October 25, 2002

Brazil's Lula Plots Industrial Revolution

By Carlos A. DeJuana

SAO PAULO, Brazil -- Much has changed for Brazil's Metron since it began making taxi meters 18 years ago in a gritty, industrial neighborhood of Sao Paulo.

Seizing on the technological boom of the mid-1990s, Metron has transformed itself into Brazil's top home computer seller with cheap but sturdy alternatives to
foreign-made PCs. Sales grew five-fold between 1995 and 2001 to $150 million, and the company now ships desktop computers to Europe.

If leftist Luiz Inacio Lula da Silva, who is expected to win a landslide victory in Sunday's second-round vote for Brazil's presidency, lives up to his promise to help
the country's stunted industrial sector, companies like Metron may thrive.

Lula and his centrist rival Jose Serra have both pledged to strengthen local industry, especially exporters, through incentives such as tax breaks which they hope will
allow them to make due on promises to create jobs and revive the stagnant economy.

Brazil is the world's ninth-largest economy with major industries including autos, textiles, paper and pulp and aviation but it accounts for only 2.2 percent of world
economic output and less than 1 percent of global trade.

Long shunned for its association with government meddling and favoritism, Brazil's industrial policy has become a key issue during this election race, especially for
small- and medium-sized companies.

"A multinational doesn't have the same problems as Metron in a financial crisis like this one," said Clovis Valerio Ferreira, Metron's director of operations.

Driven by worries that a leftist government could mismanage the economy, investors have hammered Brazil's financial markets in the months leading up to the
election, making it harder for companies to get credit and quashing demand for consumer goods.

"The government should help local companies with financing so that they can compete on the same conditions as multinational corporations," Ferreira said.

The pro-industry platform finds a receptive ear among voters disgruntled by rising unemployment, closing factories and the increase of foreign capital in Brazilian

It also conjures up fond memories of Brazil's so-called economic miracle" of the late 1960s and early 1970s, when the country's economy grew an average of 10.9
percent a year, fueled in part by heavy spending in state industry.


Over the last decade Brazil has progressively opened its borders to foreign trade, privatizing state-run enterprises and embracing multinational companies that want
to make and sell their products here.

But critics say outgoing President Fernando Henrique Cardoso has left local industry to falter during his eight years in office as he tried to steady a chronically volatile

Interest rates are some of the world's highest, which means consumption is lackluster and corporate credit is expensive.

"The other day I was speaking to an industrialist who said '(The government) killed Brazilian business,"' said Luiz Gonzaga Belluzzo, an economist at the University of
Campinas and an economic advisor to Lula's Workers' Party.

Lula, a veteran leftist and former metalworker about 30 points ahead of Serra in opinion polls, has been relentless about the need to bolster domestic industry.

For example, he has promised to ensure state-owned oil giant Petroleo Brasileiro (Petrobras) builds two new oil platforms on Brazilian soil and has repeatedly
lambasted Cardoso for allowing it to hire out a Singapore-based firm to build the first rig.

"If those platforms were built in Brazil, they would generate close to 25,000 jobs for three years," Lula told TV viewers in his political ads.

Serra promises tax breaks to industry and exporters and wants to create a government ministry to focus on promoting foreign trade.

The presidential front-runner also promises increased corporate financing, tax breaks for exporters and plans to create an "Extraordinary Department for Foreign
Trade," with a direct line to the president.


But economists have questioned whether Lula or Serra will be able to finance tax cuts and other incentives given the government's tight fiscal situation.

"The biggest error in both candidates' platform is assuming that we had money to do this and it just didn't happen because of a lack of political will," said Fabio
Akira, an economist at J.P. Morgan in Sao Paulo.

Economists have traditionally scorned too much government intervention in the economy as it tends to generate artificial forces that inevitably disrupt the markets.

Local companies protected by high import tariffs, for example, have little reason to improve efficiency and productivity. And consumers lose by getting stuck with
low-quality, expensive goods.

No matter who wins Sunday's presidential runoff, economists say the government is likely take a much more active role in running Brazil's economy -- so much so
that some have dubbed future policies as protectionist.

"There is the perception that we will certainly have a little more protectionism," said Carlos Firetti, head of research at BBVA Securities in Sao Paulo. "Whether
that's bad or not is going to depend on its extent."