazil’s standing as an international power is limited by its slow-growth economy and a lack of military power, so President Lula and his foreign policy advisors perceive multilateralism as an opportunity for Brazil to position itself as a key decision-maker in a rules-based system. They also see the great power competition between the United States and China as an opportunity for short- and long-term economic and political gains, in particular through pendulum diplomacy — a consistent effort to extract concessions from both great powers without committing Brazil to the geopolitical strategy of any of them.

As in domestic matters, President Lula will have to balance both Brazil’s relationship with the competing great powers, and the foreign and domestic policies’ agenda. A recent administration defeat in a key domestic policy vote was seen as partially the result of Lula’s failure to pay attention to negotiations with congressional leadership because of his foreign travel commitments.

The President’s Playbook and its Limits

As the new administration approaches its first half-year mark, it seems increasingly clear that President Lula has been trying to apply in 2023 the playbook he used 20 years earlier, when he was elected for his first term.

This playbook has at least three main features: relatively conservative fiscal and monetary policies combined with strong social policies for the poor and a role for state-owned companies in key economic sectors; a left-leaning foreign policy focused on increasing Brazil’s soft power, and on supporting multilateralism and multipolarity; and a congressional coalition encompassing parties on the left, center and right, kept together by the administration’s centralized management of budget earmarks and key posts for political appointees.

However, much has changed in the last two decades. The country seems to have moved decidedly to the right of the political spectrum, demanding a conservative economic policy, rejecting state capitalism-type initiatives, and longing for more ideological alignment in foreign policy. As a result, Congress has become increasingly conservative and independent, reducing the administration’s power to establish and manage its coalition. And increasing great power competition has reduced the political space for pendulum diplomacy, as well as for a soft power-based, multilateralism-anchored strategy in foreign affairs.

An insistence on the 2003 playbook by the President and his administration might risk diminishing returns in domestic and foreign policies, eventually leading to paralysis of both agendas. There is still time to pursue a course correction, but it remains unclear if there is an understanding that the limits of the playbook are real.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Latin America practice.