An Unusual Economic Arrangement: The Brazilian Economy during the First Lula Administration, 2003–2006

Abstract

This paper describes the economic policy and economic performance of Brazil during the first Lula administration, in 2003–2006. I show that in his first term as president Lula chose fast disinflation as one of the main priority of its economic policy. This choice required the adoption of high real interest rates, which also demanded an increase in the government’s primary surplus to keep the country’s public debt under control. Consequently, as I strive to demonstrate, investment in social safety net (the administration’s other main priority) was financed not only by the increase in tax revenues but also by a reduction in the government’s expenditure on both wages and benefits of public employees and in public investments in infrastructure. A combination of, on the one hand, a favorable global environment and, on the other, successful economic policies resulted in a significant improvement in the Brazilian macroeconomic performance. This in turn contributed a great deal to a reduction in both income inequality and poverty rates. I conclude by unveiling what I view as a quite unusual economic arrangement: president Lula’s economic choices over the 2003–2006 period ended up benefiting most the extremely rich (through high real interest rates) and the very poor (through the increase in income transfers).