Indeed, a strategy of bond-market appeasement places may turn out to be futile, because it places a huge bet on the rationality of global financial markets. But the people in New York and London who set interest rates know little about Brazil. They know that Ipanema is a beach, that the Amazon is a river, that former-US treasury secretary Paul O'Neill worried that money loaned to Brazil would re-appear in numbered European bank accounts, and that Lula is a president without administrative experience who heads a party with "workers" in its name.
Remember, these are the type of people who once thought that selling dog food over the internet was a brilliant business strategy, and that by 2010 Qualcomm would be able to sell two mobile phones a year to everyone in the northern hemisphere. If such people cannot be appeased, or if they panic for no particular reason, then everything goes down the drain. Lula becomes a failure and Brazil loses another decade as its economy sinks into a depression of uncertain length and suffers inflation of uncertain magnitude.
Once upon a time, Lula would have been able to rely on broad international support, as Cardoso did. The Clinton administration and the IMF educated financial markets about countries that they believed were following sound policies and that had bright long-run growth prospects. The US Treasury under Robert Rubin and Larry Summers was unafraid to join the IMF in betting the store on Mexico, Thailand, Korea and Brazil when they thought the odds were favorable.
Perhaps this assurance of broad international support made it prudent -- or at least less imprudent -- to appease the financial markets first. It is not at all clear that the Bush administration and today's IMF can offer similar support. So Lula's odds do not look particularly high. But they still look better than the odds attached to any alternative political-economic strategy--and certainly than anything being offered by khaki-clad would-be commandantes.
J. Bradford DeLong is professor of economics at the University of California at Berkeley and a former assistant US treasury secretary. Copyright: Project Syndicate
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