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To virtually no one's surprise, Dilma Rousseff took office on January 1, 2011, as Brazil's first female president. She won decisively-by a 12 percent margin nationwide in the second round-through capturing the many voters at the bottom of the income scale who look forward to continuing gains in their daily lives under her presidency.

Dilma's ascension to the presidential palace is really Lula's victory, with his popularity exceeding 80 percent upon departing office. The rapid recovery from world recession, increasing employment and stable prices-all achieved during the Lula administration-ensured that Brazilians' satisfaction would extend to his chosen successor. Lula not only picked her but guided her political campaign and has even influenced the structuring of the cabinet. Lula's finance minister, Guido Mantega, for example, will remain in his post.

But what happens afterwards? What role will Lula play in their party, the Partido dos Trabalhadores (PT), as leaders of the Left inevitably contest with more moderate forces?

Political Change

The Dilma era will begin with the PT emerging as the largest party in the Chamber of Deputies, as it did in 2002, but with only about one-fifth of all seats. That is typical. Joined with the Partido do Movimento Democrático Brasileiro (PMDB) and its other political partners, the overall majority comes to more than the 60 percent needed for constitutional amendments. This represents a slight increase from its 53 percent control at the time of the last election in 2006.

In the Senate, the PMDB retains its numerical lead, followed by the PT. But additional support from allied parties assures the needed super-majority, with overall parties aligned with Dilma now holding a comparable 60 percent of the seats. In 2006 the margin was 54 percent. These totals exclude the Partido Progressista (PP) and Partido Verde (PV), both of which will be inclined to vote with the government on some legislation. In sum, the PT, with less than a fifth of each body, stands better able to manage legislatively than previously.

This ascension of the PT coincides with the strong decline of the Democratas (the former Partido da Frente Liberal and, before that, Partido Democrático Social). At one time, the Democratas benefited from the more-than-proportional representation afforded to the Northeast and occupied a strong position in the national legislature. But that position has now been eroded-a result of long-standing differences between the South and the Northeast. With this power erosion, future realignment becomes a possibility. Already São Paulo Mayor Gilberto Kassab has spoken of defecting.

 

A restructuring of political parties will be a possible consequence of last fall's election. More than 20 parties have again won seats in the Congress. The much-reduced Democratas could consider a merger with the Partido da Social Democracia Brasileira (PSDB), now led by Senator Aécio Neves of Minas Gerais. With governors in São Paulo, Minas Gerais, Paraná, Goias, and elsewhere, the PSDB, the party of former president Fernando Henrique Cardoso, will hold sway over more than half the Brazilian population. Federalism counts in Brazil, and any effective opposition to the PT will likely emanate from state capitals rather than Brasilia.

Also on the table is the never-fulfilled possibility of political reform. Lula has suggested an interest in leading the process and calling a Constituent Assembly. Brazil simply has too many individual political parties, which complicates electoral choice and the effectiveness of congressional action. Current rules are oriented to individual appeal and, not immaterially, to past benefits bestowed. Movement toward a closed electoral list for the Chamber of Deputies as well as formal district affiliation within states could lead to more coherent political parties.

The election of Francisco Oliveira Silva, a clown known as Tiririca (Grumpy), with the highest popular vote in the country illustrates the need for changes to the electoral system. After winning on slogans such as "It can't get any worse," Oliveira transferred through the proportional voting system the surplus (about 1 million) of his 1.3 million votes to elect four more deputies.

A total of 6,000 candidates from 27 separate parties competed for the Chamber's 513 seats. Few of the victors owe their place to party platform and many are unlikely to pursue active, long-term careers within the legislature. Several will become members of the baixo clero (or backbenchers) called upon to vote in specific circumstances, before returning to compete for preferred positions in mayoral and state elections.

The result of this dysfunctionality is that Brazilian politics in the New Republic has centered on the executive. The medida provisória, which allows for immediate temporary passage of legislation, subject to congressional overturn, has become an often-used presidential mechanism to enact laws. Although a constitutional amendment has stopped their continued executive extension, the measure remains a potent alternative to passing proposed legislation.

One likely change, now more possible under a Dilma administration, is greater legislative initiative. Political parties no longer need to contend with a president whose personal popularity is far-reaching. They can assert themselves. This is even more likely since Vice President Michel Temer is a long-time leader and former Speaker of the PMDB within the Chamber.

Economic Realities

Dilma has promised to retain the key elements of the economic strategy in place since 1999: inflation targeting with a 4.5 percent increase annually, a variable exchange rate and a primary surplus of 3.3 percent of GDP annually. That will join a commitment to reinforce declining poverty through Bolsa Familia's social transfers, as well as to assure current high rates of economic expansion. She has promised attention to fiscal discipline and to tax reform and pledged a more efficient expenditure policy.

An immediate issue is the potential increase in the minimum wage, now scheduled to rise by 5.5 percent in 2011, which is more than the inflation rate. Other tasks include restricting government expenditures and dealing with an appreciated real, in addition to responding to unpopular Central Bank hikes in interest rates.

Import substitution may be gone, but greater federal intervention is on its way back. Dilma-along with the PT and many of its allies-believes in a bigger state role in this next phase of Brazilian expansion. She was central to the preparation and management of the Programa de Aceleração do Crescimento (Growth Acceleration Program, PAC) put into effect in 2007.

This means a more aggressive industrial policy to select future winners and a greater willingness to apply state investment (and management) than during the Lula government. There was much talk about this but little practical action for a long time. Not until the crisis of 2009, when the Banco Nacional de Desenvolvimento Econômico e Social (BNDES) assumed a much expanded role, did that begin to change. However, many in the PT would have preferred a greater BNDES effort to strengthen the industrial sector and domestic market rather than agricultural and mining exports. This issue will recur, but Luciano Coutinho's reappointment as head of BNDES assures him a continued central role.

Inevitably, Petrobras, Brazil's semi-public energy company, will be the lead actor. There is an understandable preference for counting the gains rather than recognizing the costs deriving from the sub-salt oil deposits found some 250 kilometers (160 miles) offshore from Rio de Janeiro. This goes beyond the technical risks inherent in exploration and development that BP brought to the forefront in the Gulf of Mexico. Brazilian oil deposits are 50 percent deeper than the Gulf deposits, and the difficulties in extracting them are undetermined.

A great deal of expenditure is promised in the coming years-much of it committed domestically rather than internationally-to develop these petroleum riches. This means larger investment, but it is not clear that domestic savings will rise to finance it. Recent years-with the exception of 2009-have been good for Brazil, and especially for the rising lower-middle class. But growth via internal consumption, bolstered by rising terms of trade, has limits. Continued spending is also ahead for the 2014 World Cup and the 2016 Olympic Games in Brazil.

In the midst of talk about the primary surplus, it is easy to forget that Brazil still faces an overall fiscal deficit. Although its increase in 2009 undoubtedly helped recovery, the deficit became larger in 2010. During the 1950s and the 1970s, the state invested, and the private sector saved-both contributing voluntarily and involuntarily-through what amounted to an inflation tax that fell most prominently upon the poorest. No one wants a repetition of inflation now.

To grow at a steady 5 percent a year implies a much higher investment rate of close to 25 percent. Domestic savings now amount to about 17 percent. Foreign savings can help, but by no more than 3 percentage points or so. That limit emerges not only from the lessons of the debt crisis of the 1980s, but from more recent downturns in Mexico and Argentina. Savings ought to come from the public sector to guarantee their continuity. Eliminating the annual deficit-now greater than 3 percent of GDP-in the pension system is one way to do that.

A larger state must be financed somehow. The Brazilian public is unlikely to want even higher tax rates, so reducing the social security deficit and not spending the surplus provides a way out. Will Dilma be inclined to confront that problem and to procure the necessary broad support in Congress? It happened before in a PT government: Lula's first constitutional amendment in 2003 dealt with social security.

In these good years, Brazil must also deal with an appreciated exchange rate that is beginning to hinder its industrial sector. It is easy to accuse the U.S. and China of creating the problem, while portraying Brazil as an innocent victim. Capital flows come in response to high domestic interest rates. Eliminating the fiscal deficit-which social security reform would do-would lead to lower interest rates. Higher taxes on capital inflows can work only in the short run.

Foreign Policy

Lula was quite popular internationally. During his presidency, he traveled widely and gained plaudits-and wider markets-for Brazil with a foreign policy that transcended Latin America. The search for a permanent position on the UN Security Council has been emphasized, along with a desire for greater status on such issues as the environment, nuclear weapons, peace in the Middle East, and conclusion of the Doha Round at the World Trade Organization.

Dilma cannot, and will not, match this record. Satisfying Iranian President Mahmoud Ahmadinejad and U.S. President Barack Obama simultaneously, as well as Chilean President Sebastián Piñera and Venezuelan President Hugo Chávez closer to home, is a daunting effort that requires first-class diplomatic skills. Lula managed to be a star at meetings of the World Economic Forum as well as the Social World Forum. But few expect her to try to duplicate Lula's foreign policy initiatives.

Dilma may be able to depend on others to a greater extent. The foreign ministry has been shifting and becoming fully aligned to active participation in world affairs. Foreign policy has become more attuned to domestic politics, mirroring the experience of other major powers. At the same time, the PT is now integrated into the foreign ministry.

Dealing with the world is no longer a choice but a necessity. Brazil has become too important globally to slide back to a more regional focus. But, for Dilma, defining an effective strategy may take more time and effort than many have yet considered.

The Road Ahead

Following the election, Dilma expressed her immense gratitude to Lula for his help during her campaign. She suggested that she will continue to consult and depend upon him. But Lula's advice may turn out to be more of a burden than a blessing. In the recent past, former Brazilian President Itamar Franco [1992-1994] created problems for his successor, Fernando Henrique Cardoso. That is why a former president's "exile" to diplomatic service is so appealing.

Lula is too central and active a participant in recent Brazilian history to simply become a mute observer. Already he is speaking of a Constituent Assembly next year. Perhaps that will work. After the death of Néstor Kirchner, some mentioned the possibility of him becoming the new Secretary-General of the Union of South American Nations (UNASUR). He rejected that, much as Chávez might have liked Brazil under the aegis of Venezuela. The possibility of a future UN role remains.

In the meantime, Lula is staying. Having Brazil successfully develop at a high rate, more equally and more democratically, and with a PT dominant position, is what he cares about.