US embassy cable - 05BRASILIA2682

UNCLAS SECTION 01 OF 03 BRASILIA 002682 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958:  N/A 
TAGS: PGOV, PREL, ETRD, ECON, BR, OVIP (ZOELLICK ROBERT), Bilateral Relations with the US 
SUBJECT: DEPUTY SECRETARY'S ROUNDTABLE WITH BRAZILIAN 
OPINION MAKERS, THURSDAY, OCTOBER 6, 3:30 PM, AMBASSADOR'S 
RESIDENCE 
 
SENSITIVE BUT UNCLASSIFIED - PROTECT ACCORDINGLY. 
 
1.(U) Ambassador hosted a roundtable for the Deputy 
Secretary with a range of opinion makers from the private 
 
SIPDIS 
sector, academia, civil society, and government.  Topics of 
discussion included the current political crisis in Brazil, 
U.S.-Brazil relations, prospects for political and economic 
reform, and Brazil's role in South America. 
 
2.(U) Participants: 
 
 
 
Carlos Pio, Political Scientist, University of Brasilia 
David Fleischer, Political Analyst 
Edison Garcia, CVM (Brazil's SEC equivalent) 
Ellen Gracie Northfleet, Supreme Court 
Emerson Kapaz, Economist 
Helio Magalhaes, American Express and Sao Paulo AmCham 
Paulo Octavio, Senator 
Raul Velloso, Economic Consultant and Rio AmCham 
Ambassador Rubens Barbosa 
Sidney Levy, ABNC and Rio AmCham 
Arthur Vasconcelos, Sao Paulo AmCham 
 
Also present were Joel Brinkley of the New York Times and 
Carol Giacomo of Reuters.  The conversation was on 
background. 
 
3.(SBU) The Deputy Secretary began by posing a series 
of questions:  What does the current turmoil mean for the 
economy?  How does it affect prospects for political and 
economic reform?  What are the most important issues facing 
Brazilian foreign policy today and in the near future, 
especially with respect to South America? 
 
4.(SBU) Rubens Barbosa, former Ambassador to the U.S., 
expressed the view that relations between the U.S. and 
d 
Brazil had been generally good for more than five years, 
but they reached a peak with the June 2003 state visit by 
President Lula to the U.S.  Since then there have been some 
missed opportunities.  Working Groups created in various 
areas haven't advanced.  Lula wants to change the direction 
of Brazil's trade policy, but this bold aspiration will not 
be realized because it doesn't coincide with the goals of 
the private sector.  The business community sees the 
government politicizing the trade agenda and focusing on 
areas that are not producing concrete results.  Brazil is 
currently trying to expand its role in South America, as 
illustrated by its leading role in creating a Commonwealth 
of South American Nations and attempting to establish an 
Andean-Mercosul free trade area.  The U.S. has devoted less 
attention in recent years to South America, according to 
Barbosa, opening a space for Brazil to act.  Fortunately, 
Brazil's interests generally converge with those of the 
U.S. 
 
5.(SBU) One of the private sector representatives took 
up the question of the political crisis.  The failure of 
the political turmoil to have an adverse effect on business 
is striking.  It demonstrates that the business climate is 
less dependent than it used to be on the political 
situation or the actions of the government.  Furthermore, 
the business community, with its greater autonomy, can act 
independent of government to try to improve the business 
climate.  There is broad consensus within the private 
sector on what steps need to be taken to improve business 
conditions and enhance opportunities for trade.  There is 
also a growing sense that the government is unlikely to 
move forward on reform under current circumstances.  This 
was evident at the recent plenary meeting in Washington of 
the Brazil-U.S. Business Council.  Business is good, and 
companies are making money here.  And despite the political 
crisis, the currency is actually strengthening and interest 
rates are starting to go down.  This has never happened 
before and is a tribute to the strength of the economy. 
 
6. (SBU) The Deputy Secretary listed a few of the 
recurring themes he has heard from visiting CEOs on doing 
business in Brazil:  It's great if you have established a 
niche, but when you're just starting out it's very 
difficult to break in.  There are many regulatory 
obstacles, especially in the services sector.  Brazil still 
hasn't learned to welcome foreign investors the way many 
other countries do. 
 
7.(SBU)  Participants agreed that Brazil needs to 
strengthen its commitment to market reform.  Some in the 
business community still fear foreign competition.  Brazil 
has historically focused on its producers, not consumers. 
It needs to move away from a mindset of government 
intervention, subsidies, and protection, and break the 
habits of non-market thinking.  Two years ago the 
Federation of Industries of Sao Paulo State (FIESP) openly 
y 
broke with the government over its approach to the Free 
Trade Area of the Americas (FTAA).  That was an important 
first step. 
 
8.(SBU) Another participant raised the issue of the 
informal economy and gray market activity as a huge problem 
for legitimate business.  Piracy, counterfeiting, and 
contraband of all sorts thrive in the informal economy, 
where prices are 30 to 50 percent less than in the formal 
economy.  The business community needs political reform in 
Brazil in order to combat this problem.  The economy may 
continue to grow despite the government, but won't grow 7-8 
percent per year as it might with a better business 
climate.  To fulfill Brazil's potential, the government 
must pass and implement tax reform, fiscal reform, pension 
reform, political reform, and labor reform.  These measures 
will be very difficult for Congress to approve.  Some 
require amending the Constitution, which requires a three- 
fifths majority in both houses in two separate sessions. 
 
 
9.(U) The Deputy Secretary observed that Brazil is 
fortunate to have in place democratic institutions strong 
enough to pull it through the crisis, but asked how these 
reforms could be made to happen.  The answer from the 
roundtable was that a new government after next year's 
election, with a new agenda, and a newly elected Congress, 
might be able to take on the challenge.  But it will be 
necessary to connect the reforms to better growth, lower 
interest rates, and other concrete and tangible benefits in 
order to sell them.  Brazil has solved its inflation 
problem and now has a functioning exchange rate regime. 
The country has made progress on the fiscal side and has 
demonstrated it can elect a leftist government and continue 
to enjoy good macroeconomic policy.  But debt remains a 
trap because it leads to high interest rates and short 
maturities, leaving Brazil with a high sensitivity to 
internal and external shocks.  Passage of the contemplated 
reforms would help correct this problem and overcome fear. 
 
10.(SBU) Political analyst David Fleischer outlined all 
the challenges a new government will face in trying to move 
forward on the reforms.  The Presidential system is based 
on coalitions, and the government will have to put together 
a coalition of six parties or more and try to hold it 
together.  This could pose a serious governability problem. 
Others pointed out that there also needs to be a 
technocratic consensus around the reforms and support from 
the judiciary. 
 
11.(SBU) Barbosa stressed the "sea change" that has 
occurred in Brazil in the past fifteen years.  This is no 
longer a controlled economy.  The government's role has 
been sharply reduced, in part because the government no 
longer has the funds to invest in the economy, leaving the 
way clear for the private sector.  There has been 
substantial privatization and deregulation.  Huge 
opportunities exist for foreign companies willing to 
o 
invest.  Tariffs have been reduced significantly and 
exports have been stimulated.  But one major remaining 
obstacle to trade is logistics.  As of now, Brazilian 
products are competitive until they leave the factory door, 
and will be more so if the reforms are enacted, but the 
state of roads and ports remains a serious problem, as do 
the inefficiencies and bureaucracy of the government.  The 
President is always powerful in the first months of a new 
administration, and if the business community can make the 
Congress understand what is at stake, perhaps the reforms 
can be enacted. Something must be done to alleviate the tax 
and other burdens placed on business.  If the reforms can 
be passed and implemented, the gains in competitiveness 
will be enormous. 
12.  (SBU) The Deputy Secretary reiterated that the U.S.- 
Brazil bilateral relationship remains good, with lots of 
cooperation.  No one should underestimate the importance of 
what Lula has done: He came from the left, followed a 
democratic path, eventually persevered, and is now pursuing 
a responsible macroeconomic policy.  Brazil now needs to 
break through traditional barriers and become fully 
integrated into the global economy, as China and India are 
doing.  Brazil is moving, but others are moving faster. 
Some in Brazil see things through traditional lenses; the 
country and its leaders may need to develop more 
confidence.  He expressed hope that the confidence shown by 
the private sector may filter through to government 
leaders. 
 
13.(U) This message was cleared by the Deputy Secretary's 
party. 
 
DANILOVICH