By MICHAEL ASTOR
The Associated Press
Wednesday, January 3, 2007; 12:10 AM

RIO DE JANEIRO, Brazil -- President Luiz Inacio Lula da Silva faces the challenges of reinvigorating Brazil's sluggish economy and cracking down on crime under goals he set for his second term.

Silva made the economy and crime the cornerstones of his inauguration speeches Monday. He vowed to increase economic growth that has lagged behind the rest of South America, without sacrificing the social programs that are largely responsible for his high popularity.

But political opposition to needed economic-policy reforms and entrenched criminal gangs will make meeting those goals no easy task, analysts said.

First elected in 2002, Silva, known familiarly as Lula, adhered to strict fiscal discipline and market-friendly policies during his first term, attracting foreign investors, strengthening the currency and curbing inflation.

But Latin America's biggest country has seen only feeble economic growth, reaching 2.8 percent in 2006 and expected to rise 3.4 percent in 2007 _ far below Silva's stated goal of 5 percent.

"If growth were to reach or exceed 5 percent, Lula would be in better position to pursue even more aggressive and successful anti-poverty policies, giving him a splendid legacy in Brazil and even throughout Latin America," said Michael Shifter, Latin America analyst at Inter-American Dialogue research group in Washington.

"But Lula will have a very tough time reaching a higher rate of growth, raising productivity and stimulating investment, unless he carries out thoroughgoing policy reforms," he added.

And while Silva's popularity is high, the fallout from corruption scandals has left him with a weakened governing coalition that may make it hard to muster the three-fifths majority needed to pass constitutional reforms in Congress that could trim the social security deficit and streamline the tax system.

Mark Weisbrot, co-director of the Washington-based Center for Economic Policy Research, said Silva could spur growth without constitutional reforms if he faces down opposition from bankers and bondholders.

"One of the very biggest political challenges for Brazil is to take on political dominance of the financial sector, which currently determines economic policy in Brazil," Weisbrot said. "This is the main reason for the slow growth and slow social progress in Brazil. The financial sector in Brazil, as in any country, is not interested in growth or employment but only in minimizing inflation."

In his first term, Silva appeased financial markets with high interest rates and fiscal discipline while improving the lot of the poor. His Family Allowance program distributed food subsidies to some 11 million Brazilians on the condition they would keep their children in school.

While that program has widely been hailed as a success, lifting an estimated 10 million people out of extreme poverty, Brazil still has one of the world's widest gaps between rich and poor.

Weisbrot said Brazil is unlikely to further close that gap without boosting growth.

"It is very difficult, if not politically impossible, to do much about inequality or other social problems that Lula talks about without much more rapid economic growth," Weisbrot said.

Shifter said Silva's second term likely will also be dominated by security concerns, after gang attacks in Rio de Janeiro left 19 people dead last week. In May, similar violence in Sao Paulo resulted in around 200 deaths.

"The spreading lawlessness in major cities like Rio de Janeiro and Sao Paulo is likely to absorb more of his attention and political capital in the coming administration," Shifter said. "The deteriorating security situation in Brazilian cities and political corruption could prove to be the Achilles heels of Lula's second term."

On Monday, Silva pledged to send in federal troops to help fight the violence in Rio de Janeiro.

He also promised to make education a priority but provided few details.

Riordan Roett, director of Western Hemisphere Studies at Johns Hopkins University, said education is one of Brazil's biggest long-term issues "in terms of the country's competitiveness.

"But it's going to be hard to reverse trends firmly in place," he said. "Because public education is so bad, the middle and upper class have turned to private education. They are not stockholders in supporting public education."

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Associated Press Writer Alan Clendenning in Sao Paulo contributed to this report.