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C O N F I D E N T I A L SECTION 01 OF 04 SAO PAULO 000780 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/EPSC, INR/IAA, INR/R/AA 
STATE PASS USTR FOR KDUCKWORTH 
NSC FOR TOMASULO 
DOE FOR GWARD 
TREASURY FOR JHOEK 
USDOC FOR 4332/ITA./MAC/WH/OLAC 
USDOC FOR 3134/USFCS/OIO 
USAID FOR LAC/AA 
 
E.O. 12958: DECL: 09/19/2017 
TAGS: ECON PGOV PINR ELAB EAGR BR
SUBJECT: DELFIM NETTO: NOT BULLISH ON BRAZIL"S ECONOMY OR 
ITS POLITICAL LEADERSHIP 
 
REF: A. BRASILIA 1745 
 
     ¶B. SAO PAULO 749 AND PREVIOUS 
     ¶C. 06 SAO PAULO 907 
 
Classified By: CONSUL GENERAL THOMAS J. WHITE.  REASON: 1.4(D) 
 
 SUMMARY 
------- 
 
¶1.  (C) Former Finance Minister Antonio Delfim Netto told CG 
September 17 that the Brazilian economy is all right for now 
despite recent market turbulence, but he has "serious doubts" 
about the next 5-10 years, especially if the global economy 
enters a down cycle.  He characterized Brazil's focus on 
agriculture and minerals as risky, noting that the country's 
relatively sound fundamentals - e.g., strong reserve 
position, current account surplus - could disappear overnight 
if global commodity prices change.  Delfim stressed that he 
had supported President Lula's re-election and sometimes 
advises him, but believes the President isn't fully aware of 
the fragility of Brazil's economic condition and that his 
advisors simply aren't thinking ahead or planning for 
contingencies.  Thus, Brazil has benefited from a favorable 
international economy, but not nearly as much as it could 
have.  Commenting on the country's political situation, Netto 
characterized the leader of the Landless Movement (MST) as a 
possible Brazilian Hugo Chavez.  He also did not have much 
good to say about any of the likely 2010 presidential 
candidates and expressed concern that some may have populist 
tendencies.  End Summary. 
 
A LONG VIEW OF THE BRAZILIAN ECONOMY 
------------------------------------ 
 
¶2.  (SBU) Consul General (CG) and Poloff met September 17 
with former Minister Antonio Delfim Netto to discuss the 
current political and economic situation.  Netto was 
accompanied by economist and lobbyist Janio Quadros Neto, the 
AMCIT grandson and namesake of the late Brazilian President 
(January-August 1961).  Delfim Netto served as Federal Deputy 
from Sao Paulo 1987-2006 before being defeated last year in 
his bid for re-election.  He supported President Lula's 
re-election in 2006 and, though now semi-retired, serves Lula 
as an informal advisor.  Nevertheless, he is not impressed 
with the government's economic policy.  A Finance Minister 
(1967-74) and Planning Minister (1979-85) under the military 
dictatorship, Delfim takes a long view of Brazil's economy as 
his 80th birthday approaches, joking  at one point that since 
graduating from college in 1947, "I've lived through all the 
crises, and some of them I even produced!" 
 
¶3.  (C) "Back when Brazil was growing," as Netto referred to 
the "economic miracle" of the 1970s, taxes consumed 24 
percent of GDP.  Now the figure is 37 percent, and Netto 
estimated that the government spends about 3 percent of GDP 
on tax collection efforts.  He believes the government should 
reduce its footprint and limit itself to those areas where it 
can make modest but tangible improvements, such as health 
care, education, and other social areas.  Infrastructure 
development, in his view, "should be given to the private 
sector."  Within the Lula administration, however, there is 
an "ideological slant" led by Dilma Rousseff, equivalent to 
the President,s Chief of Staff, who, in Netto's words, 
"wants to construct a socialist state but by way of a tour 
through capitalism."  Rousseff is in charge of the Growth 
Acceleration Program (PAC), which aims to stimulate the 
 
SAO PAULO 00000780  002 OF 004 
 
 
economy via large infrastructure projects, many of them 
funded by the federal government or by parastatals. 
 
¶4.  (SBU) Netto argued that the GoB's monetary policies, 
while effective in keeping inflation low, are hurting 
Brazilian industry because the high interest rates lead to 
currency overvaluation.  The combination of a strong currency 
and rising wages (the minimum wage has risen by 90 percent 
over the past five years, pushing all salaries up) puts 
Brazil in a disadvantageous position vis a vis China.  The 
high internal costs of transportation and logistics caused by 
infrastructure deficiencies add to Brazil's competitiveness 
woes.  At some point, Netto predicted, Brazil is "going to 
hit the wall again."  The country may even experience another 
spurt of growth, but then some external shock or crisis will 
swamp the country's economy, probably in the first year of 
the next administration (2011), he speculated, commenting 
that "Lula is always lucky." 
 
GOVERNMENT IS "SURFING" 
----------------------- 
 
¶5.  (SBU) Fundamentals are much better than in the past, 
Delfim acknowledged.  The State has nearly USD 170 billion in 
reserves and a healthy current account surplus.  But optimal 
global economic conditions represent a lost opportunity for 
Brazil.  While countries such as India and China are booming, 
Brazil struggles to achieve four or five percent annual GDP 
growth.  Many commentators give the government a "10" grade 
for its economic management, perhaps because of its 
orthodoxy, but Netto thinks it probably deserves a "3" at 
most.  Lula's Ministers and advisors are enjoying the 
"miracle," surfing on the global wave, and not thinking about 
the country or its future.  Nobody remembers the crises of 
the past or thinks about how to avoid or minimize the next 
one.  (Note:  The sole exception, Netto said, may be Harvard 
Professor Roberto Mangabeira Unger, Secretary for Long-Term 
Planning.  End Note.)  Brazil should be expanding its 
economy, creating jobs, reducing the tax burden, and 
improving management of health care and education, thus 
creating the conditions for sustainable long-term economic 
growth. 
 
¶6. (SBU) There is a dearth of serious political leadership, 
Netto complained.  President Lula's Workers' Party (PT) is 
"primitive," and at its recent National Congress (ref B) 
demonstrated it is still in its "jurassic" phase.  Netto 
singled out as "stupidity" a PT resolution supporting a 
plebiscite to revisit the 1997 privatization of mega-mining 
concern River Doce Valley Company (CVRD).  In Delfim's view, 
the world has accepted the "WTO fantasy" that China will 
devote itself to industry, India to services, and Brazil to 
agriculture.  At some point in the years to come, Delfim 
predicted, prices of metals, foodstuffs, and even petroleum 
will fall.  What, he asked rhetorically, will happen then to 
the biofuels boom that Brazil is so excited about? 
 
REFORM NOT IN THE CARDS 
----------------------- 
 
¶7.  (SBU) Labor reform is not on the table, Netto observed, 
even though Brazil has the toughest labor laws in the world. 
The tax system is "a farce," and there is no hope of 
reforming it because it involves extremely complex questions 
of federalism.  Since colonial times, Delfim pointed out, 
every revolution in Brazil was about taxation.  Right now, 
 
SAO PAULO 00000780  003 OF 004 
 
 
Congress is considering renewal of the CPMF financial 
transactions tax, a "provisional measure" that has already 
been in place for most of the past 14 years.  CPMF renewal 
will ultimately pass, said Delfim, because many in the Sao 
Paulo Congressional caucus obey Governor Jose Serra, and many 
Deputies from Minas Gerais are beholden to Governor Aecio 
Neves.  The two states combined account for 123 of the 
Chamber of Deputies' 513 members.  Both Serra and Neves are 
potential Presidential contenders in 2010, and it would be 
suicidal for them to oppose the CPMF and thus cause disarray 
in the nation's finances. 
 
¶8.  (SBU) The situation surrounding Senate President Renan 
Calheiros  - narrowly absolved September 12 of breach of 
parliamentary decorum but facing several more charges (ref 
A)- is a "tragedy," in Netto's view, but Calheiros, though in 
many ways typical of Brazil's political system, doesn't 
really matter.  What is important, he said, is who will be 
elected President of the Chamber of Deputies and the Senate 
in the 2009 session, because they will determine whether any 
legislation will pass.  Due to the electoral calendar, Lula 
has a very limited period of time in which he can actually 
govern, and has already lost much of it to the Calheiros 
scandals.  He will need Congressional support in 2009 to make 
anything happen.  Following municipal elections and 
Congressional leadership elections, a "new power structure" 
will be in place as the country prepares for the 2010 
presidential elections. 
 
PRESIDENTIAL HOPEFULS 
--------------------- 
 
¶9.  (C) Governors Serra and Neves, both of the opposition 
Social Democracy Party of Brazil (PSDB), are the only two 
real presidential candidates, Netto said.  Lula's PT has 
"nobody".  PT Senator Aloizio Mercadante "destroyed himself" 
by first trying to cut a deal that would avoid Calheiros's 
expulsion, then abstaining in the secret vote, and finally 
disclosing his vote and portraying it as an act of political 
principle.  "He lost at least half his votes," Delfim said of 
Mercadante, who was elected to the Senate in 2002 by more 
than 10.4 million "paulistas".  He also did not think Dilma 
Rousseff or Bahia Governor Jaques Wagner had a chance.  The 
PT, Delfim said, will survive, but it is obvious that after 
Lula leaves, the party will have a leadership problem. 
 
¶10.  (C) Lula may try to support someone from his governing 
coalition, Delfim speculated, mentioning Defense Minister 
Nelson Jobim of the Brazilian Democratic Movement Party 
(PMDB).  Asked about Federal Deputy Ciro Gomes of the 
Brazilian Socialist Party (PSB), Netto expressed deep concern 
and likened him to a less intelligent Serra.  While not a big 
fan of Governor Serra, considering him authoritarian, 
interventionist, and anti-business - he recalled Serra's 
action as Health Minister asserting Brazil's right to break 
patents on HIV/AIDS drugs - Netto likes Gomes even less: 
"Serra is scary but he knows things.  Ciro is scary but he 
doesn't know anything and only pretends to know."  Netto 
believes Gomes, if elected, could become "Brazil's Chavez" 
and would attempt to govern by populist rhetoric and outdated 
socialist economic principles. 
 
¶11.  (C) Though critical of Gomes, Delfim asserted that 
Brazil already has another, &real8 Chavez in its political 
life - Joao Pedro Stedile, head of the Landless Rural 
Workers' Movement (MST).  The MST is a political organization 
 
SAO PAULO 00000780  004 OF 004 
 
 
that presses for agrarian reform and foments invasions of 
farms throughout the country.  During an April 2006 visit to 
Curitiba at the invitation of Parana's populist Governor, 
Roberto Requiao, Chavez met with Stedile and militants from 
the MST and an affiliate, Via Campesina, calling for 
solidarity among Latin American social movements.  Aligned 
with Lula,s governing coalition and generally supportive of 
the Lula administration, the MST recently marched on the 
capital in order to illustrate its displeasure over what many 
in the MST see as Lula,s abandonment of the PT,s leftist 
principles.  Stedile, Netto pointed out, is an economist, a 
good organizer with a gift for making people believe in him, 
and has control of a "paramilitary organization."  (Comment: 
Netto did not elaborate on this last characterization, but 
many in Brazil's political and economic elite consider MST 
militants a gang of armed thugs, trained by the FARC and 
other revolutionary movements, and bent on taking over the 
country.  End Comment.)  Netto acknowledged that his view of 
Brazil's political and ecoomic situation is pessimistic, but 
insisted thatit is also realistic. 
 
WHAT'S WRONG WITH THE POLTICAL SYSTEM 
------------------------------------- 
 
¶12.  (C) Brazil's political apparatus despertely needs 
overhauling, Delfim said.  The current system, in his view, 
is Fernando Henrique Cardos's (FHC, President 1995-2002) 
worst legacy.  FHCpushed to amend the 1988 Constitution to 
permit e-election, and, in Netto's words, "bought the vot" 
in Congress.  Now Brazil has "re-election without social 
control," in which politicians own the instruments of power - 
newspapers, radio, and television - and use them to 
perpetuate their own power and influence.  Proportional 
election of federal and state deputies is the other major 
problem, Netto said, arguing that it distorts the composition 
of Congress in favor of the evangelical churches.  He 
supports a single-district system similar to the one in the 
United States. 
 
COMMENT 
------- 
 
¶13.  (C) When we last met with Delfim Netto in August 2006 
(ref C), he said he was supporting Lula because, unlike his 
opponent, Lula would be able to convince the PT and other 
leftist parties not to block badly needed reforms of the tax, 
social security, and labor systems.  While he professes to 
like and admire Lula, he does not hide his disappointment: He 
minces no words about the economic path the government is 
following and sees real pitfalls in the current strategy. 
While some of his fears may be exaggerated (such as the MST 
resorting to paramilitary tactics in pursuit of 
redistribution of land and wealth), they are no more so than 
Lula's celebration of what he calls the best economic moment 
Brazilians have ever known.  End Comment. 
 
¶14.  (U) This cable was coordinated with Embassy Brasilia. 
WHITE