BRAZIL: ONE NORTHEAST STATE TRIES TO CATCH THE SOUTH

UNCLAS BRASILIA 000102 SENSITIVE SIPDIS DEPARTMENT OF COMMERCE FOR LFUSSELL AND ADRISCOLL E.O. 12958: N/A TAGS: EINV EFIN ETRD ELAB OPIC COM USTR EAID PREL BR SUBJECT: BRAZIL: ONE NORTHEAST STATE TRIES TO CATCH THE SOUTH REF: 09 RECIFE 65; 09 BRASILIA 347 ¶1. (U) Summary: The development challenges facing the Brazilian northeast state of Piaui are representative of the difficult issues Brazil's poorest regions must overcome to achieve the level of prosperity in the country's southern regions. Despite economic growth rates over the past several years comparable to those of the south and southeast, Piaui and the northeast's per capita incomes remain many times lower than those of the southern states. A recently expanded Piaui state International Relations Coordination Office and a global-minded governor are focused on closing the gap with the attraction of more international and domestic investment to Piaui. Unfortunately, the state's most recent efforts in this regard reveal significant challenges. Even the domestic investment community in Brazil, not to mention the international investor, remains largely unaware of the opportunities that exist in Piaui, and significant infrastructure and human capital deficiencies dissuade those investors that do consider projects in the state. End Summary. BRAZIL'S NORTH-SOUTH DIVIDE ¶2. (U) The per capita income in Brazil's northeast is just $7,000 Reais ($3,900 USD - less than the per capita incomes in Honduras and Guatemala),and the population of 50 million people in the northeast is 10 million more than that of Central America. In contrast, the 78 million Brazilians in the prosperous southeast earn per capita income of over $19,500 Reais ($10,800 USD). The 3.1 million people in the state of Piaui have the lowest per capita income of Brazil's 26 states, less than $5,000 Reais ($2,800 USD). This level of income puts the citizens of Piaui roughly on par with the poorest nations in Latin America, and earning less than a quarter of what a typical Brazilian from Sao Paulo state makes. In 2008, Piaui recorded total GDP of $14.9 billion Reais ($8.3 billion USD),or just 0.5 percent of the Brazilian economy. The service sector represents 60 percent of Piaui output, with half of that amount derived from government. Industry represents approximately 27 percent and agriculture approximately 13 percent. ¶3. (U) Despite bright spots like the state of Pernambuco's Industrial complex at the Port of Suape (Ref A),Brazilian and international Investment has not poured into Piaui and the northeast, but remains concentrated in the southern regions. Brazilian Central Bank foreign direct investment (FDI) data back to 1995, for example, shows only a very gradual proportional shift away from the traditionally-favored investment targets in the south and southeast. In 1995, 96 percent of FDI to Brazil flowed to the south and southeast. In 2000, the south and southeast attracted 94 percent of FDI, and by 2005, they were still grabbing 90 percent. Between 1995 and 2005, the northeast went from two to five percent of FDI share. The FDI data also reveal that the southern states are successful in attracting a greater share of FDI than their proportional share of GDP. For example, the south and southeast states comprise approximately 73 percent of the national GDP, but capture 90 percent of FDI. In contrast, the northeast states make up about 13 percent of national GDP, but only attract five percent of FDI. PIAUI STATE GOVERNMENT ORGANIZES TO ATTRACT INTERNATIONAL INVESTMENT ¶4. (U) In December 2009, the recently expanded International Relations Coordination Office of Piaui, which now includes seven people, hosted a conference in Piaui's capital Teresina themed to help the local business community attract more international investment. Second-term Piaui Governor Wellington Dias (PT - Workers Party) , who had just returned from an official Brazilian delegation to court investors in Germany, Greece, and England, provided opening remarks focused on the advantages of the internationalization of Piaui. The governor was followed by speakers and panelists representing the Brazilian Ministry of Tourism, the Piaui Office of Tourism, an international attorney from Sao Paulo, and representatives from the Piaui business community. Econoff was invited to participate and delivered a presentation on USG partnership opportunities available through the Foreign Commercial Service, USTDA, and Ex-Im Bank. While the audience included Piaui state officials, business leaders, and university international relations students, organizers had expected a stronger showing of local private firms capable of building international partnerships. The conference and Econoff visit to Teresina revealed the significant development challenges that exist in a poor Brazilian northeast state like Piaui. OPPORTUNITIES ¶5. (U) According to most conference attendees, continued infrastructure development will have the greatest impact on attracting additional investment to Piaui. Improved infrastructure, especially transportation lines over road and rail connecting Piaui's cities and ports, will also facilitate organic growth within the state. The introduction of free-trade or export processing zones (ZPE's),currently operating in the cities of Parnaiba and Pavussu, can also lower the cost of trade in Piaui and increase the level of domestic and international commerce flowing through the state. Once in place, government and business leaders expect Piaui's infrastructure should benefit the state's most important development opportunities, especially mineral and mining, fishing, agriculture, and tourism. For instance, improved infrastructure is expected to greatly benefit agriculture in the southern part of the state where newly introduced technologies are already supporting greater soy and cotton production. Infrastructure development is also assisting Piaui attract interest and investment to another promising economic opportunity: dimension stones, opals, and primary minerals. LACK OF INFRASTRUCTURE ¶6. (U) Despite some progress, Piaui suffers from the familiar problem in Brazil of deficient infrastructure. Governor Dias rates infrastructure development a priority, just behind his top concern of education. Piaui has received funds from Brazil's growth acceleration infrastructure program (PAC) (Ref B),and renovations have been completed at the Parnaiba airport on Piaui's coast. Governor Dias said that he envisions Parnaiba's geographically strategic location, where flights to Miami or Lisbon take just six hours, will make it a future air cargo hub in Brazil. Dias also highlighted planned rail improvements and 5,800 km. of ongoing asphalt road paving to link Piaui's major cities. ¶7. (SBU) The Piaui State Secretary of Tourism Silvio Leite, however, shared with Econoff that inadequate infrastructure still remains the largest obstacle to bringing visitors to Piaui. Roads linking to some of the world's largest concentrations of rock paintings dating back 50,000 years, many of them inside UNESCO World Heritage Site Serra da Capivara National Park, require significant improvement to support additional visitors. Piaui also has a short but impressive coastline containing an ecologically diverse collection of rivers, lagoons, dunes and beaches, most all of which remain outside the reach of even the most adventurous traveler. Finally, Leite lamented that Piaui has a long way to go to inform international visitors and Brazilians alike of these archeological and natural tourist attractions in the state. ¶8. (SBU) The private sector business community is also dissatisfied with the condition of Piaui's infrastructure, and says the Piaui state government is not doing enough to fulfill its infrastructure development obligations. Manuel Arrey, a Piaui business leader, who grows and exports nuts, produces leather, and runs hotels in the state, explained at the conference that many entrepreneurs pursuing investment in Piaui eventually end up disengaging when the state government fails to comply with infrastructure commitments tied to the project. Carlos Brasil, of the International Relations Coordination Office, privately confirmed the state's poor record complying with infrastructure assurances. He told Econoff that at a recent Piaui Department of Development and Infrastructure meeting state officials brainstormed why many firms were backing out of projects in the state. The overriding consensus among the group was that the state bureaucracy and lack of progress on infrastructure projects were to blame. LACK OF OUTSIDE KNOWLEDGE OF PIAUI ¶9. (SBU) International attorney and law professor from Sao Paulo, Larissa Teixeira, echoed Leite's comments describing a lack of knowledge about Piaui, but in connection to business and investment opportunities. She told Econoff that most Brazilians only know Piaui as the poorest state in the country, and international investors familiar with Sao Paulo and Rio de Janeiro have not even heard of the state. Teixeira said she represents a Brazilian fish farmer who is now in the final stages of opening operations in the neighboring states of Bahia or Pernambuco. Despite Piaui's cheaper land costs and abundance of water resources, her clients refused to seriously consider the state, because, according to Teixeira, they were unable to imagine the state as anything else but a desolate region of the country. LACK OF COMPETENCE AND HUMAN CAPITAL ¶10. (SBU) Carlos Morais, who has been active in Partners of the Americas cooperative relationship between Piaui and Nebraska, described a series of frustrating U.S. - Brazilian business relationships that failed to materialize due, according to Morais, to a lack of competent Brazilian partners in Piaui. While in Nebraska, as a member of the Midwestern International Trade Association (MITA),Morais said American firms complained of time management issues, scheduling delays, and missed commitments when working with counterparts in Piaui. Teixeira also highlighted a lack of qualified local partners for larger foreign firms considering investment in Piaui. She told Econoff that Piaui firms are reticent to engage with large foreign entities, and the state needs to build a stronger track record of successful Piaui - foreign investor partnerships to build confidence for both the Piaui prospective local partners and foreign firms. COMMENT ¶11. (SBU) If the whole of Brazil is to achieve the increasingly impressive levels of prosperity of the country's south and southeast, traditionally less-developed regions in the northeast must attain higher than national levels of growth. Otherwise, the income divide and related disparities will remain. Piaui, the poorest state of the northeast, is not entirely reflective of the northeast region, where some notable investment activity is taking place, especially in the Suape port and adjacent industrial area in Pernambuco. That said, the Piaui experience reveals a number of challenges the northeast needs to overcome, notably: poor infrastructure, a lack of outside knowledge of the opportunities, and a lack of competency among government and local partners. Mission Brazil will pursue additional positive engagement with Piaui and will specifically look to address human capital needs through promotion of Public Diplomacy international visitor opportunities, and to address social and economic development needs through Department grant initiatives. End Comment. ¶12. (U) This cable was cleared/coordinated with Consulate Recife. KUBISKE