Conflicting Signals; Brazil's market-driven economic policies have paid off, but some top government officials still favor state intervention.

Byline: Mac Margolis

When Luiz Inacio Lula da Silva took office as Brazilian president 20 months ago, he knew he had a tough sales job ahead of him. The once-militant Workers Party (PT) leader bent over backward to show the world that his days hurling bricks at the capitalist establishment were finished. His Finance minister, Antonio Palocci, has kept to an almost penitential path of tight money, miserly budgets and a no-frills package of constitutional reforms. The parsimony has paid off: Driven by a surge in exports, the Brazilian economy is stable and growing again, at a rate of 4 percent this year, says the International Monetary Fund. Little wonder that the PT more than doubled its number of mayors in municipal elections on Oct. 3.

Such a track record might hush the many hidebound populist and nationalist ideologues still roaming Latin America. But that's not the case; to some of his oldest supporters, the new Lula is a turncoat. After all, tight money and deference to free enterprise were the hallmarks of the previous president, Fernando Henrique Cardoso, whom the PT fought tooth and nail. Carlos Lessa, an outspoken economist, once branded the market-minded Cardoso the "national pawn broker." Now, oddly, Lessa holds a key position in Lula's government. As head of Brazil's powerful National Economic and Social Development Bank (BNDES), which gives low-interest loans to boost businesses, he waxes passionately about turning Brazil into a tropical superpower and woe to any foreign interests who would stand in his way.

Brazilian economics have always been a high-stakes game, but Lessa's position in government is evidence of an unsettling tug-of-war at the heart of Latin America's biggest nation. Simply put, there is dissonance at the highest levels in Brasilia over how to handle everything from monetary policy to genetically modified soybeans. The powerful chief of staff, Jose Dirceu, and even vice president Jose Alencar have frequently grumbled about the central bank's high interest rates. Mines and Energy Minister Dilma Rousseff has widely consulted with the private sector, but investors are still wary of Brazil's energy-development reform plan in which the ministry, not an independent regulator, retains control over the rules for generating, selling and distributing electricity. Philosophical disputes over economic policy have stalled many coalition governments, and investors can be forgiven for wondering if Brazil is running the same risk. "Part of the Lula government is market oriented and the other part is for state intervention," says Eduardo Giannetti, a Sao Paulo economist. "It's like two halves of a brain that aren't connected with one another."

This dichotomy is most visible in the Ministry of Development, Industry and Commerce. There, hardly a week goes by when Lessa and his boss, Minister Luiz Fernando Furlan, are not sparring with each other. Furlan, a businessman, is a believer in the power of private capital as the engine of development. Lessa tends to see the world the other way around. The 67-year-old former university provost proudly calls himself a "developmentalist" and says the government must take the economic lead by stimulating industrial mergers and blessing those industries that bureaucrats deem "strategic," such as pharmaceuticals and computer technology. Lessa, for example, has never forgiven Ambev Brewery, a Brazilian beverage maker, for merging with a Belgian brewery earlier this year.

Experts agree that the BNDES is important to Brazilian development, ...