Identifier
Created
Classification
Origin
06SAOPAULO415
2006-04-19 12:49:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Sao Paulo
Cable title:  

WASTED OPPORTUNITIES -- SAO PAULO BUSINESS TELLS A/S WAYNE

Tags:  ECON PGOV PREL ETRD EFIN EINV BR 
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UNCLAS SECTION 01 OF 05 SAO PAULO 000415 

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/BSC
STATE PASS EB/IFD/OMA MOSS
NSC FOR CRONIN

TAGS: ECON PGOV PREL ETRD EFIN EINV BR
SUBJECT: WASTED OPPORTUNITIES -- SAO PAULO BUSINESS TELLS A/S WAYNE
OF GOB'S ECONOMIC INEFFECTIVENESS


SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY

-------
SUMMARY
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UNCLAS SECTION 01 OF 05 SAO PAULO 000415

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/BSC
STATE PASS EB/IFD/OMA MOSS
NSC FOR CRONIN

TAGS: ECON PGOV PREL ETRD EFIN EINV BR
SUBJECT: WASTED OPPORTUNITIES -- SAO PAULO BUSINESS TELLS A/S WAYNE
OF GOB'S ECONOMIC INEFFECTIVENESS


SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY

--------------
SUMMARY
--------------


1. (SBU) E. Anthony Wayne, Assistant Secretary of State (A/S) for
Economic and Business Affairs, visited Sao Paulo April 5-6 to
participate in the World Economic Forum on Latin America. During
his visit, he also had several meetings with Sao Paulo business
leaders, who generally agreed that while the Lula Administration's
macro-economic policy has brought stability and international
respect to Brazil's economy, the GoB has wasted many opportunities
to implement meaningful micro-economic reform. They said government
inaction has prevented business here from taking full advantage of
the global economy, and they do not expect Brazil's economy to reach
higher growth rates under the management of the current government.
END SUMMARY.

--------------
A/S WAYNE MEETS BUSINESS LEADERS
--------------


2. (SBU) While in Sao Paulo for the World Economic Forum's
Roundtable on Latin America (WEF),A/S Wayne met with three groups
of Sao Paulo business leaders to discuss issues of trade, economic
policy, and the state of business in Brazil generally. On April 5,
he met with the president and several directors of the Industry
Center of Sao Paulo State (CIESP),a non-profit trade organization
providing technical, legal and other support services to 9,700
member companies. He had lunch with the presidents of the Brazilian
or Latin American subsidiaries of four multinational corporations,
and with two financial and political risk consultants. The
following day, A/S Wayne met with the leaders of the Sao Paulo
Chamber of Commerce (ACSP),which directly represents 30,000
businesses of various sizes and sectors in metropolitan Sao Paulo
and is part of a network of 150,000 businesses in the state of Sao
Paulo. The meeting was followed by A/S Wayne's speech to the
Chamber on economic ties between the United States and Brazil.

(NOTE: Photos and text of his speech may be found on AMCONSUL Sao
Paulo's Website, linked from the Embassy's Home Page at
www.embaixadaamericana.org.br. END NOTE.)

-------------- ---
A LITTLE LESS CONVERSATION, A LITTLE MORE ACTION
-------------- ---


3. (SBU) A common refrain heard at the meetings between A/S Wayne
and Sao Paulo business leaders was that while the Lula
Administration may have had good intentions over the last four years
regarding macro-economic policy -- and in fact did no damage and
actually fostered stability through consistent policy pronouncements
-- from a broader business perspective, the GoB under Lula has been
largely ineffective in managing the economy.


4. (SBU) CIESP leadership challenged the notion that President
Lula's macro-economic policy has been an effective stimulant for
Brazilian business as a whole. The group acknowledged that Lula's
continuation of his predecessor's orthodox macro-economic policies
has led to stability and trust in the Brazilian economy. However,
they felt very strongly that not nearly enough has been accomplished
at the microeconomic level in Lula's term in office, and many
opportunities for real growth and development have been wasted.
CIESP President Claudio Vaz said that in principle, GoB policies and
rhetoric have been encouraging, but the government itself has been
badly managed and prone to inaction. "We are headless," said CIESP's
Boris Tabacof, when asked by A/S Wayne if there is any debate within
the GoB on matters important to business. Sounding a similar note,
Regina Nunes, President of Standard and Poor's (S&P) Rating Service
in Brazil, said at lunch, "Lula actually did nothing [this term].
He continued good policy, but there was little action on that
policy."


SAO PAULO 00000415 002 OF 005



5. (SBU) Specifically, CIESP leaders said the minimal progress on
structural microeconomic reforms demonstrates that the GoB lacks
real economic vision and follow-through. While it is true that some
important pieces of legislation have been passed, such as a social
security reform bill, in most cases no regulatory or implementing
structures have been created, rendering the laws ineffective.
Business leaders also complained that Lula's Public-Private
Partnerships initiative had produced no tangible results.


6. (SBU) Vaz also said that ideology, not practicality, drives
government action in Brasilia, to the extent that while the GoB
debates heady issues and releases well-worded statements to entice
world interest, there is little on-the-ground progress being made by
Brazilian companies to exploit the global marketplace. For example,
Vaz pointed to the energy sector, where he says the controlling
ministry has been so preoccupied with ideological debates that
Brazil will face energy shortages in the near-future. S&P's Nunes
later corroborated this assessment of Brazil's energy situation by
noting that potential shortages remain a chief challenge to Brazil's
development. Vaz further stated that Brazil has not taken advantage
of the experience and know-how of its counterparts, or of internal
investment opportunities. For example, he said that roughly USD 65
billion in financing has been made available by the Brazilian Social
and Economic Development bank (BNDES) over the last three years, but
only US$45 billion has been tapped, largely because of bureaucratic
hurdles and ideological restrictions embedded in loan
qualifications.


7. (SBU) Franklin Feder, President of Alcoa South America, suggested
that some of the perceived government inaction also has to do with
the increasing democratization of Brazil and the fact that Brazil is
becoming a complex society with a mix of government and
quasi-governmental agencies, non-governmental organizations, and an
active civil society. He said that compared with only a decade ago
or even less, the GoB has "little direct effect on the ground
today." On the other hand, Matthew Jansen, President of Archer
Daniels Midland of Brazil (ADM),said his company is reducing
investments in operations in Brazil, mostly because of the high tax
burden. He seemed to echo the sentiment of CIESP's Vaz that the GOB
has focused its attention in recent years primarily on export volume
at the expense of business in general (see paragraph 10 below).
Jansen said corporations today are facing challenges from government
decisions made 18-24 months ago regarding exports, exchange rates
and taxes. "Regardless of the image of Brazil as FDI (foreign
direct investment)-friendly," said Jansen, "ADM is withdrawing."


8. (SBU) Interestingly, CIESP's Vaz and S&P's Nunes each used the
term "existential" when describing the Lula Administration's poverty
reduction programs. They independently faulted the structure of the
oft-praised "Bolsa Familia" program which, in their words, simply
redistributes wealth by passing cash to some poor people, rather
than making effective investments in economic growth which could
spur employment and other benefits for needy families.

--------------
MARKETS FALL AS THE REAL RISES
--------------


9. (SBU) CIESP President Vaz chaired a frank discussion with A/S
Wayne on the view from the industrial sector of Brazil's recent
economic performance, and on the state of affairs today for large
businesses based in Sao Paulo. Vaz comes from the auto parts
industry, and with him at the table were representatives of
manufacturers of tools, ceramic insulators, electronics, chemicals,
and food products. A/S Wayne noted that while Brazil's general
macro-economic situation has been stable, many Brazil-watchers are
concerned about Brazil's competitiveness in the global economy.


10. (SBU) Vaz replied that many business owners are conflicted over
the GoB's economic policies. He said that while Brazil's general
volume of exports continues to grow, the focus on Brazil's
traditional external sectors has resulted in a steep appreciation of
its currency, the real, which in turn is making it difficult for

SAO PAULO 00000415 003 OF 005


much of the manufacturing sector to compete in global markets.
Three years ago the real traded at 3.7 to the dollar; today the
exchange rate is 2.1 to 1. Vaz said at this valuation of the real,
Brazilian commodity exports such as sugar, soy and oranges remain
competitive, but this exchange rate prices most Brazilian
manufactured products out of key international markets. It was
noted that twenty companies account for 32 percent of Brazil's
exports. So for manufacturers, the exchange rate is a bigger
impediment to growth than Brazil's chronically high interest rates.
Criticizing the Central Bank's implementation of its
inflation-targeting framework, he said that 30 percent of Brazil's
consumer inflation index (IPCA) is determined by non-market price
increases. That is, increases in contract costs as a result of
exchange rate movement, as opposed to fluctuating market prices of
items such as fuel and rent, require the Central Bank to maintain a
tighter monetary policy stance than if the Central Bank targeted a
core inflation index of market prices. The resulting
higher-than-necessary interest rates reduce investment and lead to
exchange rate appreciation, thus limiting Brazilian manufacturers'
export opportunities.


11. (SBU) Tied to the exchange rate challenge is a Brazilian law
requiring companies to convert dollars earned from trade into
Brazilian reals within seven months of earnings. Vaz described how
this requirement stifles longer-term re-investment into product
lines and prevents multinational corporations from integrating their
Brazilian units into their corporate financial structure to
effectively leverage earnings and plan for greater future
investments in Brazil.

-------------- --------------
BOXING BRAZIL: ARE BILATS THE WAY FORWARD ON FTAA?
-------------- --------------


12. (SBU) In all his meetings, A/S Wayne reiterated that the United
States remains interested in the Free Trade Area of the Americas
(FTAA),but that he does not see near-term prospects for successful
negotiations. CIESP leaders and members of the lunch group both
suggested that the only way to move forward on FTAA may be to
negotiate bilateral Free Trade Agreements (FTAs) with enough of
Brazil's neighbors that the GoB feels isolated in South America.
Joseph Tutundjian, Executive Vice President for International
Business at the Verdi Group consultancy, said that while he didn't
like such an approach, it may be that the GOB will not budge on FTAA
until it feels "cornered." He said, "For the government to really
get it, they must feel scared."


13. (SBU) CIESP's Boris Tabacof, a civil engineer, banker, and
entrepreneur in the fields of electronics and chemicals, made
similar comments in the industrial sector meeting, saying he feared
the GoB is moving along a path of de facto economic isolationism.
He pointed to the Lula Administration's "bravado" regarding small
trade agreements with countries like Syria and Mozambique, after
which it is often declared that Brazilian trade with these nations
will double. But, he asked aloud, when the initial trade volume is
only in the hundreds of thousands of dollars, what real effect does
doubling have? Brazil's economy needs billions of dollars in
increased trade, and the GoB needs to view the FTAA and the WTO Doha
Round as viable opportunities. Maurice Costin, Vice President of
CIESP's International Relations department and head of SKF Tools,
lamented that Brazil's economic growth is not keeping pace with the
rest of the world, and the situation will only worsen if Brazil is
"left behind" by U.S. bilateral agreements with Brazil's neighbors.


14. (SBU) Just as CIESP leaders expressed the view that the Lula
administration overall is too driven by ideology as opposed to
pragmatism, Tutundjian opined that ideology plays too big a role in
GOB decision-making on FTAA. By way of example, he described an
effort to gauge the public's support for the regional trade
agreement through a referendum organized by the Catholic Church in
which it was declared that 100 percent of Brazilian Catholics
opposed the FTAA. Tutundjian decried both the concept and the
results - "How can 100 percent of any group of such size agree on

SAO PAULO 00000415 004 OF 005


anything?" He said such efforts demonstrate the extent to which
political and ideological motivations play too big a role in the
GoB's approach to FTAA. Various businesspeople agreed that the
MFA's leadership role in trade negotiations is a problem; they
suggested that a Brazilian version of USTR could lead trade
negotiations with a focus on business, rather than ideology.

-------------- --------------
ALMOST DOHA: BRAZIL READY FOR SECTORAL AGREEMENTS?
-------------- --------------


15. (SBU) Regarding multilateral trade agreements, CIESP's Vaz said
he thinks that the "level of ambition" in FTAA and WTO negotiations
has been too high. He said that even if agreements are eventually
reached, "the book of exceptions will be much larger than the rules
themselves." Vaz suggested that trade negotiators need to "shoot
lower," noting that several of Brazil's industrial sectors are ready
for zero tariffs and that sectoral agreements might be viable.
Tutundjian said that among industrial sectors, Brazil's
petrochemical industry is the most adamantly opposed to the FTAA
because of fear that Venezuela will "trounce" Brazil's industry.
Tutundjian noted that high-value product manufacturers, such as
aircraft manufacturers and paper producers, are amenable to zero
tariffs because they are particularly competitive.

--------------
MERCOSUL: THE BEGINNING OF THE END?
--------------


16. (SBU) When asked by Charge d'Affaires (CDA) about the importance
of Mercosul today, CIESP's Tabacof said the trade organization is
important, but that it doesn't work. Tutundjian said there is no
Mercosul consensus on regional trade, because the member countries
have widely divergent interests. Brazil, for example, has more
industrial interests at stake than Argentina. Vaz noted that if
Brazil wants to re-invigorate Mercosul, it will have to pay a steep
price to reach an accord with Argentina.

-------------- --------------
GROWTH LIMITED BY ENERGY, INFRASTRUCTURE AND EDUCATION
-------------- --------------


17. (SBU) While CIESP's leaders were concerned that Brazil's
economic growth is not keeping pace with other countries' and
worldwide averages, the CEO and analyst group suggested that Brazil
cannot maintain a growth rate anywhere near five percent, mostly
because of a lack of energy supply. Tutundjian said Brazil's
economy might be able to handle a consistent rate of 3.5 to 4
percent, but above that, energy rationing would be inevitable.
Alcoa's Feder admitted that energy supply is one of his company's
greatest concerns in Brazil. Nunes from S&P added that Brazil's
infrastructure needs to be significantly expanded to support
continued economic growth. Infrastructure expansion needs to occur
simultaneously with economic expansion, and Nunes doubts that Brazil
can achieve the needed levels of public improvement to support a
growth rate of five percent or higher.


18. (SBU) In addition to energy and infrastructure shortfalls, Nunes
said education is the other chief inhibitor to Brazil's development.
In response to CDA's suggestion that Brazil also suffers from a
shortage of skilled labor, Nunes noted that there are plenty of
college graduates, but the quality of their education is
insufficient for the modern marketplace. Enrique Usher, President
of Motorola South America, said all companies need to work
continually with universities and secondary schools to form
partnerships and programs to adequately prepare Brazilian youth for
the workforce. He suggested that very soon Brazil will see
qualified Argentineans coming here to fill high-tech jobs.

--------------
COMMENT: BRAZIL'S ECONOMY COMING UP SHORT
--------------


SAO PAULO 00000415 005 OF 005



19. (SBU) While Brazil's burdensome tax rates, high interest rates,
and cumbersome bureaucracy are well-known, even to the extent that
"custo Brasil" (Brazil-cost) is part of the Latin American business
lexicon, it's also clear, as described in these meetings with A/S
Wayne, that much remains to be done on the microeconomic agenda as
well. Despite a 2005 liberalization which extended the amount of
time exporters have to convert their dollars into reals, the
requirement to convert foreign exchange remains on the books which,
combined with the rising value of the real, is creating
disincentives for some investment in Brazil. Other recent
indicators show Brazil's economy lagging: on April 11, the National
Confederation of Industries (CNI) ranked Brazil 22nd among 23
nations in terms of growth in their annual average rate of
productivity so far this decade (2001-2004). Brazil ranked fourth
from 1996 to 2000, and sixth from 1991 to 1995. The ongoing
challenges of energy, infrastructure and education will limit
industrial productivity growth and consequently continue to limit
Brazilian industry competitiveness in the global marketplace. In
this election year, the probing questions are whether the GoB in a
second Lula term would take a more active, interventionist approach
to economic development, and what changes, if any, should be
expected in the event leading opposition candidate Geraldo Alckmin
is the next President. A specific discussion of the business
leaders' impressions of Alckmin versus Lula follows septel. END
COMMENT.


20. (U) This cable was coordinated/cleared with Embassy Brasilia and
with EB A/S Wayne.

MCMCULLEN