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Brazzil - Brazil/China - May 2004

How China Fits into Brazil's Plans

With an eye on China's voluminous foreign reserves, Brazil hopes
to attract investment in infra structure projects such as much
needed modernization of its ports plus expansion and improvements
in its highways and railways. So far, though, the government
has yet to come up with any clear-cut rules for such projects.

Richard Hayes


Picture Lula and a host of businessmen, ministers, governors and political hangers on left Friday for an extended trip to Beijing and Shanghai. China is now Brazil's third largest trading partner after the US and Argentina.

Exports of the soy complex, orange juice, sugar, broilers, iron ore, steel and other primary products contribute to Brazil's impressive positive trade surplus. Beef may soon be added to the list once sanitary barriers are overcome

Prospects look good for future exports of ethanol that can be mixed with gasoline to lessen pollution. As Chinese continue to abandon the countryside driving more cars and become cognizant of their environment, they may eventually seek means to clean up the atmosphere of its large cities.

Ethanol produced from Brazilian cane cost about 30 percent of that made from maize in China. In the long term, auto engines that use gasoline, ethanol or natural gas may be used in China as they are now on a small but growing scale in Brazil.

With an eye on China's voluminous foreign reserves, Brazil hopes to attract investment in infra structure projects such as much needed modernization of its ports plus expansion and improvements in its highways and railways.

So far, though, the federal government has yet to come up with any clear-cut rules as to how they will cooperate with the private sector or foreign investors in such projects.

The legislation to create the highly touted PPP's (Parcerias Públicos-Privadas) or Public-Private Partnerships is hopelessly mired in Congress with little signs of any conclusive action on its part. This initiative was expected to create jobs but so far is just talk on the part of Lula and his people.

Actively participating in this mission to China are several governors of relatively dynamic and well run states such as Minas Gerais, Mato Grosso and São Paulo, whose governor, Geraldo Alckmin, has already had talks with Chinese officials.

São Paulo, Brazil's most important state economically, has legislation in place and has formed a corporate entity to join in partnership with interested investors. It will be interesting to see what comes out of this week-long trip that included a stop over in Kiev and will return by way of Guadalajara and Acapulco.

The economy is finally showing signs of perking up. It looks as if the worst of unemployment may be behind us. Retail sales are rising steadily and slowly but surely certain industries are hiring new workers. The situation varies from one location to another and the greater São Paulo area has yet to see much improvement.

The NYT Ghost

At a recent meeting of mayors from around the nation, Lula again announced planned spending for sewers and water systems. This has been promised before but nothing has happened due to administrative inefficiencies.

Lula managed to attract worldwide negative attention for Brazil by his reaction to the article in the New York Times mentioned in my last commentary. After his revocation of Larry Rohter's visa using legislation of dubious constitutionality dating back to the years of military authoritarian rule, the international press picked up what had been a minor incident. Endangering freedom of the press is no way to endear oneself to the media. The question of his drinking habits was forgotten due to this major error in judgment.

The Justice Minister, Márcio Thomas Bastos, who was in Bern negotiating a money laundering treaty with the Swiss at the time of the announcement, was not consulted before his ministry gave the order. Bastos, with many telephone calls from his hotel, was able to craft a letter from the Brazilian lawyers of the NYT that was interpreted as an apology by Lula after Bastos threatened to resign.

What is disturbing about all this is not just that Lula displayed his ill temper and lack of tact but that his closest advisors egged him on. Luiz Gushiken, Lula's Communications Minister and an ex bank workers' union leader and noted anti capitalist, as well as government spokesman André Singer both advocated ejecting the reporter from Brazil.

Even the normally reticent Foreign Affairs Minister, Celso Amorim, resisted those members of Lula's own party who urged him not to take such a drastic measure. Ex president José Sarney, who now presides the senate, was among those lauding Lula for his standing up to foreign insults.

With this kind of counsel, how long can Lula be expected to give full support to Antonio Palocci and his rigid fiscal and monetary policies that constantly draw fire from vocal critics?

Shaky Currency

Uncertainty reigned in financial markets with the real sinking further before recovering somewhat on Friday. The Brazilian currency has lost nearly 9 percent of its value against the US dollar this month.

This fact plus continued high interest rates and a probable price increase in oil products does not bode well for keeping inflation at the established goal for 2004. The Central Bank maintained the basic interest rate at 16 percent, a measure that seemed to please no one.

The monetary authorities are experiencing difficulty in rolling over its maturing local debt at terms and rates which they are willing to pay. Therefore the banks are quite liquid and have bought dollars, increasing pressure on the exchange rate.

There seems to be some doubt as to Lula's ability to resist calls for an easing of monetary and fiscal policies that some think would help to create more jobs. With municipal elections coming up in October and Lula and the PT's popularity declining, he may try something that could upset the apple cart and cause a further lack of confidence on the part of foreign and domestic creditors.

Because of increased deficits in the INSS or social security accounts, bloated government payrolls and very high interest rates, the government debt continues to go up. The cost of servicing this debt could be reduced if interest rates were lowered. But the conservative people running the central bank feel that lower rates would fuel inflation. Something may change before long.

Vampire on the Loose

Brazil never lacks for scandals, fraud cases and other headline grabbing stories of dishonesty and corruption. The latest involves over-invoicing and kick backs on purchases by the Health Ministry. Since the focus has been on articles and equipment for the treatment of hemophilia, the operation by the federal police has been named Operation Vampire.

So far 17 people have been arrested including Luiz Cláudio Gomes da Silva who is a close advisor to Health Minister Humberto Costa, a Lula appointee from Pernambuco as is Gomes da Silva. I seriously doubt if this investigation will yield any convictions and may be muffled soon.

The swindle goes back ten years or more and therefore was taking place when José Serra, the defeated presidential candidate in 2002 who is now the front runner in the São Paulo mayoral race, was Minister of Health.

Neither the PT nor Serra want negative publicity at the moment. The public is numbed by such revelations that never seem to result in real punishment for those stealing.

One good saying that resulted from the New York Times episode is worth passing on. "Bush used to drink and gave it up. But he invaded Iraq. So let Lula drink."

Certainly Lula's government does not have the corner on incompetence. Just look at Washington where cronyism, deceit, hypocrisy, arrogance and denial seem to be the rule. With any luck, the US may have a Portuguese speaking First Lady next year.

Richard Edward Hayes first came to Brazil in 1964 as an employee of Chase Manhattan Bank. Since then, 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.

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