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)

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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.

cbs.marketwatch.com By Sital Patel, Medill News Service Last Update: 8:55 PM ET Jan. 27, 2003

WASHINGTON (CBS.MW) -- The Bush administration reiterated its commitment to improving trade relations with Brazil on Monday, saying it is encouraged that the new Brazilian government's proposed economic reforms already have spurred a drop in interest rates and strengthened the real.

Leftist President Luiz Inacio Lula da Silva took power three weeks ago. His election had sparked worries among many international investors who feared the former labor leader would not continue market-friendly policies as president.

However, since his inauguration interest rates charged by investors have dropped by more than 10 percent and the Brazilian exchange rate against the dollar has appreciated.

Lula has outlined economic policy reforms in four key areas: fiscal, monetary, trade and structural. His administration hopes these reforms will expand economic growth for Brazil.

"We have seen an agenda designed to fight poverty and increase economic growth and stability," said John Taylor, U.S. undersecretary of the treasury. Taylor spoke to the Brazil-U.S. Business Council.

John Shott, senior fellow at the Institute for International Economics, said both countries would gain from free trade "and recognizing that there are interlinkages in bilateral, regional and global trading involved is important."

Nearly every country in the Western Hemisphere has agreed to negotiate for a Free Trade Area of the Americas in November. The goal of the FTAA is to have in place a free trade agreement for the entire region by 2005, similar to the North American Free Trade Agreement.

Brazil and the United States will lead those talks this year.

The European Union's high tariffs on some of Brazil's major exports, including livestock and soybeans, have been a roadblock to expanding its economy. Thus the United States and most Latin American economies have a common interest in reaching a regional trade deal because of the high tariffs with Europe.

But Brazil, the largest Latin American economy, is the nation most skeptical of the plan. About a quarter of Brazil's total exports, about $15.5 billion, are shipped to the United States.

"In Brazil, lots of the new industries think they need more time to fully compete with richer countries," said Lincoln Gordon, a scholar in Latin American affairs at the Brookings Institution. Generally lowering trade barriers is good for everybody, but distributing these gains evenly is critical, he added.

Peter Allgeier, deputy U.S. trade representative, cited the U.S. trade agreement with Chile as an example of an ideal pact because it does not exclude any products and includes open trade in services as well as manufactured goods.

"It's important to remember it's a two-way street," said Allgeier, "both in economic development and eliminating poverty." He added that every country is different and any trade agreement reached would be catered to that economy and its special needs.

www.miami.com Posted on Tue, Jan. 28, 2003 BY TIM JOHNSON tjohnson@herald.com

WASHINGTON - The Bush administration on Monday heaped praise on the month-old government of Brazilian President Luiz Inácio Lula da Silva, rating his administration's early economic policies as sound and applauding its social goals.

''It's a great start,'' said John B. Taylor, the Treasury Department under secretary for international affairs. ``The signs are good, and we are encouraged.''

Uncertainty about the incoming Brazilian leader, known widely as Lula, sparked turmoil in the financial markets last year and fears that the one-time leftist labor leader and the Republican White House would clash on ideological grounds.

But the remarks Monday showed that the Bush administration views U.S. relations with Brazil, the world's ninth-largest economy, as worthy of extensive cultivation.

EMBRACING REFORMS

Taylor, speaking at the U.S. Chamber of Commerce, said da Silva's government has embraced many of the reforms of the center-right government of former President Fernando Henrique Cardoso, reassuring jittery capital markets. The da Silva government has set goals of giving autonomy to the central bank, reforming bankruptcy laws, maintaining fiscal discipline and sticking by a flexible exchange rate, he said.

Joining in the praise was Peter Allgeier, a deputy U.S. trade representative, who told a chamber luncheon that the Bush administration is watching with satisfaction as trade with Brazil increases.

''It looks like we will import more than $15.5 billion worth of goods this year. This makes us the largest export market for Brazil,'' Allgeier said. ``We are edging out the European Union, taking just over a quarter of Brazil's exports.''

Taylor emphasized that the Bush administration looks kindly on the da Silva government's focus on alleviating poverty.

''We're all already quite encouraged by the economic leadership that President Lula and his economic team have shown,'' Taylor said, adding that a focus on ``ending hunger, combating corruption, dealing with drug trafficking [are] very worthwhile, important goals which rightly should be emphasized.''

NO QUICK MOVES

Taylor said the da Silva government has shown signs of fiscal restraint despite high expectations that it would take quick, and possibly deficit-producing, action to create jobs.

''Already [there are] indications that new increases in spending will involve offsets to other kinds of spending,'' Taylor said. ``There's also talk about tax reform.''

An outside international economist with experience in Brazil, John Williamson, of the Washington-based Institute for International Economics, said da Silva has ''handled things very well, very responsibly'' and has even shown abent for international affairs.

''You have Lula going to [the world economic forum of business leaders] in Davos, Switzerland, and competing with [Secretary of State] Colin Powell for headlines,'' Williamson said.

www.bayarea.com Posted on Mon, Jan. 27, 2003 ALAN CLENDENNING Associated Press

PORTO ALEGRE, Brazil - Leonilda Zurita railed against the United States on Monday for backing Bolivia's efforts to curb illegal cultivation of the coca plant - the source of cocaine but also chewed by poor Bolivians to ease hunger.

Zurita, a Quecha Indian wearing an elaborately embroidered white skirt, handed out coca leaves to anyone who approached her. She was among thousands of anti-globalization activists at the third World Social Forum, a counterpoint to the World Economic Forum in Davos, Switzerland.

Though they came from around the world, the activists were united in their anger at what they call "neoliberalism," or the perceived American control over the world through free-market economics, liberal trade and the breakdown of national borders.

"We're living with an undeclared war to defend the coca leaf, which for Bolivian peasants is a medicine that helps us put up with hunger," Zurita said. "At the root of this, I say, our struggle is with the United States."

About 30,000 acres of coca are cultivated legally in Bolivia, but there are many illegal fields the government is destroying with the financial help of the United States. Growers want more legal harvesting.

The activists blamed neoliberalism for problems ranging from sweatshops to environmental devastation and for government policies that favor foreign investors.

About 100,000 people attended the six-day forum, which closes Tuesday. The last major protest - a march against a possible U.S.-led war in Iraq and a proposed Free Trade Area of the Americas, or FTAA - was to take place Monday evening.

For many here, the United States is a bully that uses economic force to compel weaker countries to comply with its foreign policy and economic goals.

Activists from Turkey, for example, believe the United States has promised billions of dollars in debt relief to help the country's troubled economy in return for assurances that American forces can use Turkish soil to launch an invasion of Iraq.

"We directly oppose any kind of economic values being bargained that would justify the Turkish participation" in the war, said Erinc Yeldan, an economics professor with Bilkent University in Ankara.

Before hundreds of cheering activists, actor Danny Glover called for the elimination of the International Money Fund, the World Bank and the World Trade Organization, blaming them for many Third World ills.

"We have to fight and abolish those financial institutions which place us at the place where we are now, in this very fragile situation," Glover said.

Anarchist and linguist Noam Chomsky said the United States exerts its influence over other countries with more subtlety than it did decades ago.

Neoliberalism "is a new way of controlling the public that in the past was done with U.S.-backed military coups and dictatorships," he said.