www.vheadline.com Posted: Monday, January 27, 2003 - 3:09:03 PM By: Patrick J. O'Donoghue

National Assemblyman Israel Sotillo has taken up the cause of Basque citizen, Arturo Cubillas, who fears he will be kidnapped and returned to Spain for trial and claims that the Venezuelan State Political & Security (DISIP) Police has placed him under surveillance and more disturbingly still, has sighted Spanish secret service agents with them.

Cubillas has been resident in Venezuela since 1989 and is married to a Venezuelan journalist. Friends warn that Cubillas could be arrested and deported before he has a chance to argue his case.

• Two Basques, accused of belonging to the ETA separatist group, were whisked off to Spain within hours of their arrest.

The irony is that Cubillas enjoys the support of the government Movimiento Quinta Republica (MVR) party. Nevertheless, Assemblyman Sotillo has asked the Ombudsman’s Office to monitor Cubillas’ case.

www.upi.com By Bradley Brooks UPI Business Correspondent From the Business & Economics Desk Published 1/27/2003 6:00 PM

RIO DE JANEIRO, Brazil, Jan. 27 (UPI) -- It was an innocuous moment of protest, but in some regards it may foreshadow Brazil's battles in the coming years.

Jose Genoino, the president of the ruling Workers Party, was on the business end of a strawberry-and-whipped-cream pie hurled his way by three activists during a news conference this weekend at the World Social Forum in southern Brazil.

The event was mostly comedic -- the protesters claimed to be representing "Confectioners Without Borders" -- but if external shocks coupled with even a few governing gaffes occur, it may not be the last time Brazil's new government ends up with pie on its face.

Unquestionably, the mood in Brazil and for market watchers outside of the country is bullish.

But local economists who are better informed about looming internal struggles for Brazil's new President Luiz Inacio Lula da Silva are expressing caution that the country -- saddled with its $240 billion of debt -- may not be out of the woods just yet.

"Lula isn't representing the people at (the World Economic Forum in) Davos," yelled the young lady who tossed the pie toward Genoino.

A political statement as blasé as they come.

Yet it is a peep of domestic protest that could turn into a dull roar as Lula approaches an explosive battle on the home front, that of pension reform.

Streamlining the country's money-draining pension system is of utmost importance if Brazil is to remain solvent, especially if a war in Iraq and events in Venezuela continue to send strong external shocks toward the nation.

"You can break down the analysis of the debt path between short and long run," said Gustavo Reis, an economist with the Rio de Janeiro-based investment bank Pactual.

In the short run, Reis said, the government's promise unveiled this weekend at the World Economic Forum of a primary budget surplus -- excluding interest payments -- of 4 percent of gross domestic product may keep the total debt from rising, if the local currency stabilizes.

But there are two key external issues -- war in Iraq and the political uncertainty in oil-producing Venezuela -- that are playing havoc with Brazil's currency, the real, which fell 0.3 percent to 3.63 Monday, a fall of more than 35 percent in the past 13 months.

"Every 10 percent of foreign exchange devaluation means an additional 2 percentage points to the debt-to-GDP ratio," Reis said, noting that that was not taking into account any other factors that might inflate debt.

Economists expect the government to announce this week that debt now accounts for 56 percent of GDP.

"Over the short run, the government is able to trim down expenses a bit and control the debt if the exchange rate devalues at a reasonable pace," Reis said.

"The real problem seems to be with investors' uncertainty about the ... persistence of the current fiscal adjustment into the future."

That is why it is of utmost importance for Lula and the Workers Party to push through reforms to the country's pension system -- whose deficit was about 3 percent of GDP in 2002.

Brazil watchers are following developments on pension reform closely, as it has become a bellwether for whether Lula and his economic team will have the political backing -- or the resolve on austerity -- to push it through.

When it was in the opposition, the Workers Party repeatedly blocked former President Fernando Henrique Cardoso's attempts at pension reform.

Suddenly shifting 180 degrees on the issue, though, means Lula will have to battle against civil servants -- key constituents in his election -- and public unions.

This may very well fracture Brazil's left and further complicate Lula's job of building a coherent coalition government that will be able to push anything through a Congress made up of 18 political parties.

"I think in one year, all these people who voted for Lula will be trying to push him out," said a top economist with Brazil's central bank who requested anonymity.

"We are not out of the game yet, but we are losing."

The economist, who expressed deep pessimism about the paralyzing political standoffs that Brazil may see in the coming years, said he isn't convinced about the new government's real appetite for fiscal reforms and austerity.

"For 20 years, Lula is anti-United States and anti-free market, and suddenly in the last three months, he has changed? I don't know if I believe it," the official said.

That pessimism aside, Lula has come a long way during his first four weeks in office when it comes to winning over the international political and business communities.

"We're encouraged by the economic leadership that President Lula and his new economic team have already shown," said John Taylor, undersecretary for foreign affairs at the U.S. Treasury, while speaking to the Brazil-U.S. Business Council on Monday in Washington.

"There are many reasons to be hopeful about Brazil."

Taylor did note that Lula would have to build legislative coalitions to push through reform, but he sounded a touch more optimistic than local Brazilian economists on the topic.

"The atmosphere of cooperation that dominated President Lula's inauguration speech can provide comfort in this regard," Taylor said.

Which, clearly, is what the U.S government needs to be saying at this point -- unless it wants to see another default in Latin American, one that would dwarf Argentina's.

But for those closely tracking Brazil's fiscal health, there is no room for comfort on the debt question just yet.

usinfo.state.gov 27 January 2003

(Economic leadership of Lula administration is "encouraging" thus far) (2310)

The United States looks forward to working with the government of new Brazilian President Luíz Inácio Lula da Silva, commonly known as Lula, and is encouraged by the economic leadership he and his economic team have demonstrated in their first month in office, according to senior U.S. officials.

In January 27 remarks before the Brazil-U.S. Business Council in Washington, U.S. Under Secretary of the Treasury for International Affairs John Taylor and Deputy U.S. Trade Representative Peter Allgeier shared their perspectives on the "Outlook for the Brazil-U.S. Commercial Agenda."

Taylor and Allgeier agreed that Lula's recent election provides an important opportunity for the United States and Brazil to strengthen bilateral ties and work together to face common economic challenges.

Taylor said that the United States is "encouraged" by the leadership Lula and his economic team have shown since taking office on January 1, 2003.

"We have seen an agenda designed to fight poverty and increase economic growth and stability," Taylor added. "The new economic plan is rightly ambitious in its specific aims to end hunger, combat corruption, and discourage drug trafficking."

Given the economic plan's emphasis on economic reform of fiscal, monetary, trade and structural policy, "there are clearly many reasons to be hopeful about Brazil," Taylor said. He pointed to high poll numbers and dropping interest rates as evidence of support for Lula among Brazilians and international markets.

Taylor outlined a number of the Lula administration's proposed reformsand highlighted the new Brazilian government's comments on its economic agenda. He concluded that the agenda "is a model in its aggressive focus on pursuing pro-growth reforms in several areas of economic policy." Taylor said also that Lula's stated goal of opening the Brazilian economy through trade liberalization is "encouraging."

Allgeier echoed Taylor's optimism and indicated that trade liberalization could play a "critical role" in the Lula administration's efforts to reduce poverty by spurring economic growth and expanding resources to address social needs.

Beyond promoting economic development and playing a role in alleviating poverty, trade liberalization can also improve government transparency and improve the overall competitiveness of the Brazilian economy, Allgeier said.

He noted that although the United States is already Brazil's largest export market, receiving just over 25 percent of that nation's exports, Brazil's new administration offers an opportunity to bolster this bilateral trade relationship and that initial consultations between the two countries are "off to a good start."

Allgeier was also optimistic that Brazil and the United States can continue to work together to establish a Free Trade Area of the Americas (FTAA) and advance important negotiations before the World Trade Organization (WTO).

The USTR official said that the recently concluded trade negotiations between the United States and Chile could serve as one appropriate point of reference for FTAA negotiations.

Within the context of WTO negotiations, Alleiger said that Brazil and the United States "each have a strong interest in agricultural reform." He suggested that Brazil and the United States maintain pressure on nations that seem reluctant to pursue ambitious agricultural reforms.

Allgeier said that the United States feels that concurrent bilateral, regional and global trade liberalization efforts are mutually reinforcing, and expressed his belief that the United States can work successfully with Brazil on all three trade dimensions.

For his part, Taylor emphasized that "Brazil is a critical part of Latin America, a region that holds particular significance to President Bush." Moreover, Brazil and the United States agree on their overarching objective for the region, he told business executives. "Higher economic growth throughout this hemisphere is our shared priority," Taylor said.

Following is the text of Taylor's remarks before the Brazil-U.S. Business Council, as prepared for delivery:

(begin text)

JOHN B. TAYLOR, UNITED STATES TREASURY WASHINGTON, D.C. JANUARY 27, 2003

REMARKS BEFORE THE BRAZIL-U.S. BUSINESS COUNCIL

Thank you very much for the opportunity to speak before this distinguished group of business leaders. Today I would like to talk about economic policy in Brazil and in the United States, and also about opportunities for cooperation between Brazil and the United States.

The recent electoral victory of Luíz Inácio Lula da Silva provides a valuable opportunity for a promising new chapter in historically strong relations between our two countries. In this new era, Brazil and the United States face many common economic challenges, from strengthening economic growth to combating the financing of terrorism. It is now more important than ever for the United States and Brazil to continue to strengthen our cooperation.

We are encouraged by the economic leadership that President Lula and his new economic team have already shown. We have seen an agenda designed to fight poverty and increase economic growth and stability. The new economic plan is rightly ambitious in its specific aims to end hunger, combat corruption, and discourage drug trafficking. And it is responsible in its emphasis on economic reform in the four key areas: fiscal policy, monetary policy, trade policy, and structural policy. There are clearly many reasons to be hopeful about Brazil.

We in the United States government are not alone in our optimism about Brazil. A recent poll indicated that 76 percent of Brazilians believe the current government will be "good" or "excellent." The financial markets have also rallied with interest rate spreads falling 10 percentage points in four months. The positive market reaction we have seen stems from key steps Lula has taken-appointing a responsible focused economic team and clarifying a coherent set of economic priorities. And implementation of the key economic reforms is already proceeding.

In recent years, President Cardoso and his economic team made major progress by consolidating fiscal policy, eliminating hyperinflation, and strengthening the financial sector. Finance Minister Antonio Palocci has signaled an interest in traveling further down this road as well as tackling the next stage of pro-growth economic reforms. As stated in Minister Palocci's inauguration speech, "We will seek reforms that are necessary for a sound and sustainable resumption of growth.... The seriousness and responsibility in managing the public issues is an undeniable inheritance of the conduct of economic policy by Minister Pedro Malan and his team.... And we will be glad to preserve this heritage and afterwards pass it on even more consolidated."

I have argued that economic policy should focus on increasing productivity growth because productivity growth is the source of rising living standards and reduction in poverty in any country. The two determinants of productivity growth are the pace at which capital is accumulated and the effectiveness with which labor and capital are employed. According to research at the Inter-American Development Bank, both determinants are constrained in Brazil. Indeed, this is why productivity growth, while improving, is still less much lower in Brazil than it can be. One cannot easily invest in capital when real lending rates to businesses are 15 percent. And one cannot easily create high productivity jobs when tax rates are high.

The importance that the new government of Brazil places on fiscal policy reform is therefore most welcome. Again to quote Minister Palocci: "Today we have a government that spends a lot and spends badly ... We can no longer live with a budgetary management that promises more than public revenues allow."

There is a commitment to "generate the primary surplus that is necessary to undoubtedly guarantee the sustainability of our public debt." This will reduce the risk premium and thereby lower interest rates and be a boon to private investment and economic growth. And, over time, a lower debt burden will lessen the dependence on some of the highest tax rates in Latin America. And we see that elements of this policy are already being implemented with new spending proposals being offset with reductions in spending elsewhere in the budget.

Indeed one of the main purposes of the planned social security reform is to achieve a reduction in the annual deficit stemming from pension payments. Another pillar of the new administration's fiscal policy agenda is tax reform. Converting cascading tax rates into a value-added tax lowers the fiscal burden on producers and improves Brazil's investment climate. This can attract needed capital for improving productivity.

Regarding monetary policy, the new government has committed itself to maintaining a monetary policy with a floating exchange rate, an inflation target, and "clear rules and autonomy" for the central bank to change the instruments of monetary policy to achieve these targets. In particular, the new government has announced its plans to submit to the Brazilian congress a Monetary Responsibility Law, which would grant autonomy to the central bank. Evidence from many countries shows that the trinity of a flexible exchange rate, a low inflation goal, and a transparent procedure for setting the interest rate instrument will lead to greater macroeconomic stability and it is important that Brazil has chosen this route. The recent actions by the Brazilian central bank show that the policy is already being implemented.

On the structural front, the new economic team has noted the importance of expanding the private credit market so as to give small businesses more access to credit. Reform of the bankruptcy code is an important step because, by improving creditor rights, it will help increase lending and reduce interest rates. The pledge to reduce corruption, which raises the costs of economic transactions and is itself a barrier to strong economic growth, is also an important structural reform.

Regarding international trade policy, it is encouraging that President Lula cited the goal of opening the economy through trade liberalization in his inauguration address. Lowering barriers to international trade is an important way to raise productivity growth. The benefits from greater trade include improved access to needed capital imports and technology to raise productivity and improve living standards.

This agenda is a model in its aggressive focus on pursuing pro-growth reforms in several areas of economic policy. It is an agenda that resounds positively in the United States. It mirrors many of President Bush's own initiatives from lowering tax rates to expanding international trade.

Soon after coming into office President Bush was successful in implementing a timely reduction in taxes that helped mitigate the economic recession. And last year he successfully won back Trade Promotion Authority, the first time since 1994 that a president has had this essential legislative tool to negotiate trade agreements. And his recently announced program of tax cuts has the goal of raising economic growth, sustaining the recovery, and creating more jobs both in the short run and the long run. Small businesses are our main source of new jobs. The cut in the income tax rates will lower the tax on many small businesses and more generous expensing provisions for small businesses would encourage them to invest in the technology and other equipment they need to expand and create jobs. Similarly, the elimination of the double tax on dividends will lower the cost of capital, encourage investment and job creation, and raise productivity. The expansion of the child tax credit and the extension of the 10 percent income tax to more taxpayers are examples of how the tax cuts apply to all income tax payers.

We are confident that this tax program will raise economic growth and improve economic stability in the United States. And because the United States is such a large part of the world economy, raising economic growth here will raise economic growth elsewhere, including Brazil. Indeed, pursuing a pro-growth economic policy at home is a key principle of our international economic policy.

Another principle of our international economic policy is to support countries that are following good economic policies. The United States has supported Brazil consistently in the International Monetary Fund with the program in August of 2001 and its augmentation in August of 2002. We would like to encourage the multilateral development banks to provide assistance, perhaps for the zero hunger plan, or for small business lending, or for trade capacity building. We are also anxious to work with Brazil to create a solid Free Trade Agreement for the Americas.

We look forward to advancing many of these initiatives as part of the broader Summit our Presidents agreed to at their meeting in December. We at the United States Treasury plan further concrete and constructive discussions with our counterparts in the Brazilian Ministry of Finance to pursue areas of mutual interest.

Translating economic agendas into reality takes enormous skill in communication and consensus building, whether in Brazil or the United States. As we have seen in our own country, implementing economic policy is just as important as designing it. The Lula administration will have to form the important coalitions necessary for key legislative reform. Of course, the atmosphere of cooperation and outreach that dominated President Lula's inauguration speech can provide comfort in this regard

In conclusion, let me emphasize that Brazil is a critical part of Latin America, a region that holds particular significance to President Bush. Brazil is the world's fifth most populous country and the ninth largest economy. It has long been a major trade, investment, and financial partner of many countries in our hemisphere including the United States.

Our efforts to increase economic growth in this hemisphere also include the recently concluded free trade agreement with Chile, the just-opened negotiations for a Central American Free Trade Agreement, more assistance to the poorest countries through the Millennium Challenge Account, the new grants program at the World Bank, increased private sector lending through the multilateral development banks, and facilitating remittances from the United States to families in the countries of Latin America.

Higher economic growth throughout this hemisphere is our shared priority.

(end text)

(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: usinfo.state.gov)

This site is produced and maintained by the U.S. Department of State's Office of International Information Programs (usinfo.state.gov). Links to other Internet sites should not be construed as an endorsement of the views contained therein.

onenews.nzoom.com

The United States appeared further isolated in its attitude towards Baghdad, with most of the world saying UN arms inspectors needed more time to search for weapons of mass destruction in Iraq.

Even Foreign Secretary Jack Straw of staunch US ally Britain, while condemning Iraq's attitude to the inspectors as "a charade", said the continuation of the searches was up to the UN Security Council - not any one state.

Following reports from the UN arms chiefs to the Security Council on their first two months of operation, the United States said Baghdad was not cooperating with the inspectors or complying with UN resolutions to give up weapons of mass destruction Washington says it possesses.

Germany, France, Russia and Canada said the arms experts needed more time, as did Secretary-General Amr Moussa of the 22-member Arab League and states neighbouring Iraq.

UN weapons chief Hans Blix said Iraq had cooperated in opening sites for inspection but had fallen short of filling in gaps in December's declaration on its weapons programmes. He said further moves were up to the Security Council.

The head of the UN's nuclear watchdog agency, Mohamed ElBaradei, told the Security Council two months of inspections had produced no evidence Iraq was reviving its nuclear arms programme, dismantled by the UN in the 1990s. He sought more time.

While Straw called Baghdad's performance "a charade", he hedged his bets on how soon a US-led assault on Iraq might go ahead.

He said after a meeting of European Union foreign ministers in Brussels: "The decision about continuation of inspections is a matter for the Security Council, not for any one state."

US has threatened war

The United States has threatened a unilateral attack on Iraq if Baghdad does not give up biological, chemical and nuclear weaponry which Iraq says it does not have.

Baghdad said it had complied with UN demands.

US Secretary of State Colin Powell did not mince his words: "Iraq's time for choosing peaceful disarmament is fast coming to an end."

He gave no hint on when a decision to go to war might come. He said Washington would consult its allies over the next week and after that, it would decide what to do.

"The issue is not how much more time the inspectors need to search in the dark. It is how much more time Iraq should be given to turn on the lights and to come clean. And the answer is not much more time," Powell said.

Britain has already sent troops to the Gulf to join US forces there, diverging from European partners Germany and France and other international heavyweights such as Russia and China.

German Chancellor Gerhard Schroeder and French President Jacques Chirac, whose opinions have drawn fire from US Secretary of Defence Donald Rumsfeld, said the arms inspectors needed more time.

"We are of the opinion... that the inspectors will get more time for their work," Schroeder told journalists in Berlin.

At a later news conference after meeting Brazilian President Luiz Inacio Lula da Silva, Schroeder said: "We are both of the opinion that nobody has the right to undertake any kind of action without a decision of the Security Council."

Chirac, who discussed the issue with Schroeder by phone, echoed his call and urged Baghdad to give the inspectors "full and entire cooperation".

Germany's Joschka Fischer, also attending the EU foreign ministers' meeting in Brussels, said: "War is no alternative. I think one can conclude that the inspectors are doing a great job which should definitely go on."

The EU meeting produced a statement seeking more time for the inspectors in what officials said was a "unified position". Diplomats said the declaration papered over cracks that would inevitably emerge if Washington went to war.

Russia says new resolution not needed

In Moscow, Russia's Deputy Foreign Minister Yuri Fedotov said the reports of the arms inspectors were only intended to provide a preliminary survey of their work and set basic outlines for the future.

"At the present time, there is no need to adopt new (UN) resolutions on Iraq," he was quoted by Itar-Tass news agency as saying.

The Arab League's Amr Moussa said in an interview with Reuters in Berlin that the arms inspectors should get as much time as they needed, three months or more if necessary, to check for banned weaponry.

"There should be no outer limit for peace. War is a very serious and dangerous proposition, you have to avoid it by all means up until it is the only necessity and one the whole world community decides.

"So if they need more time, they should be given more time. Why should we be in a hurry to wage war?" he asked on the eve of talks with the German foreign minister.

Prime Minister Abdullah Gul of Turkey, a close NATO ally of the United States and a key to any war with Iraq, said conflict with Baghdad could spell economic and human disaster and called for increased efforts to avert it.

In New Delhi, Iranian Foreign Minister Kamal Kharrazi urged Baghdad to cooperate fully with the weapons inspectors, but said all countries bordering Iraq opposed a US-led invasion.

www.upi.com By Carmen Gentile UPI Latin America Correspondent From the International Desk Published 1/27/2003 7:08 PM

SAO PAULO, Brazil, Jan. 27 (UPI) -- While U.S. leaders used this week's economic forum to rally international support for its hard-line stance on Iraq, Brazil's president took a decidedly different agenda to Davos, Switzerland, calling on industrialized nations to make the battle against hunger the world's top priority.

In talks dominated by the imminent threat of a U.S. attack on Iraq and the results of the latest U.N. weapons inspections, Brazil's new, leftist leader, Luiz Inacio Lula da Silva, asked leaders to take a step back from the precipice of war and consider focusing on the creation of a worldwide fund to end hunger and poverty.

Lula, as the president is known, gave nearly the same address to participants of the anti-globalization meeting on Friday in the southern Brazilian city of Porto Alegre, where he received raucous applause for his declaration that "the world needs peace and comprehension, not war."

The only world leader to attend both the World Social Forum and economic forum in Davos, Lula stressed at both meetings that industrialized nations "need to start seeing the world in a new way."

"We all need to make an option for development and growth as part of a new world order," said Lula. "Hunger cannot wait."

A former union leader and metal worker who quit school as a young boy so he could help support his family, Lula used both international forums to bolster a hunger eradication agenda that has become his top priority at home.

Even in the months leading up to his Jan. 1 inauguration, Lula had been designing his much touted "Zero Hunger" plan. The initial goal is to assist 10 million people via an aggressive food allotment program over the next five years.

Government statistics show that some 44 million out of an estimated 175 million Brazilians are eligible for Zero Hunger benefits, earning less than a dollar a day.

Lula drew a grave picture of starvation in South America and especially Africa, asking G-7 industrialized nations and international investors to help get the initiative off the ground.

"We urgently need to join forces to ensure the victory of hope over fear, as we have in Brazil," Lula said. "We urgently need an understanding in favor of peace, against hunger. Brazil can be counted on to participate in this effort."

The Brazilian leader's presence at both meetings put Lula in the international spotlight on two continents, a move that puts him into the upper echelon of prominent developing nations' leaders after less than a month in office.

Popularity and name recognition come at a price, however.

Some leftists, both in Brazil and the world over, criticized Lula for attending the World Economic Forum.

Analysts note that Lula has called for social reform at home while maintaining the free-market reforms enacted over the past eight years by his predecessor, Fernando Henrique Cardoso. But that might have to change.

Party politics aside, Lula's presence in Davos appears to signal his willingness to work with both the left and right in order to promote Brazil abroad.

During his address Sunday, he pledged to continue reform efforts in the Brazilian government, most notably in the areas of taxes and pensions.

"I've told (Finance Minister Antonio) Palocci: You don't need to be a progressive or a leftist. You can even be a little conservative. In Brazil, we are only going to be radical when it comes to ending hunger," said Lula.

That said, the Brazilian president took the opportunity to condemn what he called the "uninformed youths" that issue negative credit ratings for South American countries. Jitters on Wall Street regarding a possible Lula's presidency were in part to blame for Brazil's sagging economy in the months leading up to the new president's administration.

"Here are people who can't even name the capital of Colombia and they're telling the world whether certain countries are credit-worthy or not," said Lula. "We cannot allow ourselves to be the victim of speculators."

The Brazilian president curbed his comments by stressing that "We (the developing world) cannot blame the first world (developed world) for our problems."

"We have to look inward," he said.