“Brazil is back”. Luiz Inácio Lula da Silva’s words are an ambitious declaration of intent from one of the world’s best-known leaders after a remarkable political resurrection.

Following his release from jail after the Supreme Court quashed corruption convictions, Lula’s narrow election victory last year over far-right incumbent Jair Bolsonaro proved the vitality of the southern hemisphere’s largest democracy and the strength of its institutions.

Fears of mass uprisings by Bolsonaristas have so far proved unfounded. The former army captain, who vowed that only God could remove him from the presidency, slunk away quietly before Lula’s inauguration on January 1 and was last seen eating fast food in Florida.

Now 77, Lula inherits a deeply divided and heavily indebted country facing global economic headwinds. He is unlikely to benefit from a commodity boom like the one which lifted the economy in his first two terms from 2003-10. 

Many of Lula’s early moves have been encouraging. His determination to restore Brazil’s reputation as a global environmental leader by halting deforestation in the Amazon and protecting its indigenous peoples will be warmly welcomed. So will his commitment to social and racial justice in a highly unequal country. Few can argue with a vow to eradicate hunger in one of the world’s biggest food producers or to restore professional leadership to key ministries after the chaos of Bolsonaro-era ideologues.

Abroad, Brazil’s status as a developing world power with clout in the west, Russia and China affords it diplomatic opportunities. This could be particularly valuable in negotiating with Venezuela and Cuba, where the US policy of “maximum pressure” sanctions has failed spectacularly.

But Lula’s return has not been universally welcomed. Financial markets have tumbled as investors fret that the veteran leftist will prove more interventionist and less fiscally responsible than hoped. His dismissal of a constitutional spending cap as a “stupidity” may prove rash. Pledges to use the state-controlled oil company, Petrobras, and the national development bank as engines of economic development recall past failures.

The narrow election result showed how many Brazilians still mistrust Lula’s Workers’ Party (PT). Its last period in power ended with the Car Wash scandal — Latin America’s biggest-ever corruption case — the impeachment of President Dilma Rousseff and Brazil’s deepest recession in at least 60 years. The PT needs to show it has learnt from these mistakes.

In navigating a much less forgiving economic and political environment, Lula should govern pragmatically and draw on all the talents in the broad coalition which helped him win.

His biggest challenge is to return Brazil to strong and sustainable growth after a decade of stagnation. This requires bold moves to simplify the tax system, open up the economy to trade, improve education and increase infrastructure investment.

How to fund ambitious campaign promises is a pressing question. Brazil is not a low-tax country: the tax burden is close to the OECD average and there is little room to borrow more. But there is waste: Brazil spends more of its national wealth on education than France but the results are poor. The answer is better, rather than bigger, government.

If he is to reconcile the imperatives of social justice, environmental protection and sustainable growth, Lula’s best bet is to harness the power of international investment and foreign trade to unlock Brazil’s considerable economic potential. That would open the way for a truly historic third term.

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