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What are the big economic challenges facing Lula’s government in Brazil?

Brazil’s new president faces several domestic and international challenges. Rising poverty and inequality, together with the lingering effects of Covid-19 and management of the Amazon rainforest, dominate the policy agenda. Repairing the country’s international reputation is also critical.

As he is sworn in as president of Brazil in January 2023, Luiz Inácio Lula da Silva (known by the mononym ‘Lula’) faces several internal and international economic challenges.

Domestically, the rise of inequality and hunger, and the divided political arena will dominate.

At the same time, the new president will need to regain international confidence in the country, and revive regional and international coalitions. These include Mercado Común del Sur (the Southern Common Market or Mercosur) – a trade agreement between Argentina, Brazil, Paraguay and Uruguay – and the BRICS – the group of leading economies (Brazil, Russia, India, China and South Africa).

Lula will also be dealing with a different international economic environment compared with his previous mandates (2003-2010), as much of the world faces cost of living concerns resulting from rising global energy costs.

What are the most pressing domestic economic challenges in Brazil?

The incoming president inherits a country facing a severe economic crisis due to misguided economic and political decisions aggravated by the Covid-19 pandemic (Sabatini and Couto, 2022).

Brazil’s economic growth has been slow. In 2021, the country had the lowest GDP growth among the BRICS countries, at 4.6%. This compared with 8.9% for India and 8.1% for China over the same period (World Bank, 2022). The OECD forecasts Brazil’s economic growth will be just 2.8% in 2022 and 1.2% in 2023 (OECD, 2022).

The current economic crisis has had a severe effect on the Brazilian labour market. In 2021, the World Bank calculated that 14.4% of working age Brazilians were unemployed.

The unemployment rate has almost doubled since Lula left power after his first presidency (in 2010, when it was 7.3%). Unemployment affects women in Brazil more acutely than men, partly because many women are the only providers in single-parent houses in the country (de Oliveira and Alloatti, 2021).

Brazil’s inflation rate was controlled when Lula started his previous mandate. This was the result of the ‘Real Plan’, created by the economic team of his predecessor Fernando Henrique Cardoso (Céspedes et al, 2008).

This time around, Lula will have to respond to stagnation in economic growth and high unemployment rates in a context of rising inflation, which has affected the capacity of Brazilians to pay their bills and buy food (Sabatini and Couto, 2022).

In addition, Brazil’s currency (the real) has faced severe depreciations in recent years and the country has been going through a massive deindustrialisation process over the last two decades (Castillo and Martins, 2016). In 1980, industry represented 26% of Brazil’s GDP; in 2018, it was only 11%. The Brazilian economy is highly dependent on commodities and services at the moment.

Austerity measures, the economic crisis and structural changes in social programmes during the term of Lula’s predecessor, Jair Bolsonaro (especially in the cash transfer programme Bolsa Família) have also increased inequality and put Brazil back on the Hunger Map – the World Food Programme’s list of countries where at least 5% of the population is facing severe food insecurity (Neri, 2022). Brazil had left the Hunger Map in 2014, but returned to the list in 2021 (Alves, 2021).

One report found that 33.1 million Brazilians do not currently have enough food to eat (Brazilian Research Network on Food and Nutrition Sovereignty and Security, 2022). In comparison, 19.1 million Brazilians faced hunger in 2020. Further, 58.7% of Brazilians currently live with some level of food insecurity. The report also finds that hunger has increased by 70% among the black Brazilian population.

Solving these problems will not be easy in the most divided political environment since Brazil’s re-democratisation. Lula won the elections with 50.9 % of the votes (60,345,999 in total). Nonetheless, 58,206,354 Brazilians voted for Bolsonaro in the presidential election – 49.1% of the overall share (TSE, 2022). These voters also elected many state governors, congressmen and senators that clearly support the outgoing president’s agenda (including many of his former ministers).

It is the first time that Bolsonaro’s current party (Partido Liberal) will have the largest number of seats in the Brazilian congress (Opperman, 2022). Consequently, Lula is likely to have a hard time negotiating with the congress to approve his policy agenda. This will mean that solving major domestic economic challenges will not be as straightforward as in his previous time in office.

What are the most pressing international economic challenges affecting Brazil’s economy?

International economic challenges reinforce Brazil’s national economic challenges. Lula’s first government enjoyed a boom in commodities, through which it was able to fund different programmes that helped to decrease poverty, hunger and inequality rates in Brazil. This included the conditional cash transfer redistributive programme – the Bolsa Família (Balakrishnan and Toscani, 2018; Martins Neto, 2017).

Things look quite different today. While Brazil may benefit from a new boom in commodities (Pooler and Harris, 2021), this has come with an increase in the cost of energy and fuel, rising cost of living conditions in many countries (including in the Global North), and sustained negative economic damage stemming from Covid-19.

Given that Brazil’s currency has depreciated, and the country imports most of the industrialised products it needs, it is unlikely that commodities will grant Lula the same economic leverage to address internal economic challenges as before.

Brazil is also somewhat isolated in the international arena. The Bolsonaro government shifted Brazil’s foreign policy (Casar?es and Barros Leal Farias, 2021). It abandoned both national and international environment policies and commitments, leading to a significant decline in the country’s international reputation (Lima and da Costa, 2022).

During Bolsonaro’s tenure, there was an increase in levels of deforestation in Brazil (Dutra da Silva and Fearnside, 2022). At the same time, the government was heavily criticised for violation of human rights, especially among indigenous and traditional populations (Human Rights Watch, 2022).

Lula will need to revive international confidence in Brazil in a variety of settings. There have been important advances in the environmental arena. Since his election, Lula participated in the COP27 meeting in Egypt where he stated that ‘Brazil is ready to come back’ (Spring and James, 2022).

As a recognition of anticipated changes in Brazil’s environmental policy, countries like Norway indicated that they will release the Amazon Fund – a climate finance initiative to raise donations for deforestation prevention and monitoring – as a way to support Lula’s environmental goals (Freitas, 2022).

Improving Brazil’s international reputation and increasing trust in the new government are also fundamental for attracting foreign investment into the country. This is also important for boosting tourism and encouraging new international trade agreements.

Lula must revive Brazil’s participation in economic regional and international agreements. Argentina is the third most important destination for Brazil’s exports, behind only China and the United States (OEC, 2022). The rest of South America is also important for Brazilian economic interests.

It is therefore fundamental to Brazil’s economic success to revive negotiations in Mercosur and the Union of South American Nations (UNASUR). Both European and South American partners hope that Lula may succeed in advancing a trade agreement between Mercosur and the European Union (Voituriez et al, 2022). This would bring substantial trade benefits to the region as a whole.

The BRICS group will also be important for Brazil (Bishop, 2022). Although Lula’s government will be in a different political and international environment from his previous mandate – and we still do not know what his foreign policy towards Russia will be following the invasion of Ukraine – it is reasonable to assume better relations with China. This likely to be the case, particularly compared with Bolsonaro’s disastrous diplomatic mistakes of his anti-Chinese rhetoric, especially during the pandemic (Stuenkel, 2020).

While it is still too early to know if improved relations will translate into more economic cooperation and trade in the BRICS arena (Leiroz, 2022), the strengthening and expansion of the bloc – potentially including other emerging countries, such as Argentina, Turkey and Saudi Arabia (Bishop, 2022) – could be an important mechanism through which Brazil can revive its international position.

Can Lula solve Brazil’s economic challenges?

It is not yet possible to answer this question with confidence. But we can highlight factors – both positive and negative – that may affect the answer.

First, the domestic economic challenges. During the elections, Lula had significant support from many Brazilian economists with different ideological positions. So far, he has nominated many important individuals (including the former minister of economy Nelson Barbosa, and Andrê Laura Resende and Persio Arida, key names from the ‘Real Plan’) in his transition team.

Lula also has a broad social policy project for Brazil, with fighting poverty and hunger as two of the core issues that he plans to address. This indicates that there is both the technocratic expertise and the political will to address the country’s domestic economic challenges.

On the other hand, it not yet clear how the conservative congress will react to the president’s economic agenda. Lula is a politician, used to negotiating with both his supporters and rival parties.

But this time is different: he must negotiate with far-right parties and manage a very divided Brazilian population. Two decades ago, the congress was not so ideologically split, nor was the population so ideologically divided.

On the global front, the international community has been sending positive signs of support for the new president. These include the invitation to COP27 and a visit from the current Argentine president Alberto Fernández before the start of Lula’s new term.

There are expectations that Lula’s foreign policy will mirror that of his previous presidency, when he focused on addressing the country’s economic challenges by diversifying Brazil’s international partnerships (Vigevani and Cepaluni, 2007). It remains to be seen if his foreign policy agenda will be enough to address current national and international challenges.

The world has changed a lot since 2003. So too has Brazil. From the war against Ukraine to the long-run impacts of the pandemic and the growing threat of climate change, Lula has many challenges ahead. For Brazil, the wider region and the rest of the international community, it is important that the new president is ready to tackle them.

Where can I find out more?

Who are experts on this question?

  • Maria da Conceição Tavares, University of São Paulo
  • Marcelo Cortes Neri, Fundação Getúlio Vargas, Rio de Janeiro
  • Leda Paulani, University of São Paulo
  • Pérsio Arida, University of São Paulo and Pontífical Catholic University of Rio de Janeiro
  • Daniela Campello, Brazilian School of Public and Business Administration at the Getúlio Vargas Foundation (EBAPE-FVG), Rio de Janeiro
Author: Patrícia Nabuco Martuscelli, University of Sheffield
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