ALCKMIN UNVEILS GOVERNMENT PROGRAM

UNCLAS SECTION 01 OF 05 SAO PAULO 000734

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR FOR 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 DDOUGLASS
DOL FOR ILAB MMITTELHAUSER
SOUTHCOM ALSO FOR POLAD
USAID/W FOR LAC/AA

E.O. 12958: N/A
TAGS: PGOV PREL PINR ECON ETRD BR
SUBJECT: ALCKMIN UNVEILS GOVERNMENT PROGRAM

REF: (A) SAO PAULO 573; (B) SAO PAULO 316

SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY

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SUMMARY
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1. (SBU) The opposition PSDB government program unveiled at the
party's June 11 national convention cannot be characterized as a
page-turner, but it contains a number of interesting proposals and
initiatives. Its centerpiece, as is to be expected under the
circumstances, is economic development and growth with more
opportunity and a reduction of regional disparities. These goals
are to be achieved via lower taxes and more investment. For all his
talk of "management shock" and "capitalist shock," the party's
presidential candidate, former Sao Paulo Governor Geraldo Alckmin
appears to see an active role for the state in promoting
entrepreneurship, development, and growth, and directing resources
so as to reduce inequality. He is perhaps on strongest ground when
criticizing Lula's foreign policy, but his own proposal for
"sovereign integration" is not elaborated in much detail. Alckmin's
supporters regularly cite his record of accomplishments as Governor
of Sao Paulo (and his consistently high approval ratings) as an
example of the kind of leadership he would bring to the national
government. That record, while not spectacular, contains a number
of important achievements. What remains unclear is how Alckmin's
ability to provide good, clean government - his much-touted "Ethics
and Efficiency" - would play on the national scene.


2. (SBU) At this moment, the question seems almost academic, as he
continues to trail President Lula in the polls by a wide margin.
The most recent poll, released June 30 by Datafolha, offers Alckmin
some hope, as he is shown trailing Lula by "only" 17 percentage
points, 46 to 29 percent. A "Vox Populi" poll also published June
30, shows Lula's lead falling from 26 percentage points to 13 (45
percent for Lula to 32 for Alckmin). This is an improvement and, if
nothing else, may diminish the aura of inevitability that was
beginning to grow around Lula's re-election prospects. Still, even
the new Datafolha poll shows Lula poised to win in the first round
(with 54 percent of the valid votes to Alckmin's 35),and many of
Alckmin's own supporters acknowledge that he has run a lackluster
campaign and failed to get the voters' attention. Alckmin is
described by many who know him as a cautious, risk-averse
politician, though he demonstrated considerable determination and
boldness in winning the PSDB nomination away from front-runner Jose
Serra (ref B). He may find that his best chance in this election is
to try something bold and unexpected to shake things up; otherwise,
although we agree with the pundits who insist that "anything is
possible," at this point, it is difficult to see how he can overtake
Lula. END SUMMARY.

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THE RECORD - FINANCIAL MANAGEMENT
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3. (U) According to statistics published by the Sao Paulo state
government, when Alckmin was elected Lieutenant Governor of Sao
Paulo on the ticket with the late Mario Covas in 1994, the state's
finances were in ruins, due largely to years of mismanagement (some
say corruption as well) by Governors Orestes Quercia (1987-90) and
Luiz Antonio Fleury Filho (1991-94). The fiscal deficit reached
25.6 percent of budgetary receipts in 1993 and 21.7 percent in 1994.
By 1996, Governor Covas had the budget balanced, and he and
Alckmin, who succeeded him as Governor in 2001, have run small
surpluses ever since. Alckmin and his handlers have worked
energetically to portray Alckmin as the protege and political heir
to Covas, who died of cancer in March 2001 and is treated in

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Brazilian Social Democracy Party (PSDB) circles as an infallible
patron saint, and to credit him with the major accomplishments and
achievements of the Covas period, which many look back on as a
golden era. How much credit Alckmin actually deserves for helping
to put Sao Paulo on a sound fiscal footing is difficult to judge at
this remove; however, it is clear that his management over the past
five years has promoted stability and predictability in the state's
public finances.

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TAX REDUCTION AND COST CONTROL
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4. (U) Alckmin also takes credit for a tax reform at the state
level, citing significant reductions in the ICMS (tax on the
circulation of goods and services - rough VAT equivalent) in certain
key sectors of the economy. In his campaign platform, he calls for
"doing away with many contributions and taxes and creating a simple
tax system to de-bureaucratize, reduce costs, and make life easier
for business enterprises." He notes that Brazilians pay "almost 40
percent of GDP" in taxes but do not receive corresponding government
services. (NOTE: The figure was 36.5 percent in 2005 and has been
growing steadily for almost twenty years. END NOTE.) He believes
it is possible to "cut irrelevant expenditures, reduce the weight of
useless public apparatus, define priorities in the allocation of
resources, and make society's money deliver. To the extent that
costs are rationalized, the tax burden will be decreased,
contributing to stimulate growth yet more."

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GROWTH AND TRADE
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5. (U) Alckmin inherited the governorship of Sao Paulo in 2001, a
year when the state's nominal GDP contracted by almost 15 percent
due in large part to the Argentine economic crisis, which deprived
Brazil of a major export market. In any given year, Sao Paulo
state's GDP represents between 30 and 35 percent of Brazil's total
GDP. It contracted further in 2002 but then began growing,
achieving the figure of slightly over USD 190 billion in 2004
(economic statistics for 2005 broken down by state are not yet
available). During Alckmin's tenure as Governor, the economy grew
at an average rate of 3.6 percent, considerably more than the
national average. He is especially proud of the fact that total
state exports grew from USD 20.62billion in 2001 to 38 billion in
2005, and increse of more than 84 percent. As is the case withGDP, Sao Paulo generally accounts for between 30 an 35 percent of
Brazil's total exports. In 2005,as in previous years, the U.S. was
the major desination of the state's exports, accounting for 23
percent, followed by Argentina, Mexico, and Chile

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MICRO-ENTERPRISE
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6. (U) An important component of the PSB program involves fixing
the economy on the micro level. It calls for assisting small and
medium-sized enterprises by "de-bureaucratization and reducing
encumbrances, and promoting access to credit and to services in
general," and recognizes the need to "promote the competitiveness of
small businesses and feed the immense potential of wealth generation
and income distribution of micro- and small enterprises." The
platform, however, offers few details about how about how an Alckmin
administration would achieve these results.

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SOCIAL PROGRAMS
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7. (U) In the area of social programs, Alckmin is going to have a
difficult time competing with Lula. As has been widely reported,
shortly after taking office, Lula fused several existing
anti-poverty programs into one and gave it the name "Bolsa Familia."
His supporters assert he gave the programs sound management and a
consistent implementation that was previously lacking. Critics
contend he relaxed eligibility requirements and turned the program
into a political cash cow. The Lula administration announced June
28 that the number of participants, 3.6 million families in 2003,
has grown to 11.1 million this year. The program has been an
enormous political boon to President Lula, whose name is everywhere
closely associated with it. Several other programs involving jobs
for youths, access to prescription medication, and rural
electrification also redound to Lula's benefit. However, perhaps
nothing is as dramatic as the cumulative 35 percent increase in the
real minimum wage approved by Congress in several increments and
implemented during Lula's four years in office. Critics worry about
budgetary implications, since many minimum-wage employees are in the
public sector, and since social security is indexed to the minimum
wage, but the benefit to the working poor is substantial.


8. (U) Alckmin touts a number of programs the Sao Paulo state
government has implemented under his leadership - the provision of
hundreds of thousands of residential units to families of modest
income; Youth Action, which provides education for low-income youth;
Good Dish, consisting of restaurants that offer subsidized meals for
poor people; programs for the aged; and others - but none of these
appears to arouse popular excitement. As a physician, he claims an
insider's knowledge of the strengths and weaknesses of the public
health system and talks about making it work more seamlessly, and
about ensuring universal access to medications. Similarly, he
asserts that the entire social services apparatus can be made to
deliver more services to more citizens at less cost, but again does
not provide specifics as to how.

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MAKING GOVERNMENT WORK
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9. (U) More generally, Alckmin's public discourse suggests that
reducing taxes and bureaucracy, and stimulating economic growth,
will bring benefits to the poor. He believes that one role of
government is to define regulatory norms that will stimulate
investment, while strictly limiting the role of the regulator. He
also sees the national government as intervening to invest in
infrastructure and human capital in Brazil's below-average regions -
the Center-West, Northeast, and North - with the goal of bringing
them up to the level of economic development of the south and
southeast.


10. (SBU) Alckmin is in a difficult position with respect to Lula's
macro-economic policies. Because they are a continuation of the
policies of Fernando Henrique Cardoso, Alckmin can hardly turn his
back on them or suggest he would do things differently. All he has
been able to do is suggest that the orthodox anti-inflation policies
could be managed more efficiently and in such a way as to allow for
a reduction of interest rates, thus generating more growth. This is
part of what he means when he talks about a "management shock." He
thinks the GoB should be able, literally, to do more with less, to
operate transparently, to establish performance goals, incentives,
measurements, and accountability mechanisms, and generally to
function in an effective manner. In this context, the PSDB's
government program criticizes the federal judicial system, its
procedural bureaucracy, archaic structure, and inaccessibility to
citizens in some parts of the country.

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FOREIGN POLICY
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11. (SBU) Where Alckmin is perhaps on the most solid ground is in
his criticism of Lula's foreign policy. In his acceptance speech at
the PSDB national convention, he asserted that "Disaster is a mild
adjective to characterize the foreign policy of Lula's government.
Without an idea and hostage to ideological fantasies, the current
government spent its term in acts of mere marketing, in quests for
positions in international organizations and in dangerous relations
with upstart adventurers. Much show, much drama, and no results."
Here, it is difficult to argue. His diagnosis of Mercosul's
problems is also on point: "Instead of more protection, Mercosul
needs more competition via a serious timeline for the removal of
protectionist barriers and the many exceptions and loopholes that
deprive the agreement of its credibility and predictability." He
doesn't say exactly what he would do to fix these problems, but
perhaps he doesn't need to. In our conversations with Alckmin and
several of his advisers, we have been told that he would be
interested in re-opening FTAA negotiations, or at the very least in
re-invigorating economic and trade relations with the U.S. He
doesn't say much about this publicly, but this may be simply because
of the prevailing wisdom that foreign and trade policy does not make
a good campaign issue. Alckmin does say a great deal about
technology, innovation, and education and training to make Brazil
more competitive in the global economy.

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INFRASTRUCTURE
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12. (U) Alckmin boasts of certain large infrastructure projects in
Sao Paulo state, but nothing dramatic. The "Rodoanel," a ring of
highways circling metropolitan Sao Paulo that is supposed to ease
commuting and traffic headaches, is one such, but so far only one of
its four tranches has been completed. A great deal of work has been
done on decontamination and flood control of the Tiete River, which
runs through the northern part of the city, with support from
Japanese Bank for International Cooperation (JBIC). In December
2005, Alckmin announced what he claimed was the first Public-Private
Partnership to be implemented in the entire country, the extension
of one line of the Metro into western Sao Paulo with financing from
the World Bank and the JBIC. On the national level, he does not
propose specific infrastructure improvements, but rather limits
himself to observing the damage to global competitiveness caused by
Brazil's inadequate infrastructure.

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PUBLIC SECURITY
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13. (SBU) During the mid-May wave of violence in Sao Paulo (ref A),
Alckmin stirred up controversy by publicly criticizing his
successor, Governor Claudio Lembo, for not accepting President
Lula's offer of federal assistance to help quell the violence
generated in streets and state prisons by the criminal gang First
Capital Command (PCC),and to restore order. Many observers pointed
out that the gang problem had germinated on his watch, and a certain
amount of political finger-pointing and recrimination followed. In
his acceptance speech, Alckmin reiterated his view that organized
crime, "especially trafficking in drugs and arms that crosses state
and national boundaries," belongs, according to the Constitution,
under federal police jurisdiction. He then proceeded to outline
measures he would take to promote better cooperation among federal
agencies, and between federal and state authorities, to combat
organized crime.

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COMMENT: BOLDNESS REQUIRED NOW
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14. (SBU) One observer commented recently to Poloff that Alckmin's
problem is that, as a small-town doctor, he just doesn't know how to
think big. Furthermore, as an anesthesiologist, he knows how to
prepare the patient for surgery, but is accustomed then to sitting
back and letting someone else do all the hard work while he contents
himself with monitoring the vital signs. Over the past few weeks,
during the political convention season, he has stepped up his
rhetoric somewhat, amplifying his criticism of Lula and "the forty
thieves" who have been indicted in the political scandal and his
calls for a wholesale political reform. This may be one factor in
his recent improvement in the polls. However, as many political
analysts have pointed out, Brazilians tend towards an anti-reformist
culture; moreover, the politicians who would have to design,
negotiate, pass, and implement any such reform are the very people
most invested in the system the way it operates now. It is hard to
reconcile the prudent, reserved, almost timid Alckmin with the
politician who proposes to present to Congress in the first week of
January 2007 draft legislation for tax, social security, labor, and
political reform, and to expend political capital getting them
passed. At the same time, Alckmin showed considerable boldness,
determination, and imagination in challenging and ultimately
defeating Jose Serra to win the PSDB nomination. If indeed he still
has that sort of boldness in him, he might well consider calling
upon some of it between now and October, because as things stand
now, without some kind of dramatic action, he appears increasingly
likely to run a competent but uninspired campaign and lose. END
COMMENT.


15. (U) This cable was coordinated/cleared with Embassy Brasilia.

MCMULLEN