Identifier
Created
Classification
Origin
05BRASILIA2628
2005-09-30 20:18:00
CONFIDENTIAL
Embassy Brasilia
Cable title:  

SCENESETTER CABLE FOR VISIT OF THE DEPUTY SECRETARY

Tags:  OVIP PREL ECON PGOV ETRD BR US 
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C O N F I D E N T I A L SECTION 01 OF 04 BRASILIA 002628 

SIPDIS

FOR THE DEPUTY SECRETARY

E.O. 12958: DECL: 09/30/2015
TAGS: OVIP PREL ECON PGOV ETRD BR US
SUBJECT: SCENESETTER CABLE FOR VISIT OF THE DEPUTY SECRETARY

Classified By: CDA PHILLIP CHICOLA, REASONS 1.4 (b) AND (d)

C O N F I D E N T I A L SECTION 01 OF 04 BRASILIA 002628

SIPDIS

FOR THE DEPUTY SECRETARY

E.O. 12958: DECL: 09/30/2015
TAGS: OVIP PREL ECON PGOV ETRD BR US
SUBJECT: SCENESETTER CABLE FOR VISIT OF THE DEPUTY SECRETARY

Classified By: CDA PHILLIP CHICOLA, REASONS 1.4 (b) AND (d)


1. (SBU) The United States Mission in Brazil warmly welcomes
your planned October 5 to 7 visit to Brasilia. Ambassador
Danilovich will meet you upon arrival the evening of October

5. The next day, we have scheduled meetings for you with
Foreign Minister Amorim, Finance Minister Palocci,
Presidential International Affairs Advisor Marco Aurelio
Garcia, and Senate leaders. We have also scheduled you to
announce the 2006 selections for the Mission's Youth
Ambassador's program, to meet with the press and to
informally meet and greet Embassy direct-hire personnel. The
meeting request with President Lula is still pending.


2. (SBU) Your visit comes in the wake of a series of meetings
in Washington between Brazilian cabinet ministers and their
USG counterparts the week of September 25. Foreign Minister
Amorim met with Secretary Rice, USTR Portman, and yourself.
Trade Minister Furlan, in town for the annual Brazil-U.S.
Business Council meeting, met with Secretary Gutierrez, USTR
Portman, and Secretary Bodman. Finance Minister Palocci, in
Washington to attend the Bank/Fund meetings, met with
Secretary Snow. And Environment Minister Silva attended a

SIPDIS
bilateral meeting on environmental issues.

THE BILATERAL RELATIONSHIP
--------------


3. (C) While relations between the U.S. and Brazil are
friendly, often the USG encounters major difficulties in
gaining the cooperation of senior policymakers on issues of
significant interest to the United States. Eager to assert
its own influence, the Brazilian government shies away from
cooperation with the USG - unless it can clearly be
characterized as a reciprocal exchange among equals. Indeed,
hyper-sensitivity on issues viewed as infringing on Brazil's
sovereignty can get out of hand and may be seen as signs of
political immaturity. Many Brazilians believe the U.S. has
designs on the Amazon. Our fingerprinting of visitors to the

U.S. drew reciprocal treatment for Americans here; visa and
immigration issues remain sensitive points.


4. (C) During recent months, our ongoing dialogue with the
Brazilians has focused on a variety of potentially useful
projects for both sides. We sought to interest the GOB in a
Defense Cooperation Accord, but the Foreign Ministry rejected
the proposal even though the Defense Ministry was supportive.
Gaining agreement on privileges and immunities to be granted
U.S. servicemen engaging in military exercises has been just
as tough sledding, as the Foreign Ministry saw it as "a foot
in the door" and linked it with Brazil's strong opposition to
Article 98 agreements. While we seek to get the GOB to move
forward with an agreement governing space launches at the
country's equatorial base at Alcantara, our pleas are met
with silence even as Brazil has executed space-related
agreements with Ukraine and others. On trade issues, when
unscripted, President Lula has characterized the FTAA as "off
his agenda." IPR is another sore point, as it has become
clear that the USG and the Brazilian government have
differing views on the protection to be afforded to
intellectual property. Only after gargantuan efforts have we
gotten the GOB to turn the corner on copyright piracy and
(apparently) persuaded policymakers to seek negotiated
solutions on compulsory licensing of AIDs anti-retrovirals.



5. (C) However, all our conversations are not difficult.
At the personal level, Lula has met President Bush several
times and the two have a good rapport. On issues involving
matters perceived as technical in nature - i.e., law
enforcement and science (but not the environment or
counter-terrorism) - the GOB is eager to engage. For
example, from 2003 to 2004, the GOB worked quietly with us on
the timing and details of its shoot-down program to
accommodate our statutory requirements (although now a new
crop of GOB bureaucrats appears to be unaware of the
government's past promises). Foreign Minister Amorim's
statements to the press in the wake of his September 26
meeting with you, i.e., to the effect that Brazil would seek
as a deliverable during the upcoming POTUS visit intensified
bilateral dialogue on scientific, education, and
environmental issues, reflect this desire to cooperate only
on matters of marginal interest to the U.S.


6. (C) On development assistance issues, our dialogue is
positive - but still constrained. Despite lackluster
results, the Brazilian government's multi-billion dollar
poverty alleviation program - Zero Hunger - receives
substantial funding from the World Bank and the IDB. Given
USG budget constraints and the fact that Zero Hunger is, in
essence, a cash transfer program, USAID support has been
limited. Instead of focusing on cash transfers to the poor,
USAID has sought to target its efforts towards promoting
sustainable livelihoods - inter alia, through working with
small and medium-sized enterprises. PA's Youth Ambassador
program takes a similar targeted approach. This difference
in focus, broad cash transfers versus targeted assistance,
ends up putting the USG at the margins of Brazil's overall
anti-poverty efforts.

FOREIGN POLICY
--------------


7. (C) In large part due to Brazil's ambivalence towards the
United States, President Lula has run an activist foreign
policy with a focus on South America and the Third World,
seeking to forge alliances with other mid-sized powers (South
Africa, India, etc). He has traveled extensively in pursuit
of a higher international profile for Brazil. Despite
prodding from the USG and others, Lula has refused to condemn
Cuba for human rights violations and, in fact, has pushed for
Cuban membership in the Rio Group. Brazil has also advocated
a Cuba-Mercosul trade pact. In addition, the GOB has worked
to increase both its economic and political ties with
Venezuela. Enhanced integration of the two countries' energy
sectors is high on its agenda. Lula has been especially
solicitous of Chavez. During the September 29-30 South
American Community of Nations Summit in Brasilia, Lula
praised the Venezuelan President's democratic credentials
("if anything, Venezuela has an excess of democracy") and
declared that the Chavez government had been demonized by its
foes. We understand that the Lula administration even paid
for the transportation costs of Brazil's youth contingent
attending the recent Bolivaran Youth Festival in Venezuela.
Given all this, it would be unrealistic to expect Brazilian
activism in support of Venezuelan democracy.


8. (C) In the face of declining inter-bloc trade, Brazil has
sought to revitalize Mercosul. It has pursued Mercosul-USG
trade talks, an effort seen by many as a way to delay/derail
the FTAA process. Indeed, given its size and natural
resources, Brazil has long seen itself as the natural leader
of the region (even though that perception is not shared by
many of its neighbors).


9. (C) Emblematic of Brazil's efforts to gain greater
standing on the world stage is its tenacious pursuit of a
permanent UN Security council (UNSC) seat. Brazil and other
G4 states (India, Germany, Japan) are, despite recent
setbacks, continuing to press their campaign for a vote on a
resolution on UNSC reform. This stance is at odds with the
position of many Latin American countries, including those
which Brazil believes should follow its "natural leadership."



10. (C) Brazil has long seen international fora as a way to
enhance its international stature. Reflecting this, in 2005
it launched failed national candidates for the top jobs at
both the WTO and the IDB. The failure of both, together
with the unlikely prospects for a permanent seat in the UNSC,
has widely been seen in Brazil as a "political" disaster
created by a badly designed foreign policy.

PRESIDENT LULA
--------------


11. (C) President Luiz Inacio Lula da Silva was inaugurated
in January 2003 after a career as a Sao Paulo metalworker and
labor leader. He founded the left-of-center Workers' Party
(PT) in 1980 and lost three presidential campaigns before
winning in the October 2002 elections. Lula is eligible to
run for reelection in October 2006. Elected in large part on
promises of promoting an ambitious social agenda, including a
"Zero Hunger" program, Lula's government has failed to
deliver much in this area, as managerial shortcomings and the
need for fiscal restraint have limited progress. The
public's top concern -- crime and public security -- have not
improved under this administration


12. (C) In recent months the Lula Administration has been
beset by a grave political crisis as interlocking influencing
peddling/vote-buying scandals linked to important elements of
Lula's PT party continue to unfold. The crisis has placed
Lula on the defensive and caused near paralysis in the
congress and the executive branch. Politics have become
dominated by investigations, accusations and revelations. The
President's Chief of Staff resigned his post, and he and
several other congressmen are the subjects of investigations
and expulsion proceedings owing to bribery allegations.
However, influential Finance Minister Palocci appears
entrenched, despite recent corruption allegations against him
-- which he has forcefully denied. Thus far Brazilian
society -- including the opposition -- seems disinclined to
hold Lula personally responsible for the scandals or press
for impeachment proceedings. However, the breadth of the
crisis and the continuing revelations have created a domestic
political environment that is fluid and unpredictable.
Indeed, some rumors link the President directly to the
scandal. Lula's popularity has been badly damaged, with
recent polls suggesting he could lose his re-election bid
should he pursue it in 2006.

MACRO-ECONOMIC DEVELOPMENTS
--------------


13. (C) President Lula and his economic team have implemented
prudent fiscal and monetary policies and pursued necessary
microeconomic reforms. As a result, Brazil's economy, aided
by a benign international environment, is having another
solid year. GDP growth of 4.9% in 2004 has coupled with
booming exports, healthy external accounts, inflation under
control, decreasing unemployment and reductions in the
debt-to-GDP ratio. In recent months, the real has risen
sharply against the dollar and the Sao Paulo Stock Exchange
(BOVESPA) has hit record levels. In March 2005, the
Brazilian government declined to renew its Stand-by Agreement
with the IMF and in mid-July it announced that it would pay
early US$5.12 billion in Standard Reserve Facility payments
due by March 2006.


14. (C) Overall, while Brazil has made considerable progress,
problems remain. Despite registering its first year-on-year
decline in 2004, Brazil's (largely domestic) government debt
remains high, at 52% of GDP. Real interest rates (at more
than 13 percent) are among the highest in the world. Income
and land distribution remain skewed. Investment (including
FDI) is low. The country's sovereign risk ratings are, in
general, three to four levels below investment grade. And
the informal sector constitutes between 35 to 40 percent of
the economy, in part because the tax burden (nearly 38
percent of GDP) is so high. The good new is that, so far,
the uncertainty surrounding the political scandal has neither
retarded economic growth or frightened away foreign investors.


15. (C) Sustaining high growth rates in the longer term
depends on the impact of President Lula's structural reform
program and efforts to build a more welcoming climate for
investment, both domestic and foreign. In its first year,
the Lula administration passed key tax and pension reforms to
improve the government fiscal accounts. Judicial reform and
an overhaul of the bankruptcy law, which should improve the
functioning of credit markets, were passed in late 2004,
along with tax measures to create incentives for long-term
savings and investments.


16. (C) Public-Private-Partnerships, a key effort to attract
private investment to infrastructure, also passed in 2004,
although implementation of this initiative still awaits
promulgation of the necessary regulations. Labor reform and
autonomy for the Central Bank are on the agenda for 2005 but
look increasingly unlikely to be addressed this year.
Despite this well-considered reform agenda, much remains to
be done to improve the regulatory climate for investment,
particularly in the energy sector; to simplify tortuous tax
systems at the state and federal levels; and to further
reform the pension system. Given the current focus of
Congress on the political scandal, prospects for much of this
reform agenda are dim for the remainder of Lula's term.

TRADE POLICY
--------------


17. (C) To increase its international profile (both
economically and politically),the Foreign Ministry
(Itamaraty) is seeking expanded trade ties with developing
countries, as well as a strengthening the Mercosul customs
union with Uruguay, Paraguay and Argentina. In 2004,
Mercosul concluded free trade agreements with Colombia,
Ecuador, Venezuela and Peru, adding to its existing
agreements with Chile and Bolivia to establish a commercial
base for the newly-launched South American Community of
Nations. This year Mercosul is pursuing free trade
negotiations with Mexico and Canada and hopes to be able to
resume trade negotiations with the EU. The trade bloc also
plans to launch trilateral free trade negotiations with India
and South Africa, building on partial trade liberalization
agreements concluded with these countries in 2004. China has
increased its importance as an export market for Brazilian
soy, iron ore and steel, becoming Brazil's fourth largest
trading partner and a potential source of investment. As
many Brazilian observers have indicated, all this effort is
aimed at countries which together represent less than a third
of Brazil's foreign trade.

DOHA AGENDA - WTO
--------------


18. (C) Brazil leads the G-20 group of developing countries
that is pressing for agricultural trade reform in the WTO
Doha Development Agenda negotiations. Brazil's assertive
leadership of the G-20 was blamed in some quarters for
causing the failure of the WTO Cancun Ministerial in
September 2003. Since then, Brazil has been more
constructively engaged in the Doha Round as a member of the
"Five Interested Parties" informal group, although many of
its positions are still at odds with U.S. interests. Brazil
can be expected to maintain its assertive stance in the Doha
Round on agricultural trade reform while taking more
defensive postures in the discussions covering industrial
products and services.

FREE TRADE OF THE AMERICAS - FTAA
--------------


19. (C) As indicated above, the Lula Administration shows
no serious interest in pursuing the FTAA. Despite serving as
co-chair and having secured in the November 2003 Miami
meeting a new framework for negotiation, Brazil has shown no
inclination to move the process along and has failed to
convoke the next FTAA Ministerial - which is now overdue.


CHICOLA