WHA PDAS SHAPIRO'S MEETINGS IN SAO PAULO

UNCLAS SECTION 01 OF 04 SAO PAULO 001038

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR SCRONIN/MSULLIVAN
STATE PASS EXIMBANK
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE
NSC FOR FEARS
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA
TREASURY FOR OASIA, DAS LEE AND JHOEK
SOUTHCOM ALSO FOR POLAD
USAID/W FOR LAC/AA

E.O. 12958: N/A
TAGS: PGOV PINR PREL EINV ETRD SOCI ECON BR
SUBJECT: WHA PDAS SHAPIRO'S MEETINGS IN SAO PAULO

REF: BRASILIA 1996

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY

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SUMMARY
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1. (SBU) During a September 18-21 visit to Sao Paulo to attend the
WHA ELO Conference, WHA PDAS Charles Shapiro met with a series of
experts on questions of foreign policy, international trade, and
socio-economic issues. Private sector representatives painted a
gloomy economic picture, noting the lack of investment needed to
sustain a higher level of growth. Many interlocutors criticized
President Lula's foreign policy as "ideological" rather than
national interests-based. Another complaint was that the government
doesn't consult with the private sector on trade issues, and the
existing consultative mechanisms are inadequate. Representatives of
FIESP made a strong argument for seeking resolution of Doha Round
trade issues and outlined their lobbying efforts in support of
continued GSP benefits for Brazil. Experts on public education
outlined initiatives under way to improve Brazil's badly broken
education system. Ambassador Shapiro was also briefed by a Sao
Paulo state official on federal, state, and municipal cash transfer
programs. END SUMMARY.


2. (SBU) Ambassador Shapiro used his meetings to elicit information
and perspectives on whether Brazil was interested in moving towards
a deeper relationship with the United States culminating over time
in a strategic partnership; the extent to which Brazil as a country
was truly interested in free trade; and the effectiveness of the
government's anti-poverty programs. He met with former Ambassador
to the United States Rubens Barbosa; several Amcham Board members;
the foreign trade director of the Sao Paulo State Federation of
Industries (FIESP); a businessman allied with Lula; and the state
social development coordinator. He also lunched with a group of
experts on foreign policy and trade and another on social
development. In all his meetings, the unfolding "dossier" political
corruption scandal was a topic of lively discussion; most hoped it
would increase the likelihood of a second round to the election, but
most still believed that President Lula would ultimately win.


RUBENS BARBOSA - STRATEGIC RELATIONSHIP POSSIBLE, BUT NOT IN THE
NEAR TERM


3. (SBU) Rubens Barbosa, former Ambassador to the United States
(and Alckmin supporter),believes that there exists a solid
framework for strengthening U.S.-Brazil relations and moving in the
direction of a strategic relationship if the political will to do so
is present, but he doubts it will happen if Lula is re-elected.
Foreign policy, he said, is the area of the greatest difference
between Lula and opposition candidate Geraldo Alckmin, because Lula
has politicized the Foreign Ministry. Brazil's acquiescence to
Venezuela's accession to Mercosul without its first fulfilling the
necessary conditions is an example of GoB mismanagement.
Nevertheless, Barbosa believes Lula is trying to moderate Hugo
Chavez, although the results may not be visible now. While the
U.S.-Brazil relationship has only "small problems," he continued, it
could be much stronger. If Lula is re-elected, the private sector
will put pressure on the government to reopen dialogue with the U.S.
The USG should take the initiative to open up areas of cooperation,
beginning with trade. Unfortunately, he said, the GoB doesn't
consult with the private sector on trade negotiations, and the
official fora for such consultations don't work well. Trade and
investment form the focus of U.S.-Brazil relations, but U.S.
investment in Brazil is down, leading to lower GDP growth rates. In
order for the country to remain competitive and advance, it needs to
grow by 5-7 percent per year, whereas the actual rate is closer to 3

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percent.

AMCHAM - NEED INVESTMENT TO GENERATE SUSTAINED GROWTH


4. (SBU) According to four members of the AmCham Board -- Joseph
Tutundjian, Arthur Vasconcellos, Geraldo Barbosa, and Adhemar
Altieri -- who breakfasted with Ambassador Shapiro on November 19,
Brazil is the most modern country in the region and could act as a
moderating influence on other countries such as Venezuela and
Bolivia, but has not done so. The government is preoccupied with
internal problems. Due to its debt situation and fiscal
constraints, the government is unable to provide the needed
investment, and business is reluctant to invest because of
infrastructure problems, high interest rates, an overvalued
currency, and a low rate of savings. Large companies like Gerdau
Steel are unable to grow more in Brazil and are now investing in the
U.S. and elsewhere. Without growth, Brazil will resemble Mexico, a
large economy but retarded in growth, which aggravates underlying
social tensions. Growth requires investment, and investment
requires tax, social security, labor, and political reforms. Lula
apparently recognizes the need for reform and has been talking about
it in private with businessmen, but not talked much publicly. Four
years from now, Brazil will have to find a capable leader to succeed
Lula, because his Worker's Party (PT) has no apparent candidate.

FIESP - CONCERNED ABOUT GSP BENEFITS


5. (SBU) Roberto Gianetti de Fonseca of the Sao Paulo State
Federation of Industries (FIESP),Brazil's most important and
influential business organization, outlined the organization's
activities in helping combat piracy and lobbying on behalf of
private sector interests. He defended Brazil's position on
agricultural subsidies in the Doha round. FIESP supports free
trade, but its constituency, which includes agribusiness, fears that
if meaningful movement on agriculture is deferred, the opportunity
may be lost. He acknowledged that Brazil needs to amend its
constitution and change its laws to remove protection from some
sectors of the economy, but insisted that agriculture must be part
of the equation. Prospects would be much better if Alckmin were
elected President, but if Lula is re-elected, Gianetti believes Doha
Round negotiations will collapse. He does not believe Lula wants to
undertake reforms. Like Ambassador Barbosa, he believes the GoB
acted irresponsibly in allowing Venezuela into Mercosul. Gianetti
listed two ideas that he thought would improve bilateral relations:
working more closely on Doha Round issues, and cooperation on
developing markets for ethanol. Gianetti was particularly concerned
over what will happen if the U.S. does not renew Brazil's GSP
benefits. FIESP representatives are meeting with key U.S.
Congressmen to urge favorable treatment for Brazil. If Brazil loses
GSP, U.S. companies won't benefit, he asserted, but rather China.

EXPERTS CRITICIZE "IDEOLOGICAL" FOREIGN POLICY


6. (SBU) Ambassador Shapiro attended a lunch hosted by the CG with
former Foreign Minister Celso Lafer, private consultant Mario
Marconini, Ricardo Lacerda of Citibank, and Economics Professor
Roberto Macedo. They asserted that Lula is implementing a leftist
foreign policy to compensate for his orthodox economic policies,
though Lula himself is more conservative than some of his senior
foreign policy officials like Marco Aurelio Garcia and Samuel
Pinheiro Guimaraes. Celso Lafer complained that for the first time
Itamaraty's influence had been diluted with Garcia supplanting the
foreign minister as Lula's most influential foreign policy advisor.
The group was especially critical of Lula's mismanagement of
Mercosul and Venezuela's accession, and his handling of Bolivia.
While they believed that Lula would likely win the election - though
it might require a second round - they noted he will lack a majority
in Congress and will have trouble governing and passing reform
measures. Lula's government has benefited from favorable world

SAO PAULO 00001038 003 OF 004


economic conditions that won't last forever, and could face real
problems over the next four years.

PRO-LULA BUSINESSMAN OFFERS A DIFFERENT VIEW


7. (U) Lawrence Pih, CEO of the large grain milling company Moinho
Pacifico, director of "Businessmen for Lula," and a formerly close
associate of Lula, offered a different perspective. He said that
much of the corruption in Brazilian politics had begun in Fernando
Henrrique Cardoso's (FHC) presidency, and that Lula's government had
been better than FHC's. With respect to the future, Pih
acknowledged that Lula (who he assumes will be re-elected),will
face a difficult situation in Congress, because his party won't have
a majority. Lula's first priority will be to develop a solid base
in Congress, and will then be able to address reforms, especially
political reform. Education will also be a priority. Looking
towards his legacy, Lula will want to make the economy grow faster
and address social inequality, but he will have tough time with the
opposition. Lula, he asserted, wants closer ties to the United
States, but many of the people around him do not. He thinks Lula is
also beginning to see Hugo Chavez and Evo Morales in a different
light, but will wait until after the election to change his approach
to them. Pih acknowledged that Lula has no heir apparent, and that
for Sao Paulo mayor Jose Serra and Minas Gerais Governor Aecio Neves
will compete for the PSDB nomination in 2010, and one of them will
likely be elected president. He commented ironically that on
economic issues, Serra may be more "leftist" (i.e., statist) than
Lula.

BRIEFING ON CONDITIONAL CASH TRANSFER PROGRAMS


8. (U) PDAS Shapiro visited the Sao Paulo State Secretariat for
Social Development and Assistance. There he met with a team led by
Social Development Coordinator Maria Camila de Mendonca, who
oversees all cash transfer programs operating in the state.
Mendonca outlined an interlocking web of social protection programs
operating at national, state, and local levels and aimed primarily
at the poorest individuals and families, those who have low
education levels and limited access to health care. The federal
program, Bolsa Familia, grew out of the Bolsa Escola and three other
programs developed during the administration of Fernando Henrique
Cardoso. This program, which covered 6.7 million families in 2004,
has grown to reach 11 million families. Beneficiaries are required
to keep their children in school and ensure they get vaccinations
and medical checkups. Low-income families are eligible to receive
the equivalent of between USD 10 and 50 per month depending on
family size and number of children in school. The funds come from
the federal government -- beneficiaries receive a card to withdraw
money from the Caixa Economica Federal -- but the program is
administered by the municipalities.


9. (U) Local secretariats for education and health are tasked with
reporting on compliance with conditions. Mendonca said these
reports are often delayed or unreliable; accordingly, it is
difficult to provide effective enforcement. Furthermore, she said
that to date there have been no reliable studies on the extent to
which the transfer programs are effective on moving poor families
out of poverty and into the formal economy. Each of the states has
its own programs to complement Bolsa Familia, as do many
municipalities. These vary considerably in coverage and quality.
Bolsa Familia covers roughly 1.2 million families in Sao Paulo
state. The state's program, Citizen Income, is designed like Bolsa
Familia, with similar conditions, and covers 175,000 families and
provides up to about USD 30 per month, paid out of state-owned Nossa
Caixa. The state's youth action program assists young people
between the ages of 15 and 24 who are out of school or at risk of
dropping out. In addition to these, the city of Sao Paulo also has
a program, Family Action, which currently covers some 30,000
families. Depending on circumstances, some families may benefit

SAO PAULO 00001038 004 OF 004


from more than one program.

PRIVATE SECTOR ENGAGED ON EDUCATION


10. (U) PDAS Shapiro, CG, and Poloffs lunched with several private
sector and NGO leaders involved with education programs and other
initiatives to combat poverty. Norman Gall of the Braudel
Institute, Eduardo Bom Angelo of Brasilprev, and Luiz Norberto
Paschoal of the Educar Foundation outlined the challenges facing
education in Brazil. Too much attention, they said, is devoted to
the university system and not enough to primary and secondary
education. Ideally, five percent of GDP should go to primary and
secondary education where intervention can make a difference, but
the actual figure is much lower. Furthermore, most of the budget
goes to building new facilities and paying salaries, and not enough
to improving quality. Schools in Sao Paulo are overcrowded to the
point that some have to operate in three shifts and on Saturdays.
The result is that many poor students drop out or are unprepared for
university, and the Brazilian private sector suffers from a lack of
educated, well-qualified workers, which ultimately affects
competitiveness.


11. (U) The business community has developed initiatives to improve
the situation. Notably, on September 6, civil society, business,
and government launched the Everyone for Education Commitment, with
a broad range of corporate and civic sponsors and five objectives to
be achieved by Brazil's bicentennial in 2022. In addition, the
Senna Foundation implements initiatives that target children at risk
of failing and helps them overcome difficulties and remain in
school. The Braudel Institute runs reading circles for
disadvantaged children. The AmCham's Institute for Quality
Instruction (IQE) is working to ensure that teachers are better
trained and prepared. In addition to these, the Consulate's PAS
section has organized a project that funds exchanges of school
principals, enabling them to share experiences and techniques.


12. (U) Despite these promising efforts, Paschoal noted that it is
difficult to get the public interested in the debate over improving
the education system. While candidates for public office discuss
education in general terms, they have offered few concrete
proposals. For this reason, federal, state and municipal
governments tend to apply band-aids to the existing system rather
than try to reconfigure it as is needed. Participants expressed
hope that whoever is elected president would appoint a prominent
business leader as Minister of Education. That said, they believed
that private sector involvement in education is greater than
elsewhere in the region.

COMMENT: PATIENCE REQUIRED


13. (SBU) With the exception of Pih, our interlocutors actively
support the opposition. Even so, their analysis was disheartening:
the Brazilian economy cannot sustain growth above 3 percent without
dealing with some very basic structural inefficiencies, public
education is Brazil is a disaster that attracts little interest from
any of the candidates (or the public),and "conditioned cash
transfers" in fact are not conditioned but are programs by the
federal, state and municipal governments to curry favor with poor
voters. The word we heard most often in advising us how to engage
with Brazil was "patience." END COMMENT.


14. (U) This cable has been cleared by PDAS Shapiro and coordinated
with Embassy Brasilia.

MCMULLEN