Washington Post Foreign Service
October 27, 2002; Page A18

Predicted Winner in Brazil Faces Great Expectations
If Elected, Lula Will Have to Satisfy Constituents, Creditors

By Scott Wilson

SAO PAULO, Brazil, Oct. 26 -- Beginning at a subway station called Paradise and ending at one called Consolation, Paulista Avenue is a downward path that
bankers and beggars who work along the teeming commercial stretch liken to the course of a typical marriage.

The landmarks could just as easily describe what many Brazilians say is the gap between their country's economic potential and the grim reality of its current
performance, a slump that has worried Wall Street, plagued Brazil's smaller neighbors and put this country on the verge of electing a former union leader and
committed leftist as the next president.

Luiz Inacio Lula da Silva, known as Lula, has promised change, and that appeals to people like Renata Encarnacao, who waves a flag bearing the red star of his
Workers' Party near the Consolation end of the avenue. Her campaign work pays Encarnacao $5 a day, but it ends Sunday, when 115 million Brazilians are to vote
in an election that public opinion polls suggest will result in a Lula landslide.

A high school dropout, Encarnacao and millions of Brazilians like her are counting on Lula to create jobs, as he has promised to do throughout a campaign
dominated by domestic economic issues and the place Brazil should take in the global economy. The 21-year-old woman is counting on him to create those jobs

"I'm going to give him a chance, since none of the other governments have done a thing," said Encarnacao. "I hope it happens right away, within months. If he doesn't
do it, no one else is going to."

As Brazilians prepare to endorse a sharp turn to the left in today's election, Lula himself is bracing for what political and economic analysts say will be the central
challenge of his administration: balancing the insistent demands of his mostly poor, left-wing political base with the unforgiving expectations of global financial markets
jittery about what his victory might mean for the world's eighth-largest economy.

In the days leading up to the election, Lula calibrated his populist campaign rhetoric in an attempt to calm markets abroad and modulate expectations at home.
Meeting this week with a group of artists in Rio de Janeiro, Lula acknowledged bluntly, "I can't work miracles."

The adjustments have come at the end of a campaign season that featured Lula as the chief opponent of a package of economic prescriptions for developing nations
known as the "Washington consensus." The prescriptions are based on free trade, strict monetary policy and privatization favored by the outgoing president,
Fernando Henrique Cardoso. But Lula has signaled through his advisers that, despite his threats to default on Brazil's $260 billion public debt, he would largely
maintain Cardoso's strict monetary regime and intends to name a conservative economist to head Brazil's central bank.

In so doing, however, Lula risks bumping up against a core constituency that has embraced his pledge to cast off past economic policies and deliver a quick infusion
of public spending to improve social services and create jobs. If key financial posts go to the right in a bid to soothe Wall Street, most analysts here predict that the
left will demand the important industrial development and agricultural ministries, inviting a crippling internal economic debate.

"Setting up the economic and social teams is going to be very tricky," said Carlos Pio, an independent political analyst who teaches international economics at the
University of Brasilia. "He's going to try to balance out those positions between the left and the right, and my fear is that in a debate between orthodox and heterodox
economic teams the president is going to have a very hard time making a decision."

Lula, who turns 57 on Election Day, is easily outpolling Jose Serra, a respected if charismatically challenged former minister in Cardoso's government. Renowned for
his success in reducing the price of AIDS medicine as Brazil's health minister, Serra was also Cardoso's first budget and planning minister and is the candidate most
identified with globalization at a time when much of South America believes those forces have brought nothing but economic despair.

Cardoso recently secured a $30 billion International Monetary Fund emergency loan because of fears that Brazil was following neighboring Argentina down the path
toward financial collapse.

During his eight years in office, Cardoso managed to end rampant inflation, privatize inefficient state-run businesses and open the economy to trade. But Brazil's
foreign-debt burden has grown enormously, and now equals almost half of the country's gross domestic product. Servicing that debt has become increasingly
expensive because Brazil's national currency, the real, has lost 40 percent of its value against the dollar this year. Brazilian bond values have also fallen, a market
reaction to Lula's campaign that he has dubbed "economic terrorism."

The worst may be over, however, and most economic analysts here predict little immediate post-election financial fallout because the markets have already adjusted
for a Lula victory. On Friday, Brazil's currency crept up slightly against the dollar and bond prices rose.

But economic analysts warn that Lula, who is running for the fourth time and who would take office Jan. 1, could face fresh troubles during his first six months as
president if his policies spook fearful markets. Mindful of those possible pitfalls, he is already sending signals to Wall Street that he intends to take a cautious
approach to the economy.

In the past week, the Lula campaign has suggested that Sergio Werlang, an economist at the Getulio Vargas Foundation in Rio, is the candidate's choice to run the
central bank. Werlang has a reputation as a fiscally conservative free-market advocate, analysts say, and he has worked as an adviser to the current Central Bank
president, Arminio Fraga, who is widely admired by foreign investors.

"There is some major doubt in the investment community, but my personal view is that the change is for real," said Ricardo Amorim, head of Latin America Research
at IDEAglobal, a financial research firm.

But Lula has not changed his message about the Free Trade Area of the Americas (FTAA), a proposed free-trade zone extending from the Arctic Circle to Tierra
del Fuego that is the Bush administration's most important policy initiative in Latin America. From the start, Lula has opposed the agreement as it is currently
conceived -- along with U.S. military aid to Colombia and the embargo against Cuba -- but even constituencies traditionally supportive of Washington's economic
policy have endorsed his position.

"Lula's opposition to the FTAA has been largely rhetorical, and it is only going to become important when we sit down with the United States to really start
discussing what this agreement is going to be about," said Mario Mugnairne, the free-trade analyst at the 7,000-member Federation of State Industries of Sao Paulo.
"But we are aware that he is going to have to give the left a big say in his government, and we don't know how he is going to do that."

Lula's advisers say it will be done through social initiatives, not economic policy. New money for social spending will be hard to come by, and Lula's advisers say he
will be looking to fund new projects by rearranging the existing budget. His proposal to subsidize the costly health care and pension benefits for 400,000 young
people to help them enter the job market, for example, will be drawn from the existing unemployment insurance fund.

Here in this city of nearly 18 million people, Brazil's industrial heart where Lula got his start as a metalworker, union leader and activist opposed to the military
dictatorship that ran Brazil until 1985, unemployment climbed last month to an all-time high of 9.4 percent. Crime is rising, as it is across Brazil, and the pressure for
instant economic relief is intensifying.

Conceicao Sander, a 41-year-old housewife, did not vote for Lula in his three previous runs for the presidency, but she intends to this time. "Serra," she said,
strolling along Paulista Avenue toward Consolation, "will just do more of what Fernando Henrique has done and that's nothing."

"Lula is capable now," Sander said. "But it's going to take some time to change things."

Staff writer Paul Blustein in Washington contributed to this report.