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Sun 26 Jul 2009 04:00 AM

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Teens, models, bailouts meet lucky leaders

If someone handed out a prize for the world's luckiest head of state, Brazil's President Luiz Inacio Lula da Silva should win it hands down. What about French president Nicolas Sarkozy, you say, who's married to the beautiful and talented Carla Bruni? Or how about Italy's Silvio Berlusconi, who parties with teenage girls? No, neither is as fortunate as Lula.

If someone handed out a prize for the world's luckiest head of state, Brazil's President Luiz Inacio Lula da Silva should win it hands down. What about French president Nicolas Sarkozy, you say, who's married to the beautiful and talented Carla Bruni? Or how about Italy's Silvio Berlusconi, who parties with teenage girls? No, neither is as fortunate as Lula.

A lucky person is "favoured by chance, successful through causes other than one's own action or merit," says the Oxford dictionary. That's Lula alright.

His recent stance on fiscal policy, for example, may lead to disaster in the near future, but for now Lula looks like a hero.

For years, Lula bashed his predecessor's economic policies. They were part of a failed model that needed to be changed, Lula wrote in a "Letter to the Brazilian People" on June 22, 2002. Soon after becoming president in 2003, though, Lula did an about-face and embraced the same economic programs he ridiculed earlier. His comrades in the Workers' Party, known as PT, howled disapproval.

During most of his first term in office, Lula's allies criticised him for maintaining an independent central bank that allegedly pursued overly ambitious inflation targets that required double-digit interest rates. That plan, they argued, hurt economic growth and attracted speculative foreign capital. Coupled with Lula's decision to stick with his predecessor's floating exchange rate, the real would strengthen, hurting the competitiveness of Brazilian exports.

Lula was also criticised for keeping fiscal policy as austere as it had been before which, according to his party's economists, choked off the public spending Brazil needed to improve its decrepit infrastructure.

Lula didn't keep his predecessor's economic policies in place because he was convinced they were right, but because he and his team knew of no practical alternative that markets would welcome and they feared making the wrong move.

Amazingly, breaking his promise to change the economic model didn't hurt Lula personally. He got lucky right away. During his entire first term, the global economy grew at an unprecedented level. The prices of commodities Brazil exported boomed. Credit was abundant. As a result, the nation's economy was stronger than it had been for the previous 20 years.

The rising economic tide served him well. Although he faced a serious corruption scandal, Lula was reelected in 2006. His critics could no longer fault him for continuing the previous administration's economic policies.

It was only during the 2006 presidential campaign that Lula began to reveal his true colours. His preference for oversized government led him to add about 300,000 new public sector workers. Then he handed government employees wage increases of as much as 457 percent over what they earned in 2003.

His foreign policy favoured trade with less developed and politically unstable countries such as Venezuela, Bolivia, Libya and Iran. He didn't focus on the traditional large buyers of Brazilian goods - Europe, the US and Japan. He allowed the country to grow dependent on revenue from the sale of commodities, whose prices are volatile, rather than rely on the more stable income from manufactured goods.

And finally, Lula showed an excessive tolerance for corruption within his administration and his political party.

Those decisions usually would lead to disaster, but not for a blessed politician like Lula. So how was Lula able to turn these sins into virtues? The need for aggressive government intervention in the US and Western Europe following Lehman Brothers' collapse offered leaders like Lula the perfect alibi to defend a larger government role in the nation's economy.

Suddenly, Lula's late 2006 decision to kiss fiscal austerity goodbye by boosting government expenditures and hiring more public workers than any other Brazilian president looked timely and smart.

Concerns about growing budget deficits disappeared overnight. And although Brazil's net public debt as a percentage of gross domestic product rose by almost five percentage points in the last six months, Moody's Investors Service earlier this month placed its Brazilian government bond ratings on review for possible elevation to investment grade. Standard & Poor's and Fitch upgraded Brazil to the lowest investment grade level last year.

When consumers in the richest, most developed nations faltered, Lula's idea of fostering trade ties with poorer and unreliable partners turned out to be a blessing. And remember the concerns about Brazil's excessive reliance on exporting commodities? Well, it proved quite providential when consumers turned more interested in buying food than automobiles. Finally, as Wall Street appeared to house more crooks than Brasilia, even Lula's tolerance of corruption became more easily justifiable, at least for party sympathisers.

While the crisis made Lula's dark colours look brighter, everything else that was apparently out of place in the Brazilian economy now began to fit. The stratospheric pre-crisis interest rate of 13.75 percent enabled the central bank to slash rates aggressively, preventing an economic meltdown without risking a liquidity trap.

Reserve requirements on Brazilian banks, which were among the highest in the world - topping 45 percent for cash deposits - could finally be reduced. This injected more than 100 billion reais ($52bn) into the economy without fuelling inflation and helped to minimise the impact of the world credit squeeze.

Brazil's asphyxiating tax burden, which reached a record 36 percent of GDP in 2008 largely due to Lula's oversized government, allowed his administration to cut selected taxes temporarily. This led to record sales of automobiles and lifted the sales of major appliances such as refrigerators, ovens and washing machines during a global recession.

While the global economic boom and bust have made Lula the luckiest politician on earth, they have also hidden most of his mistakes. When the crisis is gone and Lula's mistakes uncovered, his successor will quickly become one of the world's most unfortunate presidents. It's only a matter of timing.

Alexandre Marinis is a Bloomberg news columnist. The opinions expressed are his own.

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