Special report: Dilma Rousseff, Brazil's "automatic pilot"

JUIZ DE FORA, Brazil Thu Sep 23, 2010 11:28pm EDT

1 of 5. Brazil's presidential candidate for the ruling party PT (Workers Party), Dilma Rousseff (L), chats with Brazilian President Luiz Inacio Lula da Silva in Brasilia, May 19, 2010.

Credit: Reuters/Ricardo Moraes

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JUIZ DE FORA, Brazil (Reuters) - Here's some advice for anyone who meets Dilma Rousseff (aka "Stella.")

First, speak quickly. And second, if you're looking to ingratiate yourself, it's probably not a good idea to suggest that major reforms are needed for Brazil to retain its title as one of the world's fastest-growing emerging economies.

In an interview with Reuters, the woman who is almost certain to be elected Brazil's president in October flatly dismissed the need for big budget cuts or changes to some of the world's most restrictive labor laws. Asked if it was possible for Brazil to keep growing at a 7 percent annual pace without such reforms, Rousseff shook her head, smiled, and interrupted the question.

"Is Brazil growing (that quickly) now?" she asked sharply.

Well, yes, but some economists say...

"But is it growing?"

Yes.

"Well, then, it's possible," she concluded.

The message was clear, and it was reinforced in interviews with about a dozen of Rousseff's top advisers: for better or worse, the 62-year-old former guerrilla leader, who has evolved over time into a highly pragmatic career civil servant, does not plan major changes to Brazil's economic policies if she is elected.

Rousseff's wager is that she will be able to create millions of jobs, improve Brazil's woeful infrastructure and schools, and harness its newfound oil wealth without deviating substantially from the mix of social welfare plans and market-friendly policies that have made her former boss, current President Luiz Inacio Lula da Silva, wildly popular both at home and on Wall Street.

"We're going to follow Lula's path!" Rousseff vowed to a crowd of 10,000 at a Friday night rally in the southeastern city of Juiz de Fora. Lula, who plucked her from relative obscurity to run for elected office for the first time in her life, stood by her side, beaming.

Lula, for his part, has left little doubt that he expects his chosen successor to hew closely to his policies when he leaves office on January 1. As he told a crowd in August: "If I see something wrong, I'm going to call my president and say look, there's a problem here. You can take care of it, my child, because I wasn't able to."

As president, Rousseff will likely oversee a continued expansion of the government's role in the strategic oil sector, according to her advisers. State-owned banks will keep playing a major part in providing mortgages for low-income families and doling out funds for infrastructure projects, especially as Brazil prepares to host the World Cup and Olympics in 2014 and 2016, respectively.

Yet fears that Rousseff will govern significantly to the left of Lula -- expressed by some investors and opposition politicians -- seem overdone.

An examination of her time as energy minister and then as cabinet chief in Lula's government paints a portrait of a demanding technocrat concerned primarily with job creation who openly disdains the inefficiencies often seen in the public sector. She has repeatedly surrounded herself with the most market-friendly officials in her left-leaning Workers' Party.

Instead, the primary risk with Rousseff seems to be a status-quo presidency that results in economic stagnation. Given her lack of appetite for major reforms, some economists fear that Brazil's notoriously high costs of doing business could soon drag the country back to its trend growth level of years past -- around 3 percent -- and thus cause the country to fall behind its high-flying peers in the so-called BRIC group of big emerging markets: Russia, India and China.

Rousseff's relative lack of charisma or executive experience could also leave her government vulnerable in the event of an unexpected external or internal crisis. Her potentially volatile coalition of political parties is another question mark, as is the bout of moderate cancer that she suffered, and completely overcame, in 2009.

Yet, like their future boss, many potential officials in a Rousseff government seem unconcerned that Brazil's run of prosperity could end any time soon.

"We're going to do what we can," said Fernando Pimentel, a senatorial candidate and adviser to Rousseff's campaign who has known her since the 1960s, when as teenagers they were both involved in the armed resistance to Brazil's dictatorship.

"But there are certain areas where you can just turn on the automatic pilot," Pimentel added, citing the finance ministry as an example. "Brazil is in a stage of tremendous growth."

FROM JAIL, AND TORTURE, TO PUBLIC OFFICE

Rousseff has downplayed the importance of her activist youth, which saw her imprisoned for nearly three years and tortured by her military captors. But the truth is that, while the era did not define her, it is critical to understanding her rise in Brazilian politics.

The daughter of a well-to-do Bulgarian immigrant who fled political oppression in his own country, Rousseff joined a radical leftist resistance group known as the Colina shortly after entering the economics program at the Federal University of Minas Gerais.

The leftist groups that proliferated throughout Brazil never engaged in large-scale combat or posed a serious threat to the military government. Instead, they consisted primarily of loosely affiliated cells in urban areas that robbed banks, set off bombs and kidnapped and killed political figures.

Rousseff's second husband, Carlos Araujo, was a fellow dissident. He said that her responsibilities consisted primarily of "coordinating" the actions of various cells. As the military cracked down, both went on the run for months at a time and assumed aliases -- including, in her case, "Stella."

Rousseff herself "never picked up a gun," Araujo said. "And she never fired a shot."

Husband and wife were both soon captured. Rousseff suffered "extremely cruel" torture while in prison, Pimentel said, including repeated electric shocks.

"It pushed her to the edge," Pimentel said.

Even prior to her imprisonment, though, Rousseff had begun displaying the pragmatic streak that would come to define her career. Pimentel said she "was one of the first among us to realize" that the guerrillas were outgunned and badly organized, and would not succeed in toppling the military.

Indeed, upon her release from jail in 1973, Rousseff never really looked back. She resumed her studies in economics and completely gave up hard-line resistance, Araujo said.

"Just as we got into that world quickly, we exited it quickly too," he said. The two are now divorced, but they remain close and the car in the driveway of Araujo's house in Porto Alegre has a giant Dilma sticker on the rear window.

Over time, Rousseff's militancy proved to be anything but a handicap. As in other South American countries such as Argentina and Chile, the resistance movement in Brazil evolved into an insular fraternity of politicians, most of whom moderated their views but never quite abandoned their leftist roots -- or one another.

After democracy returned in the 1980s, they would come to dominate their countries' politics -- by elected means.

"I gave Dilma her first (high-ranking government) job because of her courage in the armed fight," said Alceu Collares, a former governor of the southern state of Rio Grande do Sul, who made Rousseff the state's energy secretary in the early 1990s. "I always admired those people."

Rousseff, who in intervening years had worked at a regional think-tank and served as an adviser to trade unions, eventually acquired a reputation as an effective, if unspectacular, administrator.

As energy secretary, she worked well with private-sector companies to help plug in some of the gaps in the state's power grid and avoid blackouts that plagued the rest of Brazil, said Olivio Dutra, another former governor.

She also began to shed an image as a somewhat frumpy "hippie" who wore thick glasses, sandals and paid no attention to her hair, said Neuza Canabarro, Collares' wife. She recalled one occasion when Rousseff showed up to work wearing makeup for a TV interview. "That's when we discovered that she was pretty," Canabarro said, laughing fondly.

During this period, Rousseff cultivated a love for poetry and literature -- one of her favorite writers is the French novelist Marcel Proust -- and gave birth to her only child, a daughter, Paula.

But there was no indication that she would ever rise above the status of mid-level public servant, Dutra and others said. "Nobody said, nobody thought -- not even her -- that she would ever be a major candidate for anything," Dutra said. "She never did anything to indicate that was her goal."

ON THE NATIONAL STAGE, A CRISIS AWAITS

When she was finally given an opportunity on the national stage, Rousseff seized it -- and began to reveal her true colors as a leader.

The year was 2003, and Lula had just been elected president on his fourth try. The former metalworkers' union leader, who in previous campaigns had advocated defaulting on Brazil's debt and nationalizing key industries, was under intense pressure to demonstrate to panicked financial markets that he would not undertake radical changes as president.

Eager to calm investors before the financial system fell apart, Lula reached into a shallow pool of officials from the moderate wing of his Workers' Party to staff critical posts in his government. That included Rousseff, who had defected only three years prior from a different leftist party based in Rio Grande do Sul.

Lula put her in charge of the energy ministry, where a crisis awaited.

Brazil was still reeling from national electricity shortages, the consequence of a drought that left Brazil's hydroelectric dams depleted, but also decades of underinvestment in more diverse energy sources. The result was widespread rationing that shaved more than a percentage point off economic growth in 2001.

Rousseff's task was to lead a "complete overhaul" of the sector to prevent it from happening again, said Mauricio Tolmasquim, her former No. 2 at the energy ministry.

A working group of ministry officials gathered. Tolmasquim said that some from the party's more radical wing advocated a partial reversal of the free-market reforms of the energy sector in the 1990s, which would have restored the former state-run electricity monopoly Eletrobras to a more prominent role.

In the end, Tolmasquim's more moderate proposal prevailed: a "Dutch auction" system in which private-sector companies bid for projects based on how low a rate they could provide to Brazilian consumers. It also provided a legal framework that guaranteed their investments over the long term.

"They called me the neoliberal of the group," Tolmasquim recalled, using a term often employed in Latin America to label someone a stooge for private, usually foreign, capital. "But," he added with a twinkle in his eye, "I was the one she promoted to executive secretary."

Lula's administration has seen Brazil's electrical capacity expand by about 4.4 percent a year, up from 3.9 percent a year in the previous government, according to official data. Blackouts are no longer a major issue, although Brazil's electricity rates remain among the world's highest.

The flip side has been Rousseff's relationship with Petrobras, Brazil's state-run oil company. The company has been in the spotlight since 2007, when it made one of the world's biggest recent oil finds -- as many as 50 billion barrels of oil buried beneath a thick layer of salt more than four miles under the ocean's surface. Lula has said the so-called subsalt reserves could generate enough revenue in coming years to push Brazil into developed-world status if successfully exploited.

Faced with a potential bonanza, Lula's government -- with Rousseff as the point person -- has largely rewritten the rules for the country's oil sector. Instead of the old system of auctioning concessions to oil fields to companies, the government has proposed a new system under which it owns the oil, and pays companies with the proceeds.

Meanwhile, Petrobras has paid a steep price for access to the subsalt oil. As part of a complex capitalization plan that could be worth up to $79 billion -- which would make it the world's largest-ever share offering -- Petrobras will pay the government for rights to the oil with its own shares.

The upshot: the Brazilian state will likely end up with a significantly bigger ownership stake in Petrobras than before. Meanwhile, Petrobras has committed to relying on local manufacturers for 65 percent of the equipment used for drilling, vessels and platforms, despite concerns that Brazil lacks the ability to produce all of it at home.

Faced with what they see as a government power play and an utter disregard for minority shareholders, many investors have beaten a path for the door. Petrobras shares have lost about 27 percent since the start of 2010 -- wiping a whopping $70 billion-plus off the company's market value.

AIDES: ROUSSEFF HAS NO SPECIAL LOVE FOR THE STATE

Rousseff's doubters typically cite Petrobras, and the massive expansion of lending by state-run development bank BNDES in recent years, as evidence that she will govern to the left of Lula once she is elected.

Rousseff "will try to centralize as much of the economy as she can, giving power to corporatist groups and unions, above all," said Fernando Henrique Cardoso, who was president from 1995 to 2003 and whose party is now the main opposition.

In a report issued in August, Goldman Sachs said many foreign investors were waiting until after the election to make "definitive moves" in Brazil. "The concern is over the state's role in the economy and whether this will be reined in or expanded" under the next government, the report said.

Luciano Coutinho, the president of the BNDES and a strong candidate to be Rousseff's finance minister, has defended the bank's credit expansion as a necessary response to the global financial crisis.

He also said in a rare interview in his Rio de Janeiro office that Petrobras was a special case, and not indicative of Rousseff's broader outlook on private investment. "The notion that the state will play a major role in her government is absolutely false," said Coutinho, who taught Rousseff economics during her post-graduate days.

Pressed on why investors should believe that a case as important as Petrobras was an exception rather than the rule, Coutinho bristled. He said oil was a "strategic resource," and pointed to the rise of national energy companies in other countries during the past decade.

"Oil had to be treated in a different way," he said. "It's naive and an insult to our intelligence to think of it as an ordinary commodity."

Other officials have also portrayed the subsalt find as a once-in-a-lifetime opportunity to improve not only Brazil's infrastructure, but its energy industry as well.

"As president, Dilma will fight strongly ... for the independence of the industry of goods and services for oil and gas," said Maria das Gracas Foster, Petrobras' director of gas and energy, who is likely to play a role in Rousseff's government.

Coutinho said he didn't believe that other state-run enterprises would "grow massively" under Rousseff.

"She doesn't have an ideological tendency to ... favor the public sector or discriminate against the private sector. She is pragmatic and looks primarily for results," he said.

Nearly everyone else in Rousseff's inner circle echoed that sentiment in conversations both on and off the record. And during her presidential campaign, Rousseff has again surrounded herself with her party's most market-friendly voices, including Coutinho and Lula's first finance minister, Antonio Palocci.

Tolmasquim described Rousseff as a "developmentalist" -- concerned primarily with homegrown, job-creating industries and infrastructure projects.

The main debate, in her mind, is "not state versus private," Tolmasquim said. "It's 'Made in Brazil' versus not."

The ultimate proof of Rousseff's attitude toward the state? Araujo, her ex-husband, points to the reputation she earned in the public sector as brusque, even rude, with her subordinates. "Oh, she's extremely demanding," he said, laughing. "She's not rude at all, quite the contrary. But people in the public sector aren't used to being asked for results."

"She's obsessed with efficiency."

PROSPERITY NOW, BUT THERE MAY BE TROUBLE AHEAD

As for just how she made her unlikely leap to frontrunning presidential candidate... well, even Rousseff admits to being a little hazy on that one.

She says that Lula began by "joking around" about a possible presidential run -- "the only way that someone who is not thinking about becoming a candidate will get used to the idea," she says.

To this day, Lula has never formally asked her to run, Rousseff says. "It was spontaneous, natural," she said. "And over time, I just kind of became a candidate."

There's another version to the story. It's unlikely that Rousseff would have been Lula's chosen successor if not for multiple corruption scandals during his administration that forced more obvious candidates, namely former cabinet chief Jose Dirceu and Palocci, to resign in 2005 and 2006, respectively.

"It was like she won the lottery," said Collares, the former state governor.

Rousseff began the campaign as an enigma even within some political circles in Brasilia. Her name recognition among voters registered in the single digits, and the nomination did not go over well among some in the Workers' Party who wanted a better-known, more experienced candidate.

That helps explain why, from day one, she has staked her candidacy on a message of total continuity of Lula's policies, appearing by his side at rallies and on TV as often as possible.

It has been an effective strategy. Under Lula's mix of responsible fiscal management and cash transfer programs to Brazil's poorest, more than 20 million Brazilians have escaped poverty since he took office. In a country that was long defined by its massive gap between rich and poor, inequality has fallen and a newly empowered lower-middle class has been snapping up cars, homes and TVs in record numbers.

Brazil, as a whole, has become consumed by its centuries-old, long-elusive dream of becoming a global economic power worthy of its continental size. Lula's ability to keep inflation under control and entice foreign capital -- plus booming demand for its commodities from China -- has made Brazil a rare hotspot at a time when most developed economies are struggling.

Lula has been, and will remain, a hard act to follow. At a joint rally last month in Osasco, an industrial suburb of Sao Paulo, Rousseff gave an awkward, at times rambling catalog of Lula's accomplishments. She then promised to be "the mother of all Brazilians" and concluded her speech by pledging, at full-throated roar, that "this will be the election that dignifies the women of our country!"

The crowd clapped politely, as if they were attending a golf tournament. Lula then bounded on stage. The crowd burst into frantic cheering and chanting as music blared and confetti fell. With the flair of an experienced performer, Lula waited for the din to die down before grabbing the microphone, leaning into the audience and flashing a huge grin.

"Comrades..." he began. And the crowd went wild again.

The difference in styles has a serious side that goes to the heart of the limitations that Rousseff may face as president: if Lula, with his 75 percent approval rating and massive street cred with Brazil's poor, couldn't get contentious legislation such as a tax reform through Congress during eight years in office -- then how can she?

And that, in a nutshell, is what worries critics, who believe the need for change is clear. Rousseff "seems to believe that she can just make investments and Brazil will grow, as if this will just happen automatically," said Cardoso, the former president. "It's more difficult than that. Without a new generation of reforms, it will be very difficult to keep growing at this pace."

The numbers back him up. A World Bank report published last year ranked Brazil 129th out of 183 countries in terms of ease of doing business. That put it well behind regional peers such as Chile (49th), Mexico (51st) and even neighboring Argentina (118th), a country which investors accuse of manipulating its basic economic data.

The main reasons for Brazil's lack of competitiveness, the report concluded, were its onerous tax and labor systems. At 34.4 percent of gross domestic product, the nation's tax burden far surpasses its BRIC peers and even developed countries such as Japan (17.6 percent) and the United States (26.9 percent), according to a recent study by the Brookings Institution, a Washington think tank.

Taxes are not only high, but maddeningly complex. An average company in Brazil spends the equivalent of 2,600 hours a year calculating and paying taxes, the World Bank said. That is about five times the Latin American average.

Meanwhile, rigid restrictions on hiring and firing have relegated many Brazilian workers to the black market, despite rigorous job growth in recent years. According to the World Bank, a typical manufacturer in Brazil must pay on average 46 weeks' worth of salary to terminate a worker, once severance costs, penalties and advance notice are factored in.

The head of Brazil's main industrial lobby, the National Confederation of Industry, is among those who warn that such restrictions will prevent Brazil from realizing its grand ambitions unless changes are made. "If there is no change in the country's business climate, we won't transform Brazil into the power and the (world's) fifth-largest economy as some foresee," Robson Andrade said.

TAX REFORM? MAYBE. LABOR, FISCAL CHANGES? FORGET IT.

Among the major reforms, tax policy might have the best chance of being addressed under Rousseff -- but even there, it may well fall short of the major overhaul that many businesses are hoping for, her advisers say.

Pimentel, the senatorial candidate, said that Rousseff has told advisers she will probably send an omnibus tax bill to Congress. But he called this approach the "Holy Grail," and said Rousseff could also be willing to make incremental changes to the tax code if that approach proves more expedient.

He compared that strategy -- which he called a "bypass" -- to the piecemeal approach Rousseff employed to execute infrastructure projects as Lula's chief of staff. "You do a bunch of little things, and it has a large effect," he said.

Meanwhile, Rousseff has ruled out major labor reforms, saying in speeches she will not touch the rights of Brazilian workers -- who form her party's constituency.

As for the other dream held by some investors -- a major overhaul of Brazil's budget that could open up more cash for infrastructure spending by cutting pension outlays, for example -- Rousseff is even more emphatic.

"I won't do a fiscal reform," she told Reuters. "You do major fiscal reform when you have economic crises, not when you have the country's international reserves (at record levels), inflation within its target range and decreasing public debt."

"We will control spending in good and bad times," she vowed. "And we will transform the Brazilian state into a more professional state based on meritocracy."

The risk is that, without finding substantial fiscal savings, Brazil will be unable to increase the relatively small amount of money it invests in infrastructure -- about 2 percent of GDP. By contrast, China spends about 16 percent. As is, Brazil's ports and roads are completely overwhelmed, and crops often rot before export because of bottlenecks.

Yet, even if Rousseff did want major changes, it's unclear she could push them through Congress. Her main coalition partner, the PMDB party, is an ideologically disparate group that has shown little enthusiasm for major legislative initiatives under Lula, focusing primarily on pork-barrel projects instead.

Franklin Martins, Lula's communications strategist and a close adviser to Rousseff, indicated that she is betting on responsible macroeconomic management policies that will bring down Brazil's debt-to-gross domestic product ratio from its already low level of 41.7 percent.

That, in turn, should bring interest rates down from their current level of 10.75 percent, among the world's highest. Martins pointed out that each full percentage point drop in interest rates generates about $9 billion in fiscal savings on Brazil's debt payments. "That's an entire Bolsa Familia," he said, naming Lula's social program that sends cash transfers to poor families.

Martins says he's sure that Rousseff will forge her own identity as president. "Anybody who says she'll be an automatic pilot doesn't know Dilma," he said, laughing.

His other prediction -- that Rousseff would quickly grow into the role of president, just as she has others throughout her career -- is also showing signs of coming true.

At the rally in Juiz de Fora, Rousseff looked much more comfortable than she had at the Osasco speech, working the crowd into a frenzy by singing Lula's praises.

She said a new spate of corruption accusations that have shaken her party were just cynical scare tactics whipped up by the opposition -- much like predictions that the economy would collapse if Lula was elected in 2002, she said.

"Was there chaos?" she asked the crowd.

"Nooooooo!" they yelled back.

"Did Brazil grow?"

"Yessssss!"

"Did (Lula) create 10 million jobs?" she asked. But before the audience could shout a reply, she yelled one of her own into the microphone: "Nooooo! He created 14 million jobs!"

Many in the crowd laughed.

Lula lingered backstage for part of the night, watching Rousseff work the crowd.

Asked why he never actually asked Rousseff to run, Lula thought for a moment. "Because it worked out," he said with a smile and a shrug. And then he bounded on stage, ready to push his chosen successor one step closer to power. (Additional reporting by Raymond Colitt, Editing by Todd Benson, Jim Impoco and Claudia Parsons)

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