Political Risk Latin America Blog @PolRiskLatam

How tough will Dilma be?

Posted in News and Articles, Political Risk by politicalrisklatam on February 18, 2011

by The Economist, February 18th, 2011.

The new government sets out to cool an overheating economy.

On February 16th Brazil’s new president, Dilma Rousseff, faced her first serious test in Congress, and passed it. Trade unionists, opposition politicians and even some members of her own coalition had tried to force through a big increase in the minimum wage. Instead, as Ms Rousseff wanted, it will rise from 510 reais ($305) a month to just 545 reais, barely outpacing inflation. Tough politicking behind the scenes by Antônio Palocci, her heavyweight chief of staff, together with the bait of unfilled senior jobs in the government, kept most members of her coalition in line. Her predecessor, Luiz Inácio Lula da Silva, did his bit too, telling his trade-union friends that seeking more money was “opportunism”.

At first sight it seems an odd year for Ms Rousseff to be stingy. Brazil is booming, and in the private sector many workers are getting double-digit pay rises. Brazilians have grown used to big rises in the minimum wage. During Lula’s eight years in office he boosted it by around 60% in real terms. That is one reason why income distribution has become less unequal in recent years, why Lula was so popular and, ultimately, why Ms Rousseff was elected last October.

The government’s figure stuck to the letter of a deal brokered by Lula with the unions in 2006 to raise the minimum wage each year by the sum of the previous year’s inflation and GDP growth from the year before that. In 2008 the economy shrank slightly. But if Ms Rousseff had wanted to be generous, she could have brought forward some of the whopping 13% that this formula is likely to award in 2012. The main reason for her parsimony was the impact on public-sector wages and pensions, which are linked to the minimum wage. All told, each real by which it rises costs the government 286m reais a year. (continue reading… )


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