REVIEW OF A TOUGH SEMESTER AS THE BRAZILIAN

UNCLAS SECTION 01 OF 03 BRASILIA 001750 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: PGOV ECON SOCI BR SUBJECT: REVIEW OF A TOUGH SEMESTER AS THE BRAZILIAN CONGRESS FADES INTO RECESS REF: A. BRASILIA 812 ¶B. BRASILIA 1155 ¶C. BRASILIA 1144 ¶D. BRASILIA 313 ¶E. BRASILIA 1076 1.(SBU) SUMMARY. After a tough and dramatic semester, the first congressional session of 2004 ended on July 13. Despite beginning three weeks early and ending two weeks late, this session's results were modest at best. The Waldomiro Diniz scandal, poor economic results from 2003, and divisive debates over the minimum wage and the term lengths of Congressional leaders created a lack of focus, and Lula and his coalition contributed with several tactical blunders. No major bills were passed this session, though several --including the Bankruptcy bill, Public-Private Partnerships, and the Biosecurity bill-- made significant progress through the legislative wickets. With Brazil's economy apparently on the rebound and political attention now turning towards the October municipal elections, Lula's slipping approval numbers may stabilize or improve in the coming months, but there is no sign that the administration has moved to improve its strategic approach to passing its agenda. END SUMMARY. CONGRESS IN NEAR-CONTINUOUS SESSION SINCE EARLY 2003 -------------- -------------- ¶2. (SBU) The 2004 first semester session of the Brazilian Congress, marked by controversy and high drama, ground to a halt on July 13, two weeks after its scheduled end --this is the third of three recesses that have been truncated during the 52nd Congress. The legislature is now in recess until August 2, but the upcoming session will operate in low gear until the nationwide municipal elections conclude on October ¶31. In 2003, Lula's new government worked hard to pass its keystone pension and tax reform bills. So hard, in fact, that Lula canceled Congress's July recess last year and held the Members in extraordinary session. Thus, by late 2003, Congress was understandably ready for its two-month holiday recess, with many Members planning international travel. Then Lula cut short that recess also, calling Congress into extraordinary session on January 19 in a futile attempt to do some heavy lifting before the scheduled opening on February ¶15. On January 23, Lula reshuffled his cabinet, bringing five Congressmen into the administration, including several from the PMDB party. Lula hoped, vainly as it turned out, that cementing the PMDB's place in his coalition would smooth passage of his priority projects through Congress. SCANDAL SET STAGE FOR ADMINISTRATION DEFEATS -------------- ¶3. (SBU) On February 13, the "Waldomiro Diniz Scandal" broke, in which an advisor to Lula's powerful Chief-of-Staff, Jose Dirceu, was videotaped soliciting bribes from a numbers racketeer. The scandal dominated the headlines for seven weeks. A March 30 disclosure that a prosecutor seemed to be pursuing the case largely for political reasons (ref A) took the wind out of the case, and the government coalition managed to head off calls for a congressional inquiry. By then, however, Dirceu was damaged and the administration's authority in Congress was weakened. The scandal, as well as poor 2003 economic results that were trickling in, reinvigorated the opposition and set the stage for a series of administration defeats. Lula's coalition was also cursed with particularly maladroit Congressional leadership, and the President tarnished his own image by fumbling his response to a critical May 9 New York Times article (ref B). ¶4. (SBU) On May 5, the opposition in the Senate managed to kill Lula's proposal to close bingo parlors, which had been his clearest response to the Waldomiro scandal (ref C). The same day, the opposition initiated a series of maneuvers attacking Lula's small increase in the minimum wage (from R$240 to R$260 per month). By the time the dust settled on June 23, Lula's increase remained intact but the opposition had enjoyed seven weeks of press coverage accusing him of being more interested in IMF fiscal targets than Brazil's working class. Opposition candidates will carry this message into October's municipal elections. SESSION HAD FIREWORKS BUT LITTLE ACCOMPLISHMENT -------------- -- ¶5. (SBU) Thus there were plenty of fireworks this session, and the opposition repeatedly pushed Lula's coalition into a corner. As a result of the time and energy spent on the Waldomiro scandal and the minimum wage debates (as well as a divisive and futile debate over allowing the leaders of Congress to remain in their posts for four years instead of two),Congress failed to pass any of the significant bills on its plate. Some items made progress, while others were simply pushed onto next year's notional calender. In the meantime, congressional leaders complained that Lula was too quick to issue Presidential Decrees (which have the force of law, but require Congressional ratification to remain in force --and which clog the congressional calendar while awaiting ratification). But given the political challenges for Lula to pass his legislation, issuing Decrees offered him a mechanism to move forward on some elements of his agenda. Among the key bills that did not pass: - Biosecurity bill to regulate biotechnology, including GMO soy, which remains illegal here. For the past two years, the GoB has issued waivers allowing farmers to plant and sell their GMO soybeans, but an overdue bill to regulate the sector faces an impasse in the Senate, and another waiver is likely to be issued in the coming weeks to legalize the 2004-05 soy crop. (ref D). - Public-Private Partnership bill to generate funding for infrastructure projects is bogged down in a Senate committee, where there are questions about the bill's accounting mechanisms and impact on city and state budgets. If a deal can be reached, this bill may pass in August. - Judicial Reform to streamline the judiciary. This bill had been stalled by opposition from the Supreme Court Chief Justice who retired in May (ref E). Parts of the text have passed the Senate, but more work remains to be done. - Bankruptcy bill, closely watched by investors, passed both houses but in different forms, so it must now go back to the Chamber for a final vote, possibly in August. - Other legislation, including the final pieces of last year's pension reform and a bill to combat the use of slave labor also failed to pass into law but made progress and could pass by year's end. RECESS GUARANTEED BY MINIMUM WAGE DEAL -------------- ¶6. (SBU) Congress's final act on July 13 was to pass a mandatory, but preliminary, budget piece called the Law of Budgetary Directives (LDO). This year's LDO sparked interest because it includes an amendment that will avert a partisan battle next year over the minimum wage increase. Under the law, next year's minimum wage hike will be indexed to the sum of inflation and per capita GDP growth. The administration was divided over this amendment but eventually acceded. On the one hand it does not wish to have its fiscal hands tied by a pre-fixed minimum wage hike (and indexing was a major culprit in the hyperinflation of the early 1990s). On the other hand, Lula is loathe to endure another bruising battle over the minimum wage. COMMENT - NOWHERE TO GO BUT UP -------------- ¶7. (SBU) The failure of the Brazilian Congress to pass key laws this session was due to a combination of factors that weakened the administration's hand: the Waldomiro scandal, poor economic results, lame whip work in Congress, rebellious coalition partners, and an opposition not only emboldened by these weaknesses, but given incentive to capitalize on them in advance of the October municipal elections. While the session was disappointing to some, it was not an utter failure. It seems likely that the coming months will be a bit better for Lula. Some of the key bills left hanging fire during this recess should pass, and economic statistics suggest improved growth through year's end. One interlocutor noted that Lula's dipping approval numbers could recover as the middle class regains some of the confidence it lost during the first semester's travails, but that the working class --those most affected by stubbornly high unemployment-- may remain disillusioned until employment numbers improve. An economic rebound would give a bounce to the government and strengthen its hand in congress, but there is no sign that the administration has fixed the structural problems in the coalition. The nine main parties in the coalition often do not share legislative priorities nor do they maintain internal discipline on votes --another significant contributing factor to this session's disappointing results. Better tactics and a clearer strategic vision for its agenda would have gone a long way to averting the serial crises of the past few months, yet the administration seems surprisingly inactive in addressing these shortcomings. DUDDY