www.gulf-news.com Dubai |By Manoj Nair | 13-01-2003

Despite the economic risks involved, India should still take "sequential" steps towards full capital account convertibility, according to a senior economist.

"India's banking system is still weak and fiscal deficit is not under control. This is why small, incremental steps towards convertibility are what is required," said Jairam Ramesh, who, according to many in the know, could be a future Indian finance or commerce minister.

He later yesterday spoke at a meeting organised by the India Today group and the Indian Business Council in Dubai.

During his earlier tenure with the finance ministry - in 1997 -as a consultant, Ramesh was instrumental in putting together a position paper on India's road map towards full convertibility. According to it, the status was to be achieved by 2007.

Then, the Asean crisis sprang up, which slowed the momentum. This was followed by general elections which brought a new coalition government to power.

In recent months, a debate has sprung up in certain quarters about whether it was indeed advisable for the country to follow such a course. There were many who were cautioning a slower approach, or none at all.

Those who favour it point out to India's strong foreign exchange reserves position - of $70 billion. "There is still a lot of risk - Brazil lost $50 billion in just three weeks when it allowed convertibility during 1999. However, hot money represents only 20 to 15 per cent of India's overall foreign exchange reserves, which represents a far more stable situation than in other cases," said Ramesh, presently secretary in the economic affairs department of All India Congress Committee, the main opposition party.

"But, from the political perspective, India does not go in for big reforms unless there is a crisis." On India's economic situation, Ramesh said 2002-2003 has been bad with industrial growth not more than 5 to 6 per cent. "I do not think it is possible to achieve a 4 per cent GDP growth. Agriculture too has been badly affected."

On the plus side, "Many Indian companies are in the process of restructuring and getting results. Tisco is the lowest cost steel producer in the world, but not many know that. Telco was written off a few years ago, but is now a success story of transformation. There is a growing universe of Indian companies that are globally competitive.

"But we still have many issues - poor infrastructure tops. In balance, India has many macro successes, while having its large share of micro failures."

On the impact of possible war with Iraq and its fallout on India's oil bills, "Most of our calculations are based on an oil price of $25 a barrel. With $70 billion in reserves, the import scene is not what's worrying.

"What is of concern is the economic and social cost of the dislocation of a huge number of expatriate Indians in the Middle East back to the country.

"The recent global NRI summit in New Delhi made no effort to look at the Middle East, which accounts for $6 to 7 billion in annual remittances to India from an estimated three million Indians here. The whole focus of the meeting was on Indians in the West."    

www.infobrazil.com Analysis by Alcides Ferreira          Jan 11 - 17, 2003

President Luiz Inácio Lula da Silva's first few days in office offered the news media an abundance of photo opportunities. He visited poor towns in the Northeast and brought his entire cabinet with him for a close-up look. In many ways, Lula is still behaving as if he were in the middle of an election campaign – at times, he seems more like a pop star than a president in his public appearances.

Probably the last time Brazil had such a popular president was in the fifties, with the late Juscelino Kubitschek. This is not negative, but the big hopes for change that carried him to victory may well work like a double-edged sword, and turn into deep disillusion in a while. All it would take is a return trip by reporters to the same impoverished locations Lula visited in recent days, and their subsequent stories showing that not much has changed.

As I predicted here, Lula's economic team has so far produced the best performance among all cabinet members. Markets are reacting positively to that. There is, however, one important exception: new Labor Minister Jacques Wagner, who declared that the past administration's proposal to change Labor Legislation Consolidation (Consolidação das Leis do Trabalho, in Portuguese) – a proposal that gathered dust in Congress since the end of 2001 without being voted on – will now be set aside.

In fact, this is consistent since the Worker's Party was among the biggest opponents of the changes proposed. The fact remains that Brazil's labour regulations are a road to hell paved with nothing but good intentions. More than one thousand specific labour rules clutter the Constitution and the Labor Legislation Consolidation The end result of one of the most detailed and strict set of labor laws in the world is that just 40 percent of Brazilian workers are formally registered employees. The majority of workers in Brazil are informal, unregistered, without basic benefits.

As I have been saying here *, a thorough revision of Brazil's labour laws is a vital pre-requisite for employment growth. As things stand, when a company hires someone in Brazil it has to follow every detail in the law, and that means offering the new employee a number of benefits called for in legislation. It makes no difference whether the employer is in a poor state, or if it's a startup company – it will have to put out just as an established enterprise in a bustling city would have to.

Not only has this led to Brazil's enormous informal labour market, but there is also an incredible amount of labor litigation in Brazilian courts. According to University of São Paulo Professor José Pastore, one of Brazil's foremost labor law specialists, there are currently two million litigations making their way through the court system, all related to employment issues. In Japan, which has a labor market equivalent in size to Brazil's, there are just 1,500 lawsuits under way.

As Americans like to say, only a person who has never met a payroll would push aside this issue. Labour Minister Wagner said he intends to modernize labour regulations, and mentioned, for instance, the idea of ending the payment of a fine every time a company fires someone without just cause. Under current legislation, the company pays the employee a fine equivalent to 40 percent of the Employees Severance Indemnity Fund, known as FGTS account, when it fires a employee. FGTS are the initials, in Portuguese, of this fund. Every registered worker in Brazil has an FGTS account, which receives monthly deposits from the employer. These accounts are managed by the government, and can only be drawn in three circumstances: if the employee buys a home, opens a business, or is fired without just cause.

This penalty paid by the employer was created in 1988, when the Brazilian Constitution was given a thorough review in Congress. It was the result of a bizarre negotiation between right and left-wing parties. Leftists, led by the Worker's Party, wanted to re-introduce employment stability as a constitutional guarantee, something that was dropped in the 60s and replaced by the FGTS accounts. The left didn't get its way, but obtained this fine. **

The idea of penalizing a company because it fires someone is nonsense. The result of this is clearly visible in Brazil. What it has generated is a growing informal market, as well as giving rise to yet another very Brazilian "solution" for regulations that don't make a lot of sense. It is quite common for companies and employees to reach informal agreements, in which the company agrees to fire the employee. This allows the worker to draw the funds from the FGTS account. To return the "favour", the employee agrees to give back to the company the 40 percent fine. This money returns to the company under the table, since this type of deal between employer and employee is not recognized in the law books.

Labour unions in Brazil consider this fine is a hard-earned "conquest" and a form of insurance for employees, so predictably, reaction against the new Labour Minister's suggestions was strong. And not surprisingly, Jacques Wagner was forced to backtrack, saying he never really intended to remove the fine specifically. This was another clear indication of the contradictions the Worker's Party will face in government. On one side, part of its members recognize the need to continue reforms and modernize the economy, in spite of the fact that in the recent past, the Worker's Party voted against all major reforms.

On the other side, there are those within the party, as well as key supporters in the labour movement, who will continue to react strongly to these changes, much as they did while in the opposition. In the case of this specific change involving labor regulations, those who might benefit most – the unemployed – have no way of applying pressure, since there are no lobbies or unions acting for the jobless. Barring an unexpected burst of internal defiance, the unfortunate likelihood is that we'll continue to see union leaders grabbing headlines, calling on the new government to preserve, and never extinguish these "worker's rights".

news.ft.com By Raymond Colitt Published: January 13 2003 4:00 | Last Updated: January 13 2003 4:00

Like a firefighter in a rescue operation, Luiz Inácio Lula da Silva leaned from a shanty over a 10ft drop into filth and mud and shouted "I'll get you out of there," to the occupant of the next hut, promising a new home.

The rickety construction on stilts risked collapse from the crowds of supporters that had flocked to see Brazil's newly elected president in Brasília Teimosa, a slum on the outskirts of Recife.

It was the second of three stops on a two-day "reality tour" on which Mr Lula da Silva took his cabinet through some of Brazil's poorest regions in the north-east. Himself a former shoeshine boy and lathe turner, Mr Lula da Silva said: "I want my ministers to look misery in the eye."

He is off to a quick start to try and fulfil his campaign promise of radical action to tackle Brazil's infamous social inequalities. The trip marks a new style of government in Latin America's largest country, in which not only the president but, he hopes, the entire government will be working more closely with the people.

Brazil has one of the world's most unequal income distributions. While regions in the country's south boast living conditions similar to those of Spain, between 10m and 30m of the 175m inhabitants live in conditions similar to those in sub-Saharan Africa. Pockets of misery are concentrated in the drought-stricken north-east and in city slums.

The mayor of Recife, also of Mr Lula da Silva's Workers' party (PT), seemed to have missed the point of the trip, sending in cleaning crews to pull out 10 tonnes of garbage before the distinguished guests arrived.

Still, there was no hiding the sub-human living conditions in Brasília Teimosa (Fearsome Brasília). There is no running water and latrines are little more than a hole in the floor. On particularly stormy days huts are washed out to sea.

Several of Mr Lula da Silva's ministers were deeply impressed. "I have seen this only in movies," said Celso Amorim, foreign minister, who had just returned from the comforts of being ambassador in London.

With teary eyes and a choking voice, Luiz Fernando Furlan, one of the few businessmen in government, admitted the experience would mark his tenure as industry and trade minister. "Without a doubt I'll be more socially aware. Look at their eyes. In all that misery, they are still hopeful."

Wherever he goes, Mr Lula da Silva is greeted with spontaneous celebration and requests for help. Geazi Belarmino da Silva was one of many in the crowd hoping to pass the president a letter. He would like to get back his job as a mailman, which he lost 12 years ago.

One of numerous signs hung from windows read: "Brazil is 1000 times bigger than its problems - congratulations Lula." Another read: "Lula you have been sent by God to save the poor. Now keep your promises - thank you!"

Mr Lula da Silva is walking a fine line between meeting demands and generating even higher expectations. Critics say his high-profile anti-poverty campaign is beginning to smack of populism. Yet, well aware that the post-election honeymoon could soon fade, he must show results to maintain the support he needs to implement much-needed and often controversial reforms.

Stern-faced and visibly tired from the first two intense weeks on the job, the former metalworker did not appear to be basking in his massive popularity at the weekend. "This is not about him, he is a humble person," said Mr Amorim.

While talking of a gradual social revolution to Brazil's masses, Mr Lula da Silva's discourse of economic austerity has also encouraged Wall Street in recent days.

Travelling between "poverty hot spots" on the presidential aircraft, he detailed plans to address investors at the World Economic Forum this month. Deep budget cuts that could help meet International Monetary Fund targets were also on the agenda.

Pledging to grant property titles and expand housing resettlement projects for slum dwellers, Mr Lula da Silva asked the poor for patience. "I cannot promise you that tomorrow everything will be resolved. The government is like a baby. It takes nine months to be born and another 11 to walk."

www.guardian.co.uk Sue Branford Monday January 13, 2003 The Guardian

Will the international financial community give Lula a chance? There is no doubt that Brazil's new left-leaning president is passionately committed to social reform.

As he repeatedly said in his electoral campaign, it is a national scandal that 9m families are going hungry in this vast country, almost the size of the United States. The Workers' Party would love to turn its back on neo-liberalism, as free market economics is called in Latin America, and introduce expansionist policies with an emphasis on economic growth, full employment and wealth redistribution.

Nothing would please it more than to develop the domestic market of 175m people, which has been stagnant for years because the poor have lacked the jobs and the income to be good consumers.

Yet the new government faces a predicament. Under the outgoing administration headed by Fernando Henrique Cardoso, Brazil adopted the familiar package of IMF policies: cuts in state spending, privatisation of state companies, deregulation, and so on.

At first the policies seemed to be working. Foreign investment poured in, growing eightfold between 1995 and 2000, but it did not deliver the promised high rates of economic growth. The abundance of dollars led to an appreciation in the value of the local currency, the real. With exports priced out of the market, Brazil began to suffer heavy trade deficits which the government had to cover by borrowing heavily at home and abroad.

Throughout the 1990s the country was hit by a series of external shocks. Each time government was able to restore confidence only by raising interest rates, which further depressed the economy and made it more expensive to service the internal and foreign debts. In August last year it seemed that Brazil would follow its neighbour Argentina into default but the IMF, fearful of the international repercussions, came up with its largest loan to date, of $30bn.

This loan, most of which is yet to be disbursed, is creating problems for the new government. Among its strict conditions, the IMF is demanding a budget surplus of at least 3.75% this year. If the government agrees, it can wave goodbye to reactivating the economy this year and shatter the hopes of millions of poor Brazilians. As financier George Soros has pointed out, the power of the "market" to determine Brazil's economic policy amounts to a serious infringement of the country's democratic rights.

Even though he confesses that the state of the economy is extremely serious, Lula believes there is a way out of the conundrum. He says that on the macroeconomic front Brazil must respect existing budget constraints for one or two difficult transitional years. Rather than spending more, the government will have to make progress by rooting out corruption and reallocating existing resources.

After consulting military chiefs, Lula has cancelled an order for military aircraft and said the armed forces will play a greater role in tackling social problems such as distribution of food to starving families, rather than preparing for anunlikely war with a neighbour. As his first act in office, the transport minister has frozen highway construction to allow time to review the transport needs of the poorer sectors.

Along with the economic caution, Lula has been radical on the social front. The environment minister, Marina da Silva, who was born into a family of poor rubber-tappers deep in the Amazon forest, has brought many of Brazil's most active environmentalists into her ministry and is preparing new policies for many controversial issues, including the Amazon rain forest.

The education minister, Cristovam Buarque, is a respected leftwing intellectual who is promising a radical overhaul of the country's education system, currently heavily skewed in favour of middle class children. The minister of agrarian reform, Miguel Rossetto, is an ally of the militant landless peasant movement, the MST, and is promising far-reaching agrarian reform.

Can the strategy work? On the plus side are the government's high level of legitimacy, given the enthusiastic backing of the population, and a slight easing of the external constraints because of the better than expected trade surplus, $13bn in 2002. On the down side is Brazil's heavy dependence on foreign money.

Although the markets have reacted calmly to Lula's first fortnight in office, few expect this to last. If the government's radical social reforms begin to alarm foreign creditors, millions of dollars could again start haemorrhaging out of the country. Lula will be faced with the stark choice that he wishes to avoid: back-pedal on the reforms and disappoint millions of poor Brazilians, or impose capital controls and provoke the ire of foreign creditors.

Lula's conciliatory approach deserves a chance. Latin America is seething with discontent after 20 years of free market economic policies that have failed to deliver prosperity or social reform. If Lula fails, Latin America faces a bleak and violent future.

· Sue Branford has co-authored Politics Transformed: Lula and the Workers' Party in Brazil, to be published this month by Latin America Bureau, London

www.washingtonpost.com Reuters Monday, January 13, 2003; Page A16

CARACAS, Venezuela, Jan. 12 -- Venezuelan troops fired tear gas today to disperse tens of thousands of protesters as President Hugo Chavez ordered a crackdown against a six-week-old opposition strike that is bleeding the economy.

Chavez warned opponents he would not let them disrupt schools, banks or food supplies with the strike, which has already crippled shipments by the world's No. 5 oil exporter.

"They want to break us economically. They are not going to do it. I swear it by God and my mother," Chavez said during his weekly television and radio show.

During his broadcast, Chavez signed a decree creating a special government commission to combat a tax rebellion announced by opposition leaders. By urging Venezuelans not to pay taxes, the strikers hope to cut government revenue already drained by the oil strike.

The president, elected in 1998, said the strike was costing the country tens of millions of dollars a day. Chavez, who has already fired 2,000 striking state oil employees, repeated threats to send troops to take over private factories and warehouses if they hoarded food supplies.

He also threatened to revoke the broadcasting licenses of private TV stations that criticize his rule. He described their hostile programming as "worse than an atomic bomb."