VZCZCXRO1576
PP RUEHRG
DE RUEHBR #1866/01 2481857
ZNR UUUUU ZZH
P 051857Z SEP 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6570
INFO RUEHRG/AMCONSUL RECIFE 5397
RUEHSO/AMCONSUL SAO PAULO 7936
RUEHRI/AMCONSUL RIO DE JANEIRO 2800
RUEHSG/AMEMBASSY SANTIAGO 5753
RUEHBU/AMEMBASSY BUENOS AIRES 4248
RUEHAC/AMEMBASSY ASUNCION 5645
RUEHMN/AMEMBASSY MONTEVIDEO 6449
RUEHQT/AMEMBASSY QUITO 1959
RUEHPE/AMEMBASSY LIMA 3156
RUEHLP/AMEMBASSY LA PAZ 4846
RUEHCV/AMEMBASSY CARACAS 3420
RUEHBO/AMEMBASSY BOGOTA 3915
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDO/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 001866 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USAID FOR LAC 
STATE PASS OPIC 
NSC FOR FEARS 
TREASURY FOR OASIA - J.HOEK 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 
 
E.O. 12958: N/A 
TAGS: ECON PGOV PREL EFIN EINV BR
SUBJECT: BRAZIL: AMBASSADOR DISCUSSES REFORM AGENDA WITH FINANCE 
MINISTRY INTERNATIONAL SECRETARY 
 
This cable is sensitive but unclassified, please protect 
accordingly. 
 
¶1. (SBU) Summary:  In an August 23 meeting with the Ambassador, 
Ministry of Finance (Fazenda) International Secretary Luiz Pereira 
made the point that, with the macroeconomic framework for growth in 
place, it was time for Brazil to focus ever more on the 
microeconomic reforms and business environment issues necessary to 
boost productivity and growth.  The Ambassador suggested that the 
USG and American private sector could support the GoB's reform 
agenda.  Both the Ambassador and Pereira noted the transformational 
potential of ethanol for the economies of many countries in the 
Caribbean and Central America.  With respect to any potential tax 
treaty, Pereira stated that the principle issue for Brazil would be 
revenue flows.  End Summary 
 
¶2. (SBU) In a relaxed August 23 meeting, Fazenda International 
Secretary Luiz Pereira noted to the Ambassador that Brazil had come 
 
SIPDIS 
a long way in creating the macroeconomic conditions for stability 
and growth.  Four years ago the private sector had substantial 
doubts about candidate Lula da Silva's ability to conduct a coherent 
economic policy.  His success in so doing showed that the commitment 
to sound policy spanned the political spectrum in Brazil as this 
commitment had been maintained for over a decade.  There is a clear 
perception of the benefits of stabilization, Pereira affirmed, which 
has created a fair degree of consensus on the general outlines 
economic policy. 
 
¶3. (SBU) The time has come, Pereira stated, for Brazil to focus on 
the reforms necessary to increase productivity and potential growth. 
 This will require a more complex set of reforms, at the 
microeconomic level, Pereira argued, not only in Brazil but across 
Latin America as a whole.  Pereira explained, in broad 
brush-strokes, the Lula Administration's microeconomic reform 
agenda, which included bankruptcy law reform, Public Private 
Partnerships (PPP) legislation passed in 2004 and legislation to 
promote research and development.  The GoB also had undertaken 
measures to reduce collection risks for lenders and improve the 
workings of the financial markets.  Brazil's financial sector, 
Pereira noted, would need to become more competitive as it adjusted 
to life with lower real interest rates.  Pereira stated the GoB was 
working to introduce a flat tax on small businesses and that the GoB 
well aware that social security reform was necessary. 
 
¶4. (SBU) The Ambassador suggested that the USG and the private 
sector might be able to support the GoB as it pushes forward with 
its reform agenda.  There was interest from both the USG and private 
sector in the promoting infrastructure investment through PPPs.  The 
Russell Equity 20/20 group was planning major Brazil-focused events 
in the coming year and New York Stock Exchange Chairman John Thain 
was planning a trip as well.  Among others, these contacts should 
create opportunities to discuss what sort of improvements could be 
made to the business environment.  The Ambassador noted that the 
U.S. Small Business Administration (SBA) had worked closely with the 
government of Mexico on an SME program, the results of which the GoB 
might find could serve as an example of what could be done.  He 
suggested that the Treasury-Fazenda Group for Growth could usefully 
consider some of these issues.  The Ambassador noted that Secretary 
Paulson strong private sector background on these issues, including 
PPPs, could invaluable. 
 
Ethanol 
------- 
 
¶5. (SBU) The Ambassador and Pereira agreed on the transformational 
potential that ethanol production could have on many of the smaller 
economies of the Caribbean and Africa.  Sugar-cane based ethanol had 
 
BRASILIA 00001866  002 OF 002 
 
 
the potential, Pereira noted, to provide jobs, reduce oil imports 
and enhance energy security.  The issue was one where bilateral 
cooperation made eminent sense, he said. 
 
Tax Treaty 
---------- 
 
¶6. (SBU) Noting that there have been ongoing informal contacts about 
the potential for a Bilateral Tax Treaty (BTT), Pereira said that 
the fundamental issue for the Finance Ministry is the issue of 
revenues.  The Ambassador observed that in improving the climate for 
business in both countries, a BTT could enhance tax revenues over 
time.  Moreover, as Brazilian investment in the U.S. was growing 
apace, there would be substantial Brazilian private sector benefit 
as well. 
 
¶7. (SBU) Comment: While Pereira is correct that the GoB has a 
well-articulated reform agenda, he dwelt very little on how much 
difficulty the GoB has had in moving reforms through Congress in the 
last two years.  With so little progress since December 2004, much 
remains to be done.  This places a certain urgency in pushing 
reforms through the Congress early in the next administration, when 
the winner's mandate and political capital is at its strongest.  To 
a great extent, this is not a question of defining what needs to be 
done, which Brazilian policy makers are well aware of, but one of 
working to enhance the public debate over these measures.  A key 
issue is the tendency of the Brazilian political system to water 
down reforms.  To the extent that the USG can bring resources to 
bear, whether it be through supporting private sector dialogue with 
the GoB, through high-level visitors or through discreet 
behind-the-scenes contacts, we may have success in tipping the 
balance towards more ambitious measures.  In either case, it is time 
not simply to praise Brazil for what it has accomplished on 
macroeconomic stabilization, but for the USG to support it with some 
specific policy and knowledge-based expertise to support its 
microeconomic reform agenda. 
 
SOBEL