www.brazzil.com Brazzil Economy March 2003

Brazilian Finance Minister, Antônio Palocci, the former Trotskyist,  is saying the right things. He is honest and sincere, although his successor as mayor of Ribeirão Preto has discovered plenty of unpaid bills from Palocci's administration.

Lula has returned triumphantly from a whirlwind trip to Europe, after his appearance at the World Social Forum in Porto Alegre. He was a hit in Davos at the World Economic Forum. Lula is the only president to have appeared at both gatherings. He is being touted as a link between the First World and The Third World. Lula provided a bit of optimism to the conference that was preoccupied about war and recession. His promises of fiscal responsibility together with increased social emphasis has set well with observes in Europe.

Not everyone in Porto Alegre was pleased with Lula's participation in the World Economic Forum. One woman, upset by the way that Lula's party, the PT (Workers' Party) and the President are behaving now that they are in power, hit PT president José Genoíno in the face with a cream pie during one session.

Brazil's best interests were served by Lula stellar performance in Davos. Antônio Palocci, Brazil's Minister of Finance, met in Davos with Anne Kruger the number two person at the IMF. The encounter took place in the hospital room of Henrique Meirelles, central bank president, who had slipped and fallen on ice breaking an ankle.

In Paris, Lula and Palocci had a productive meeting with IMF president, Horst Köhler. A cordial relationship with the IMF, who has another US$ 24 billion to disburse this year under the present agreement, is crucial for Brazil to meet foreign debt payments and pay for essential imports. An IMF team of technicians is due in Brasília in mid February to review figures and make recommendations to the board. There should be no problem in releasing this next US$ 6 billion as it appears as if Brazil is meeting the previously established targets.

Palocci has said that his objective is to reduce the Brazil risk factor and regain the confidence of the international financial community. The government's stated goal is to reduce dependence on foreign sources of credit. It is not easy to achieve credibility by words that are the direct opposite of what Lula proclaimed in the early days of his 2002 presidential campaign. Palocci, the former Trotskyist, is saying the right things. I believe he is honest and sincere although his successor as mayor of Ribeirão Preto has discovered plenty of unpaid bills from Palocci's administration.

Both Gerhard Schröder and Jacques Chirac warmly received Brazil's new President. Vague promises of friendship and cooperation were exchanged. France has enlisted Brazil's help in developing Africa. Lula did not make progress on the matter of agricultural subsidies and tariff barriers. As a man of humble origin and limited education who has risen to such prominence, Lula is somewhat of a novelty. The European media gave him excellent, positive press coverage. He was careful not to be critical of George Bush, merely stating that a diplomatic solution for the Iraq situation would be preferable to war. Brazil is not on the UN Security Council nor is it expected to provide any military help.

The reality facing Lula's government, so far intact, is tough. The economy is in the doldrums with unemployment at record heights. Inflation continues. The financial markets are uneasy. This is due not necessarily because of doubts over the capacity of Lula and the PT to achieve progress toward fulfilling some campaign promises, but because of the real prospect of a war of uncertain duration and consequences. Promised austerity has not yet been tested, although there is talk of increasing the target of the primary budget surplus above the present 3.75 percent and none of the bankrupt states have received handouts from the federal government.

Recent opinion polls show Lula has a record level of approval. Thus far there has been much talk and few measures of a concrete nature, other than an increase in interest rates and pay raises and other benefits for legislators. The population is patiently waiting to see what will happen. School vacations will soon be over and life will return to normal before long. Until Congress reconvenes there may be little excitement.

Lula could have luck in persuading Congress to pass the many announced reforms. Tax, political, labor and social security reforms as well as the matter of central bank independence are the principal items on the agenda. It appears that ex-president José Sarney of the PMDB will be elected as president of the senate. The PT promoted this by interfering in internal matters of this big party in order to gain their legislative support. Many jobs at the second and third level of government have not yet been awarded. PMDB will no doubt receive its share.

Good at PR

Many federal deputies are changing parties in order to be aligned with the government. The PT is fairly rigorous in accepting new members so these turncoats are joining other parties that theoretically back the government. Since few, if any, legislators have any ideological convictions, this musical chairs game is quite common. It is much easier for a deputy to obtain favors if he is "government" rather than opposition.

Hypothetically the government, with the support of the PMDB and other parties of a more leftist nature that have ostensibly supported Lula since the first round, has a majority sufficient to make constitutional amendments and pass other urgent legislation. The PT when in the opposition obstructed many of these same proposals that FHC tried to get through Congress when he was president. Now if the other two big parties that backed FHC most of the time, the PFL & PSDB, were to support these necessary reforms, Lula might make some progress. I wouldn't count on this happening.

My prediction is that little will be accomplished in Congress very soon. If Brazil's credibility abroad depends upon what happens in the legislative area, it will be a long time coming. Marketing and PR, at which so far this government excels, have their limit. Eventually tangible results must be evident.

Lula has now unveiled the much heralded "Zero Hunger" program. How it will work is a mystery. Brazil does not lack food but many people do not have the money to buy it. Hopefully funds doled out to poor people for them to acquire food will not be spent on soda pop, beer, candy, cigarettes and cachaça, Brazil's cane spirits that is the world's second most consumed distilled beverage after sake.

It will be interesting to see if administrative and distribution costs can be controlled in order that some benefit from this noble cause accrues to those who should enjoy better nutrition. The danger is that the government will create an inefficient bureaucracy that will minimize the benefits to those who need help.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. During the past thirty-eight years, Hayes has worked directly and as an advisor for a number of Brazilian and international banks and companies. Currently he is a free lance consultant and can be contacted at 192louvre@uol.com.br

washingtontimes.com By Tom Carter THE WASHINGTON TIMES

     Ecuador's new president, Lucio Gutierrez, who is frequently grouped with Latin America's growing cadre of populist left-wing leaders, said yesterday he aims to establish social justice without sacrificing the rights of businessmen and entrepreneurs.      "I am a radical in the struggle against corruption, social injustice, impunity and achieving the extradition of corrupt bankers and politicians who stole from our country," Mr. Gutierrez said at a breakfast meeting with editors and reporters at The Washington Times.      "We must use the things that are good from the left, but also take what is good from the right: the respect for private property, entrepreneurship and guarantees and the protection of capital."      Less than one month in office, Mr. Gutierrez came to Washington to meet President Bush and other top officials. He also came to reassure the U.S. business community that their interests are safe in Ecuador.      "We offer legal security, the rule of law, complete transparency in all state transactions. We are a country of immense potential in tourism, natural resources and human resources," he said.      He said that by helping his country to create employment, jobs and wealth, the Bush administration could also reduce illegal immigration into the United States.      "We are truly desirous, to the point of anxiety, to receive [U.S.] investments into our country," Mr. Gutierrez said.      Like Venezuela's President Hugo Chavez, Mr. Gutierrez is a former military officer who led what he called a "civil junta" to oust a corrupt civilian government. Both men spent time in jail and both emerged to win elections based on populist themes.      Mr. Gutierrez is also criticized for his friendship with Cuba's Fidel Castro and Brazil's Inacio Lula da Silva. But he seems to be winning over some who were initially skeptical.      "By and large, this is a gentleman who is genuinely interested in improving the well-being of his countrymen," said Stephen Johnson, Latin America analyst at the Heritage Foundation, after meeting Mr. Gutierrez on Monday. "He understands that you cannot generate wealth by taking out loans and giving handouts."      Ecuador has had six presidents in the last seven years. Jamil Mahuad was ousted in January 2002 when Mr. Gutierrez, then an army colonel, led marches of Ecuadorean Indians demanding a new government.      Elected in November with 54 percent of the vote, Mr. Gutierrez said he met and spoke with Mr. Chavez for the first time at his inauguration in January. He was also cautious regarding U.S. policy on Cuba, saying only that the people of Cuba should not be made to suffer for the policies of Mr. Castro.      But he was effusive about Brazil, thanking Mr. Lula da Silva for intervening on Ecuador's behalf with the International Monetary Fund. The IMF on Jan. 31 announced $300 million in loans and support for Mr. Gutierrez' administration, which inherited an $11 billion debt.      "The new Ecuadorean government has been very courageous in its first few days by quickly taking measures to address a difficult fiscal situation," the IMF said in announcing the loans.      Following meetings with Mr. Gutierrez, the IMF released another statement Monday saying Ecuador's economic reform program "should substantially strengthen the country's fiscal position, stabilize the economy, and lay the basis for sustaining healthy growth."      Mr. Gutierrez said he would talk to Attorney General John Ashcroft about the extradition under a 1948 treaty of Ecuadorean politicians and bankers now living comfortably in Miami. He said the government he helped overthrow looted approximately $3 billion from Ecuador's treasury.      "My main objective is to bring morality to Ecuador and to recover the money that was stolen by corrupt politicians and bankers," he said.

www.globeandmail.com By PAUL KNOX Wednesday, February 12, 2003 – Page A19

Concern for the health of Venezuela's democracy should guide the thinking of Canadians

CARACAS -- Latin America's anguish once again demands attention, even as conflict looms on the other side of the world. Keeping the 20 republics straight can be difficult, but, fortunately, each boasts at least one distinctive characteristic with a major influence on history and current events.

Mexico has its tortured relationship with the United States. Had Cuba not been an island, its story since 1959 could not have been the same. A slave revolt gave birth to Haiti, canal-building intrigue to Panama. Indian-mestizo tension permeates life in Guatemala, high population density in El Salvador. Honduras was the original banana republic, Nicaragua had the Sandinista revolution, Costa Rica abolished its army. The Dominican Republic is a virtual factory for baseball infielders.

In South America, Colombia's rugged geography nurtures political and social strife. Ecuador is split between coastal and mountain cliques. Peru was the centre of the continent's largest pre-Columbian empire. Chile is -- visibly, at any rate -- the least corrupt of all the republics. Argentina is the most European. Brazil has immense size and a moving frontier. Bolivia is landlocked, and don't you forget it. Uruguay was the region's first welfare state. Paraguay, half Hispanic and half Guarani Indian, is the most strongly bilingual country in the Americas.

As for Venezuela, oil quickly became the defining feature after large reserves were discovered nearly a hundred years ago.

For more than 40 years, until 1970, Venezuela was the world's biggest petroleum exporter. Even after its eclipse by Middle Eastern suppliers, it was still considered a strategic source by the United States. Recently, it has accounted for about 13 per cent of U.S. imports. It is relatively close to U.S. ports and, for a long time, there was no threat of political turmoil interrupting the supply.

Since December, of course, the second statement is no longer true. A walkout by oil workers, part of a carefully planned challenge by political opponents of President Hugo Chavez, virtually halted production and cut off exports. Oil has begun to flow again, but a massive purge of senior staff and a radical change of strategy at state-owned Petroleos de Venezuela have left its future cloudy. Venezuela is an increasing source of worry to the United States.

Even before the stoppage, new attention was being paid to oil exploration and development in Latin America because of growing uncertainty about the security of the Middle East. As long as the tap was turned on, the social reforms and eccentric imagery of Mr. Chavez's "Bolivarian revolution" inspired curiosity in Washington, but not much more. Now, an overriding question hangs over U.S.-Venezuelan relations: Can Mr. Chavez guarantee stable petroleum supplies?

The answer will determine the extent to which the United States favours an early vote on whether he should continue in office. Only the Bush administration's obsession with overthrowing Saddam Hussein has stopped it from paying more attention at high levels to the Venezuelan crisis.

As far as I can make out, the effect of the turmoil here on gasoline and heating-oil prices in Canada is indirect. Three decades ago, Venezuela supplied more than half of Canada's petroleum imports. But our sources are now far more diverse, mainly because of the availability of North Sea oil. Brad Wark, an energy specialist at the Department of Natural Resources in Ottawa, tells me that Venezuelan oil is "a drop in the bucket, and it's relatively easy to replace." High prices in Canada are due to global market conditions; the contribution of Venezuela's troubles to those is smaller than that of colder weather or the outlook for the Middle East.

Venezuela's constitution includes mechanisms that could lead to some type of popular referendum on Mr. Chavez's rule before the end of this year. If his opponents have, as they claim, obtained the number of signatures needed to trigger such a vote, it should proceed without undue delay. Concern for the health of democracy in the Americas -- not fear of an oil shock -- should guide the thinking of Canadians and their government.

My mistake: In my description last week of Canada's recent official presence in South America, I mistakenly said that House of Commons Speaker Peter Milliken met several Brazilian cabinet ministers while attending inauguration ceremonies for President Luiz Inacio Lula da Silva. Mr. Milliken held a 45-minute meeting with Mr. da Silva. Foreign Affairs Minister Bill Graham visited Brazil later in the month and also met several ministers. pknox@globeandmail.ca

news.ft.com By Jonathan Wheatley Published: February 12 2003 20:37 | Last Updated: February 12 2003 20:37

One of the final acts of Fernando Henrique Cardoso as Brazilian president was to modify a fuel tax called Cide, created in 2001 primarily to pay for much-needed investment in transport infrastructure.

At the request of his successor, Luiz Inácio Lula da Silva of the leftwing Workers party (PT), Mr Cardoso released Cide funds - about R$10bn (US$2.7bn) this year - for use at the government's discretion.

This will help the government to pay debts and meet fiscal targets. It is the kind of thing that has earned Mr Lula da Silva the approval of international financial markets but it has left the transport industry up in arms - not only at potentially losing funds but also at the cost to the economy.

"There is a clear crisis in the sector," says Clésio Andrade, president of the National Confederation of Transport (CNT) and vice-governor of the powerful state of Minas Gerais. "Taking away its funding is a bad start."

Some 65 per cent of Brazil's freight is carried by lorry; similar to small countries such as Belgium but more than twice the level of other continental countries such as the US, Russia and China.

Of 1.5m kilometres of roads, just 160,000 kilometres are paved. Of these, more than 75 per cent are in "precarious" condition: dangerously potholed, with inadequate and often contradictory road markings.

Accidents are horrifically common and highway robbery is on the rise. There were 8,000 such robberies in 2001, up from 3,000 in 1994, at a cost of R$500m. Many hauliers who suffer these conditions are owner-drivers, accounting for about half of Brazil's 1.8m lorries.

The average vehicle is as dilapidated as the roads, having been in service for 18 years, while maintenance is a luxury few can afford. "Most of them hardly make enough to pay for their diesel and their food," says Geraldo Vianna, president of the National Cargo Transport Association (NTC).

There are few alternatives to the roads: Brazil's rail network is tiny for a country of its size and suffered years of underinvestment and neglect before privatisation in the mid-1990s. Some foreign companies that bought parts of the system have since quit the country.

One reason is the cost of capital in Brazil. Paulo Fernando Fleury of the Federal University of Rio de Janeiro says Brazilian railways produce twice the operating returns of US railways (30 per cent a year compared with 15 per cent) because of low labour costs.

But railways are much more capital-intensive than labour-intensive. While US railways produce return on equity of 9 per cent, Mr Fleury says, Brazilian railways make a negative return of 34 per cent.

Lack of investment capital has also stymied development of river transport. The previous administration's grand plans for intermodal transport systems - to open up the enormous agricultural potential of Brazil's interior - remain mostly at the planning stage.

The cost to the economy is hard to quantify. As an example, Mr Vianna at the NTC says transport inefficiencies force Brazilian companies to hold 21 days' more stocks than US firms, tying up US$30bn.

Optimists hope Mr Lula da Silva will reverse Mr Cardoso's ruling on Cide. More realistically, the government-owned National Development Bank (BNDES) shows signs of paying more attention to development and less, as in the recent past, to returns on its investments. This could signal new funding for the sector.

More help will come if the government succeeds in its drive to make early progress on long-awaited pensions and tax reforms. Both would create sources of investment capital, especially through long-term savings. "These two reforms are the basis of everything in Brazil today," says Mr Andrade at the CNT.

But there are reasons for pessimism, too. The transport ministry has gone to Anderson Adauto of the Liberal party, the PT's electoral ally, rather than to a figure closer to the president, as happened with key ministries.

Mr Adauto has made a shaky start and been accused of corruption in a previous job; senior figures in the PT have called for him to be dismissed. Many fear that transport is not getting the attention it needs.

Mr Vianna at the NTC says: "[Mr Lula da Silva] will only meet his campaign promises if the economy grows. With transport infrastructure in its present condition, that won't happen."

Previous articles in this series can be found at: www.ft.com/lula

www.forbes.com Reuters, 02.12.03, 5:17 PM ET BRASILIA, Brazil, Feb 12 (Reuters) - Brazil's Finance Minister Antonio Palocci said on Wednesday a review by a team of visiting officials from the IMF should proceed smoothly with no expected changes to the terms of a $30 billion loan accord with Latin America's largest economy. "There are no points of tension," Palocci said. "I believe we will have a calm review of the deal. There is no projection of any important change." The loan is the largest ever granted by the IMF. The IMF loan deal, struck last year amid a loss of investor confidence ahead of presidential elections, obliges Brazil to post a primary budget surplus of 3.75 percent of gross domestic product. The primary surplus excludes debt servicing costs. The new government of President Luiz Inacio Lula da Silva announced last week that it is targeting a budget surplus of 4.25 percent of GDP but it is not yet clear whether that will be incorporated into the terms of the IMF deal. The IMF team, which is expected to stay for two weeks, met with Central Bank officials on Wednesday. The review is necessary for the IMF to free up the next tranche of the loan -- of $6 billion -- which Brazil has the right to draw down as of March.