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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