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INFO RUEHBR/AMEMBASSY BRASILIA 6877
RUEHAC/AMEMBASSY ASUNCION 2784
RUEHBU/AMEMBASSY BUENOS AIRES 2471
RUEHMN/AMEMBASSY MONTEVIDEO 2164
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RUEHRI/AMCONSUL RIO DE JANEIRO 7457
RUEHRG/AMCONSUL RECIFE 3146
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2578
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 04 SAO PAULO 001038 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR SCRONIN/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 JHOEK 
SOUTHCOM ALSO FOR POLAD 
USAID/W FOR LAC/AA 
 
E.O. 12958: N/A 
TAGS: PGOV PINR PREL EINV ETRD SOCI ECON BR
SUBJECT: WHA PDAS SHAPIRO'S MEETINGS IN SAO PAULO 
 
REF: BRASILIA 1996 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
------- 
SUMMARY 
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¶1.  (SBU) During a  September 18-21 visit to Sao Paulo to attend the 
WHA ELO Conference, WHA PDAS Charles Shapiro met with a series of 
experts on questions of foreign policy, international trade, and 
socio-economic issues.  Private sector representatives painted a 
gloomy economic picture, noting the lack of investment needed to 
sustain a higher level of growth. Many interlocutors criticized 
President Lula's foreign policy as "ideological" rather than 
national interests-based. Another complaint was that the government 
doesn't consult with the private sector on trade issues, and the 
existing consultative mechanisms are inadequate.  Representatives of 
FIESP made a strong argument for seeking resolution of Doha Round 
trade issues and outlined their lobbying efforts in support of 
continued GSP benefits for Brazil.  Experts on public education 
outlined initiatives under way to improve Brazil's badly broken 
education system.  Ambassador Shapiro was also briefed by a Sao 
Paulo state official on federal, state, and municipal cash transfer 
programs.  END SUMMARY. 
 
¶2. (SBU) Ambassador Shapiro used his meetings to elicit information 
and perspectives on whether Brazil was interested in moving towards 
a deeper relationship with the United States culminating over time 
in a strategic partnership; the extent to which Brazil as a country 
was truly interested in free trade; and the effectiveness of the 
government's anti-poverty programs.  He met with former Ambassador 
to the United States Rubens Barbosa; several Amcham Board members; 
the foreign trade director of the Sao Paulo State Federation of 
Industries (FIESP); a businessman  allied with Lula; and the state 
social development coordinator.  He also lunched with a group of 
experts on foreign policy and trade and another on social 
development.  In all his meetings, the unfolding "dossier" political 
corruption scandal was a topic of lively discussion; most hoped it 
would increase the likelihood of a second round to the election, but 
most still believed that President Lula would ultimately win. 
 
 
RUBENS BARBOSA - STRATEGIC RELATIONSHIP POSSIBLE, BUT NOT IN THE 
NEAR TERM 
 
¶3.  (SBU) Rubens Barbosa, former Ambassador to the United States 
(and Alckmin supporter), believes that there exists a solid 
framework for strengthening U.S.-Brazil relations and moving in the 
direction of a strategic relationship if the political will to do so 
is present, but he doubts it will happen if Lula is re-elected. 
Foreign policy, he said, is the area of the greatest difference 
between Lula and opposition candidate Geraldo Alckmin, because Lula 
has politicized the Foreign Ministry.  Brazil's acquiescence to 
Venezuela's accession to Mercosul without its first fulfilling the 
necessary conditions is an example of GoB mismanagement. 
Nevertheless, Barbosa believes Lula is trying to moderate Hugo 
Chavez, although the results may not be visible now.  While the 
U.S.-Brazil relationship has only "small problems," he continued, it 
could be much stronger.  If Lula is re-elected, the private sector 
will put pressure on the government to reopen dialogue with the U.S. 
 The USG should take the initiative to open up areas of cooperation, 
beginning with trade.  Unfortunately, he said, the GoB doesn't 
consult with the private sector on trade negotiations, and the 
official fora for such consultations don't work well.  Trade and 
investment form the focus of U.S.-Brazil relations, but U.S. 
investment in Brazil is down, leading to lower GDP growth rates.  In 
order for the country to remain competitive and advance, it needs to 
grow by 5-7 percent per year, whereas the actual rate is closer to 3 
 
SAO PAULO 00001038  002 OF 004 
 
 
percent. 
 
AMCHAM - NEED INVESTMENT TO GENERATE SUSTAINED GROWTH 
 
¶4.  (SBU) According to four members of the AmCham Board -- Joseph 
Tutundjian, Arthur Vasconcellos, Geraldo Barbosa, and Adhemar 
Altieri -- who breakfasted with Ambassador Shapiro on November 19, 
Brazil is the most modern country in the region and could act as a 
moderating influence on other countries such as Venezuela and 
Bolivia, but has not done so.  The government is preoccupied with 
internal problems.  Due to its debt situation and fiscal 
constraints, the government is unable to provide the needed 
investment, and business is reluctant to invest because of 
infrastructure problems, high interest rates, an overvalued 
currency, and a low rate of savings.  Large companies like Gerdau 
Steel are unable to grow more in Brazil and are now investing in the 
U.S. and elsewhere.  Without growth, Brazil will resemble Mexico, a 
large economy but retarded in growth, which aggravates underlying 
social tensions.   Growth requires investment, and investment 
requires tax, social security, labor, and political reforms.  Lula 
apparently recognizes the need for reform and has been talking about 
it in private with businessmen, but not talked much publicly.  Four 
years from now, Brazil will have to find a capable leader to succeed 
Lula, because his Worker's Party (PT) has no apparent candidate. 
 
FIESP - CONCERNED ABOUT GSP BENEFITS 
 
¶5.  (SBU) Roberto Gianetti de Fonseca of the Sao Paulo State 
Federation of Industries (FIESP), Brazil's most important and 
influential business organization, outlined the organization's 
activities in helping combat piracy and lobbying on behalf of 
private sector interests.  He defended Brazil's position on 
agricultural subsidies in the Doha round.  FIESP supports free 
trade, but its constituency, which includes agribusiness, fears that 
if meaningful movement on agriculture is deferred, the opportunity 
may be lost.  He acknowledged that Brazil needs to amend its 
constitution and change its laws to remove protection from some 
sectors of the economy, but insisted that agriculture must be part 
of the equation.  Prospects would be much better if Alckmin were 
elected President, but if Lula is re-elected, Gianetti believes Doha 
Round negotiations will collapse.  He does not believe Lula wants to 
undertake reforms.  Like Ambassador Barbosa, he believes the GoB 
acted irresponsibly in allowing Venezuela into Mercosul.  Gianetti 
listed two ideas that he thought would improve bilateral relations: 
working more closely on Doha Round issues, and cooperation on 
developing markets for ethanol.  Gianetti was particularly concerned 
over what will happen if the U.S. does not renew Brazil's GSP 
benefits.  FIESP representatives are meeting with key U.S. 
Congressmen to urge favorable treatment for Brazil.  If Brazil loses 
GSP, U.S. companies won't benefit, he asserted, but rather China. 
 
EXPERTS CRITICIZE "IDEOLOGICAL" FOREIGN POLICY 
 
¶6.  (SBU) Ambassador Shapiro attended a lunch hosted by the CG with 
former Foreign Minister Celso Lafer, private consultant Mario 
Marconini, Ricardo Lacerda of Citibank, and Economics Professor 
Roberto Macedo.  They asserted that Lula is implementing a leftist 
foreign policy to compensate for his orthodox economic policies, 
though Lula himself is more conservative than some of his senior 
foreign policy officials like Marco Aurelio Garcia and Samuel 
Pinheiro Guimaraes.  Celso Lafer complained that for the first time 
Itamaraty's influence had been diluted with Garcia supplanting the 
foreign minister as Lula's most influential foreign policy advisor. 
The group was especially critical of Lula's mismanagement of 
Mercosul and Venezuela's accession, and his handling of Bolivia. 
While they believed that Lula would likely win the election - though 
it might require a second round - they noted he will lack a majority 
in Congress and will have trouble governing and passing reform 
measures.  Lula's government has benefited from favorable world 
 
SAO PAULO 00001038  003 OF 004 
 
 
economic conditions that won't last forever, and could face real 
problems over the next four years. 
 
PRO-LULA BUSINESSMAN OFFERS A DIFFERENT VIEW 
 
¶7.  (U) Lawrence Pih, CEO of the large grain milling company Moinho 
Pacifico, director of "Businessmen for Lula," and a formerly close 
associate of Lula, offered a different perspective.  He said that 
much of the corruption in Brazilian politics had begun in Fernando 
Henrrique Cardoso's (FHC) presidency, and that Lula's government had 
been better than FHC's.  With respect to the future, Pih 
acknowledged that Lula (who he assumes will be re-elected), will 
face a difficult situation in Congress, because his party won't have 
a majority.  Lula's first priority will be to develop a solid base 
in Congress, and will then be able to address reforms, especially 
political reform.   Education will also be a priority.  Looking 
towards his legacy, Lula will want to make the economy grow faster 
and address social inequality, but he will have tough time with the 
opposition.  Lula, he asserted, wants closer ties to the United 
States, but many of the people around him do not.  He thinks Lula is 
also beginning to see Hugo Chavez and Evo Morales in a different 
light, but will wait until after the election to change his approach 
to them.  Pih acknowledged that Lula has no heir apparent, and that 
for Sao Paulo mayor Jose Serra and Minas Gerais Governor Aecio Neves 
will compete for the PSDB nomination in 2010, and one of them will 
likely be elected president.  He commented ironically that on 
economic issues, Serra may be more "leftist" (i.e., statist) than 
Lula. 
 
BRIEFING ON CONDITIONAL CASH TRANSFER PROGRAMS 
 
¶8. (U) PDAS Shapiro visited the Sao Paulo State Secretariat for 
Social Development and Assistance.  There he met with a team led by 
Social Development Coordinator Maria Camila de Mendonca, who 
oversees all cash transfer programs operating in the state. 
Mendonca outlined an interlocking web of social protection programs 
operating at national, state, and local levels and aimed primarily 
at the poorest individuals and families, those who have low 
education levels and limited access to health care.  The federal 
program, Bolsa Familia, grew out of the Bolsa Escola and three other 
programs developed during the administration of Fernando Henrique 
Cardoso.  This program, which covered 6.7 million families in 2004, 
has grown to reach 11 million families.  Beneficiaries are required 
to keep their children in school and ensure they get vaccinations 
and medical checkups.  Low-income families are eligible to receive 
the equivalent of between USD 10 and 50  per month depending on 
family size and number of children in school.  The funds come from 
the federal government -- beneficiaries receive a card to withdraw 
money from the Caixa Economica Federal -- but the program is 
administered by the municipalities. 
 
¶9.  (U) Local secretariats for education and health are tasked with 
reporting on compliance with conditions.  Mendonca said these 
reports are often delayed or unreliable; accordingly, it is 
difficult to provide effective enforcement. Furthermore, she said 
that to date there have been no reliable studies on the extent to 
which the transfer programs are effective on moving poor families 
out of poverty and into the formal economy.  Each of the states has 
its own programs to complement Bolsa Familia, as do many 
municipalities.  These vary considerably in coverage and quality. 
Bolsa Familia covers roughly 1.2 million families in Sao Paulo 
state.  The state's program, Citizen Income, is designed like Bolsa 
Familia, with similar conditions, and covers 175,000 families and 
provides up to about USD 30 per month, paid out of state-owned Nossa 
Caixa.  The state's youth action program assists young people 
between the ages of 15 and 24 who are out of school or at risk of 
dropping out.  In addition to these, the city of Sao Paulo also has 
a program, Family Action, which currently covers some 30,000 
families.  Depending on circumstances, some families may benefit 
 
SAO PAULO 00001038  004 OF 004 
 
 
from more than one program. 
 
PRIVATE SECTOR ENGAGED ON EDUCATION 
 
¶10. (U) PDAS Shapiro, CG, and Poloffs lunched with several private 
sector and NGO leaders involved with education programs and other 
initiatives to combat poverty.  Norman Gall of the Braudel 
Institute, Eduardo Bom Angelo of Brasilprev, and Luiz Norberto 
Paschoal of the Educar Foundation outlined the challenges facing 
education in Brazil.  Too much attention, they said, is devoted to 
the university system and not enough to primary and secondary 
education.  Ideally, five percent of GDP should go to primary and 
secondary education where intervention can make a difference, but 
the actual figure is much lower.  Furthermore, most of the budget 
goes to building new facilities and paying salaries, and not enough 
to improving quality.  Schools in Sao Paulo are overcrowded to the 
point that some have to operate in three shifts and on Saturdays. 
The result is that many poor students drop out or are unprepared for 
university, and the Brazilian private sector suffers from a lack of 
educated, well-qualified workers, which ultimately affects 
competitiveness. 
 
¶11. (U) The business community has developed initiatives to improve 
the situation.  Notably, on September 6, civil society, business, 
and government launched the Everyone for Education Commitment, with 
a broad range of corporate and civic sponsors and five objectives to 
be achieved by Brazil's bicentennial in 2022.  In addition, the 
Senna Foundation implements initiatives that target children at risk 
of failing and helps them overcome difficulties and remain in 
school.  The Braudel Institute runs reading circles for 
disadvantaged children.  The AmCham's Institute for Quality 
Instruction (IQE) is working to ensure that teachers are better 
trained and prepared.  In addition to these, the Consulate's PAS 
section has organized a project that funds exchanges of school 
principals, enabling them to share experiences and techniques. 
 
¶12. (U) Despite these promising efforts, Paschoal noted that it is 
difficult to get the public interested in the debate over improving 
the education system.  While candidates for public office discuss 
education in general terms, they have offered few concrete 
proposals.  For this reason, federal, state and municipal 
governments tend to apply band-aids to the existing system rather 
than try to reconfigure it as is needed.  Participants expressed 
hope that whoever is elected president would appoint a prominent 
business leader as Minister of Education.  That said, they believed 
that private sector involvement in education is greater than 
elsewhere in the region. 
 
COMMENT: PATIENCE REQUIRED 
 
¶13.  (SBU) With the exception of Pih, our interlocutors actively 
support the opposition.  Even so, their analysis was disheartening: 
the Brazilian economy cannot sustain growth above 3 percent without 
dealing with some very basic structural inefficiencies, public 
education is Brazil is a disaster that attracts little interest from 
any of the candidates (or the public), and "conditioned cash 
transfers" in fact are not conditioned but are programs by the 
federal, state and municipal governments to curry favor with poor 
voters.  The word we heard most often in advising us how to engage 
with Brazil was "patience."  END COMMENT. 
 
¶14. (U) This cable has been cleared by PDAS Shapiro and coordinated 
with Embassy Brasilia. 
 
MCMULLEN