Instead, the doubts that hang over Lula’s decisive victory are economic ones. No one believes that Brazil’s macroeconomic path over the next presidential term will be an easy one. Employment growth, for one thing, has been far too low for an open society with Brazil's demographics. The downside of labor productivity gains in recent years is that GDP growth more robust than that of the last few years would do little to alleviate the unemployment and underemployment pressures that weigh on much of Lula's electorate. Yet more rapid income growth soon bumps up against the tight constraints that Brazil's external payments situation impose on attempts to grow faster.

It is clear from the vote, however, that the vast majority of Brazilians were willing to run the risk of entrusting a candidate with no experience of governing at the national level, rather than continue current policies that have more approval outside Brazil than within it. Indeed, many Brazilians regarded the election as a plebiscite on the policies of the outgoing Fernando Henrique Cardoso government.

The lopsided vote may be an unfair and impatient judgment. It clearly reflects, however, the disillusion of an electorate whose expectations appear to have outrun a positive but increasingly modest economic performance. As the euphoria of the Cardoso government’s clear success with the Plano Real in bringing inflation down from annual rates in the thousands to single digit levels has faded, Brazilians have unforgivingly turned their attention to the more stubborn economic problems that have yet to be successfully addressed.

At the top of this list is Brazil’s squalid income distribution, arguably the most inequitable of any of the world’s major economies. (Ironically, the Cardoso government has a better record in this respect than many of its predecessors.) Important gains in public health and in primary education have also helped. For most voters, however, these welcome trends have come too little and too late to persuade them to stick with the "neo-liberal" policies of the current government and its would-be heirs. Hence, the desire for change.

Lula’s personal appeal and charisma undoubtedly explain some of his political success. For some voters, however, his well-established credentials as a populist critic of the Brazilian establishment are of equal importance. For others, especially among those who have rallied only recently to his cause, his past is a source of considerable debate and even potential opposition. Should his traditional base in the Workers Party (PT) convince him to revert to his populist positions of earlier (and unsuccessful) campaigns, he will face a number of hard macroeconomic choices and provoke deep divisions among many of those who have so recently voted for him.

The roots of this potential schism are not hard to find. Under pressure to broaden their political support, the military governments that dominated Brazilian politics between 1964 and 1985 turned increasingly to both domestic and international capital markets to finance public sector expenditures. Although this was in the long-run a less desirable strategy than developing an effective and equitable tax system or increasing the efficiency of the expenditure process, there was a (short-term) political logic to it--especially as long as domestic and foreign sources of capital were available. A number of borrowing crises and failed stabilization plans in the eighties and nineties, however, signaled that the long-run constraints could not be ignored forever. Serious efforts to address the underlying fiscal imbalance were delayed by successive governments.

While economists will probably never reach a consensus about how much debt is too much for Brazil, there is no question that the resulting high real interest rates have raised the costs of capital formation and widened the gap between the minority that receives this interest income and the large majority that must ultimately pay the bill. In the short run, the perverse logic of public sector indebtedness requires that real interest rates remain high or even increase, if voluntary lending to the Brazilian public sector is not to be interrupted. As the probability of Lula’s victory increased over the past several months, Brazil’s Central Bank has in fact been forced to raise rates, however costly this may be for the nation in the long run.

The macroeconomic choices facing Lula are daunting, but they are not very different from those that would be faced by any of his opponents. One road, possibly favored by Lula’s traditional core of supporters, if not by the President-elect himself, would be an external debt moratorium, likely accompanied by various forms of a disguised moratorium on internal debt. Although this might in principle buy time in which to address the underlying fiscal imbalance, it is likely that the resulting radicalization of the institutional environment would prevent the emergence of any national consensus broad enough to support economic reform.

Another road for the new government, much favored by Brazil’s creditors both within and without, is simply to continue the policies of the outgoing Cardoso Administration, by respecting the promises that have been made by the current regime. Such a course, however, would lead millions of Brazilians to question what they had voted for. It is unlikely that Lula could demonstrate quickly and convincingly to his electorate that this is the best strategy, even if Lula himself truly believes that this is the only viable option.

During their long march to power, Lula and the PT have learned to be much less confrontational and divisive than they were in earlier decades. A consensus-building macroeconomic strategy that emerges from the new "Lula Lite" might imply a compromise between the two preceding polar cases. On the one hand, a total break with Brazil’s creditors would be avoided, an outcome that would require more tact and flexibility than some on either side have shown. An essential part of such an agreement would be a lowering of real interest rates in return for an increase in the probability that the debt would be paid. The deep depreciation of the real and the decline in Brazilian equities as Lula has moved closer to the Presidency suggest that there is considerable upside room for such an outcome. The price competitiveness of the real, moreover, is likely to strengthen Brazil’s external payments position, once world markets have digested a Lula victory.

The other side of a viable macroeconomic strategy would be serious tax reform and greater emphasis on the provision of government services to lower income groups, while controlling expenditures that primarily benefit the rich and near-rich. The Cardoso government had already made some progress in this direction, especially in health careand basic education. Opposition to serious tax and spending reforms is less likely to come from Lula’s recent opponents than from some of those who have recently joined his camp, motivated more by a desire to share in power than by concern for the poor. The prospects for any president of Brazil to pull this off are not guaranteed, but the decisiveness of Lula’s victory gives him at least as good a chance as the outgoing government.

Donald V. Coes is Professor of Economics and Associate Director of the Latin American and Iberian Institute at the University of New Mexico. He has taught in several Brazilian Federal Universities and at the Brazilian Capital Markets Institute (IBMEC). He is the author of Macroeconomic Crises, Policies, and Growth in Brazil, 1964-90 (The World Bank, 1995).