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