By Brian Winter
BRASILIA (Reuters) - When President Dilma Rousseff announced a $65 billion privatization of Brazilian highways and railroads last week, she could hear air horns and furious chanting coming from outside the presidential palace.
"Dilma, why have you abandoned us?" read a hand-made sign held up by one of the several hundred striking public-sector workers who had gathered to demand wage increases.
For anyone who follows Brazilian politics, the juxtaposition was surprising: a left-leaning president from the Workers' Party, which has its roots in the 1980s trade union movement, auctioning off government property to private investors while jilted public servants protested outside.
Yet the scene was no accident. Rousseff has in recent weeks deepened her embrace of the business world while playing hardball with her leftist base, a bold shift she hopes will protect public finances while providing a needed jolt of investment for Brazil's lackluster economy.
Her tactics have heartened many on Wall Street, but they could backfire on several fronts.
While most of the public sector is still functioning normally, strikes by federal police and other workers have sporadically crippled operations at airports and some key ministries. Other areas of the economy, from agricultural exports to public-sector banks to Brazil's preparations for the World Cup soccer tournament in 2014, could be disrupted if the unrest spreads.
Rousseff's approval rating is high at 75 percent, and public opinion appears to be with her rather than the strikers, who already enjoyed healthy raises in recent years. Yet a protracted conflict could put renewed strain on Rousseff's multi-party coalition, which she has struggled to manage since taking office, especially as October municipal elections draw closer.
Senior officials told Reuters that Rousseff is willing to negotiate higher wages within a small margin, but she will go to court if necessary to get striking workers to go back to work.
Meanwhile, Rousseff has said she will announce plans for more concessions to the private sector -- this time, for airports and seaports -- in coming weeks.
"The number-one priority right now is stimulating the economy while controlling inflation," said one aide close to the president. "If you look at our recent actions, we're acting on both fronts."
The confrontation has physically transformed Brasilia's Esplanade of Ministries -- the complex of modernist government buildings designed by famed architect Oscar Niemeyer in the late 1950s. Red flyers with slogans like "Raises, now!" cover many of the buildings, while striking public workers in jeans and T-shirts mill about aimlessly in the parking lots outside.
"Dilma! Dilma! Dilma! Negotiate with public servants!" blares one of the songs played repeatedly over loudspeakers.
"She has no choice but to give us what we want," said Almiro Rodrigues, a federal policeman. "The government says there's no money, but we know that to be false."
TRADITION OF PRAGMATISM
Rousseff's stance does not come as a total shock. During a decade in power, the Workers' Party has practiced a much more pragmatic leftism than ruling parties in Venezuela and Argentina, exercising relative fiscal discipline while also cultivating investment from businesses at home and abroad.
However, her predecessor -- Luiz Inacio Lula da Silva, the Workers' Party founder and a former union leader himself -- was far less shy about spending on public salaries. Brazil's public sector wage bill more than doubled in nominal terms during Lula's 2003-2010 presidency, well outstripping inflation.
Rousseff has been more tight-fisted -- largely out of necessity. A burst of government spending during Lula's final year helped him to secure Rousseff's election victory in 2010, but also left a legacy of heavy inflationary pressure for her to deal with.
Rousseff's current offer to public-sector unions is a wage increase of about 16 percent over the next three years -- which might not even keep up with inflation.
Any raise beyond that could imperil several policy goals, including her quest to drive down interest rates. The central bank's most recent inflation report, published in June, identified wage negotiations as "an important risk" to future price movements.
Whatever raise Rousseff grants to the public sector will serve as a baseline in the private sector, where unions in the oil, automobile and other sectors are also engaged in contentious wage talks for next year.
Complicating matters further, the economy has ground to a near-halt as years of under-investment in infrastructure, and over-reliance on consumer credit as a motor for growth, appear to have finally caught up with Brazil. Growth was just 2.7 percent in 2011, and an even more lackluster 1.7 percent expansion is expected this year.
That backdrop also explains Rousseff's decision to embrace a private concession model as a way to boost infrastructure spending. That decision, more than any other, was seen as heresy by many in the party after Lula spent most of his political career loudly denouncing privatizations made in the 1990s.
Rousseff herself decried privatizations in her 2010 presidential campaign. The topic is so sensitive that the Workers' Party president, Rui Falcão, issued a five-paragraph statement on the night of Rousseff's announcement explaining why it would not result in "scandalous highway tolls" or other repeats of past mistakes.
Still, the decision seems destined to mark a milestone in Rousseff's relationship with big business, which was already reasonably good. Bernardo Figueiredo, a top aide charged with overseeing the infrastructure plan, told Reuters the policy had been designed after extensive consultations with Brazilian business leaders. Wall Street brokerages including Morgan Stanley praised Rousseff for taking measures to stimulate supply rather than focusing primarily on consumer demand.
The reaction from mainstream parties has been relatively muted. That indicates that Rousseff is likely to face little resistance to her upcoming plans to involve private enterprise in airports in Rio de Janeiro and elsewhere -- key to efforts to prepare for the World Cup and the 2016 Olympic Games.
Yet, more broadly, her recent decisions have opened up an opportunity for many politicians -- especially among the wide gamut of parties on the hard left -- to accuse Rousseff of being unfair to some of the country's most powerful unions.
That criticism could become more poignant if the economy fails to pick up in coming months.
"(Rousseff) has a policy of freezing salaries," Ana Luiza Figueiredo, candidate for mayor of Sao Paulo from the far-left party PSTU, said in an interview with local newspaper O Estado de S.Paulo. "She's not negotiating and she's criminalizing workers' movements.
"The Workers' Party is divorcing itself from its history," she said.
(Additional reporting by Alonso Soto in Brasilia and Silvio Cascione in Sao Paulo; Editing by Todd Benson and Kieran Murray)