How China Fits into Brazil’s Plans

 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.
by: Richard


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

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

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