UNCLAS SECTION 01 OF 03 BRASILIA 002682

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: PGOV PREL ETRD ECON BR OVIP ZOELLICK ROBERT 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 tryi

ng 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