US embassy cable - 05BRASILIA2684

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 002684 
 
SIPDIS 
 
DEPT FOR D, E, EB, WHA/BSC 
NSC FOR SCRONIN 
STATE PLEASE PASS TO USTR FOR MSULLIVAN 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSEN/EOL SON 
TREASURY FOR DAS LEE AND F. PARODI 
 
E.O. 12958: DECL: 10/06/2015 
TAGS: PREL, EFIN, ETRD, ECON, Economic Policy & General Analysis 
SUBJECT: DEPUTY SECRETARY'S MEETING WITH BRAZILIAN FINANCE 
MINISTER PALOCCI 
 
Classified By: Janice Fair, Economic Officer; Reasons 1.4 (b), 
(d) 
 
1. October 6, 2005, 5:00 P.M., Finance Ministry, Brasilia, 
Brazil. 
 
2. Participants: 
United States: 
The Deputy Secretary 
Tom Shannon, Special Assistant to the President and 
   Senior Advisor for Western Hemisphere Affairs 
Ambassador John Danilovich 
Phillip Chicola, Deputy Chief of Mission 
Christopher Padilla, D Chief of Staff 
Janice Fair (notetaker), Econoff 
 
Brazil: 
Finance Minister Antonio Palocci 
Roberto Abdenur, Brazilian Ambassador to the United States 
Joaquim Levy, Treasury Secretary, Ministry of Finance 
Luiz Awazu Pereira, Assistant Secretary for International 
Affairs 
Marcos Galvao, Minister's Chief of Staff 
Paulo Chuc, Foreign Ministry America Desk 
 
3.  (C) Summary. In a cordial one hour meeting on Thursday, 
October 6, Deputy Secretary Zoellick and Brazilian Finance 
Minister Palocci discussed a generally positive regional 
economic scenario, as well as the need to address underlying 
economic problems that have contributed to political 
difficulties in some of the region's more fragile 
democracies.  As a means of pre-empting the rise of populist 
leaders, the Deputy Secretary broached the idea of 
hemispheric leaders mobilizing the Organization of American 
States (OAS) and the Inter-American Development Bank (IDB) to 
implement economic development programs targeting the more 
marginalized segments of society, thereby generating support 
for sound economic management and democracy.  Palocci 
identified legal reforms and improvements in the business 
climate among his priorities for further structural reforms 
in the Brazilian economy and noted international negotiations 
could help speed an opening of the reinsurance sector.  The 
Deputy Secretary described the U.S.-Brazil relationship as 
good, but not developed to its full potential.  Both 
expressed an interest in expanding and deepening the 
bilateral political and economic dialog.  End Summary. 
 
4. (C)  Minister Palocci gave an upbeat assessment of the 
economic outlook for Latin America.  Brazil has reached solid 
economic stability through prudent government policies, and 
enjoys a reduced vulnerability to oil price shocks due to 
private investment and diversification in energy use -- 68 
percent of the autos produced in Brazil can run on ethanol as 
well as gasoline.  The country is now prepared for a period 
of sustained growth, he added.  Palocci noted problems in 
Bolivia, and to a lesser extent in Ecuador, but praised 
Chile, Colombia and Uruguay for implementing policies firmly 
grounded in sound economic principles.  Palocci touched 
briefly on Brazil's economic collaboration with Argentina, 
conveying confidence in Argentine Economic Minister Lavagna, 
but noting difficulties in that country due to incomplete 
reforms, inflationary pressure, and resistance by Argentine 
industrialists to trade liberalization.  Despite good 
economic policies in a number of countries, Palocci cautioned 
that economic adjustments in major economies -- such as U.S. 
Federal Reserve announcements on interest rate changes -- can 
have substantial impact on the region's emerging markets; he 
advocated orderly, transparent and coordinated actions to 
mitigate market disruptions. 
 
5. (SBU)  In response to an inquiry from the Deputy Secretary 
regarding the GoB's agenda for structural reforms, Palocci 
counted among government successes the new bankruptcy law and 
an expansion of credit instruments.  With regard to future 
initiatives, Palocci explained that the creation of 100,000 
jobs per month as a result of economic policy reforms helped 
convince him that traditional labor reform is not as 
important as it was once.  Instead, he believes the emphasis 
should be on legal reforms and other improvements in the 
general business climate which will have a more profound 
impact on economic growth and employment.  Palocci also said 
a successful outcome in the WTO Doha trade negotiations is 
important for advancing economic development throughout the 
world. 
 
6. (C)  Picking up on the trade theme, the Deputy Secretary 
said he believes Brazil, along with China, could emerge as an 
industrial power within 10 years, and noted the importance of 
trade liberalization in the manufacture and services sectors 
for boosting the competitiveness of an increasingly outward 
oriented Brazilian industry.  Palocci responded that Brazil's 
financial services sector is open, and added that a bill is 
in the Brazilian Congress to open the reinsurance sector, 
currently a government monopoly.  He suggested that the 
process for opening this sector could be accelerated as a 
result of international negotiations.  Speaking more 
generally, Palocci shared his impression from recent IMF 
meetings of a more positive climate toward trade among 
developing countries, but added that although there is 
increased willingness on the part of developing countries to 
consider expanded market access for manufactures, the 
expectation remains that developed countries must make the 
first move. 
 
7. (C)  The Deputy Secretary characterized the U.S.-Brazil 
relationship as good, but not developed to its full 
potential, despite the goals we share as the two largest 
democracies in the western hemisphere.  He said part of his 
motivation for coming to Brazil was to seek a deepening of 
that relationship and, in particular, to explore working more 
closely with the GoB on ideas for improving economic and 
political stability in the region.  The Deputy Secretary 
reasoned that economic problems underlie many of the 
political difficulties besieging some of the more fragile 
democracies.  He argued that people must see the benefit of 
economic development policies in their own lives or their 
dissatisfaction will be exploited by populists, such as 
Venezuela's Chavez and Nicaragua's Aleman. 
 
8. (C)  An idea broached by the Deputy Secretary with 
Palocci, and raised earlier with Presidential advisor Marco 
Aurelio Garcia, was to urge the OAS and the IDB to marshal 
and coordinate their resources and expertise for projects 
that focus economic development at the individual level. 
Projects could include micro-lending, property rights for 
indigenous peoples, mortgage financing -- projects which by 
producing concrete results for marginalized citizens would 
help generate support for sound economic management and 
democracy.  The Deputy Secretary suggested that having USG 
and Brazilian officials compare notes and exchange ideas 
about the nexus between political and economic issues would 
be a useful exercise.  He noted that since Luis Moreno and 
Jose Insulza are both relatively new in their positions at 
the IDB and OAS, respectively, now is an opportune time to 
approach them on reassessing the kind of economic assistance 
that would be most useful for bolstering democracy in the 
regions' less stable countries. 
 
9. (C)  Palocci agreed that populism is a problem in Latin 
America, noting the importance of governments such as 
Brazil's, Chile's and Uruguay's in demonstrating that "left" 
does not equate with populist or unsound economic policies. 
Without endorsing the specific idea regarding the OAS and 
IDB, Palocci supported expanding the USG-GoB political and 
economic dialog and thought that Marco Aurelio Garcia would 
as well.  He praised the bilateral Group for Growth 
initiative, launched as a result of the 2003 summit between 
Presidents Bush and Lula, for providing a mechanism for 
substantive exchanges between our economic teams; he thought 
the model could be adopted for discussions of other issues as 
well. Palocci indicated an interest in encouraging the IDB to 
support countries pursuing public-private partnerships by 
helping with evaluation of projects and contracts.  The 
Deputy Secretary took the point further and suggested the 
time is ripe for development banks to reassess their mission, 
focusing more on improving access to information on a wide 
range of issue areas and facilitating implementation of 
economic development policies. 
 
10.  This cable was cleared by the Deputy Secretary's 
traveling party. 
 
Danilovich