Cablegate: Brazil: Ambassador Discusses Reform Agenda with Finance

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DE RUEHBR #1866/01 2481857
ZNR UUUUU ZZH
P 051857Z SEP 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 6570
INFO RUEHRG/AMCONSUL RECIFE 5397
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RUEHQT/AMEMBASSY QUITO 1959
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RUEHLP/AMEMBASSY LA PAZ 4846
RUEHCV/AMEMBASSY CARACAS 3420
RUEHBO/AMEMBASSY BOGOTA 3915
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDO/USDOC WASHDC
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UNCLAS SECTION 01 OF 02 BRASILIA 001866

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SENSITIVE
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E.O. 12958: N/A
TAGS: ECON PGOV PREL EFIN EINV BR
SUBJECT: BRAZIL: AMBASSADOR DISCUSSES REFORM AGENDA WITH FINANCE
MINISTRY INTERNATIONAL SECRETARY

This cable is sensitive but unclassified, please protect
accordingly.

1. (SBU) Summary: In an August 23 meeting with the Ambassador,
Ministry of Finance (Fazenda) International Secretary Luiz Pereira
made the point that, with the macroeconomic framework for growth in
place, it was time for Brazil to focus ever more on the
microeconomic reforms and business environment issues necessary to
boost productivity and growth. The Ambassador suggested that the
USG and American private sector could support the GoB's reform
agenda. Both the Ambassador and Pereira noted the transformational
potential of ethanol for the economies of many countries in the
Caribbean and Central America. With respect to any potential tax
treaty, Pereira stated that the principle issue for Brazil would be
revenue flows. End Summary

2. (SBU) In a relaxed August 23 meeting, Fazenda International
Secretary Luiz Pereira noted to the Ambassador that Brazil had come

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a long way in creating the macroeconomic conditions for stability
and growth. Four years ago the private sector had substantial
doubts about candidate Lula da Silva's ability to conduct a coherent
economic policy. His success in so doing showed that the commitment
to sound policy spanned the political spectrum in Brazil as this
commitment had been maintained for over a decade. There is a clear
perception of the benefits of stabilization, Pereira affirmed, which
has created a fair degree of consensus on the general outlines
economic policy.

3. (SBU) The time has come, Pereira stated, for Brazil to focus on
the reforms necessary to increase productivity and potential growth.
This will require a more complex set of reforms, at the
microeconomic level, Pereira argued, not only in Brazil but across
Latin America as a whole. Pereira explained, in broad
brush-strokes, the Lula Administration's microeconomic reform
agenda, which included bankruptcy law reform, Public Private
Partnerships (PPP) legislation passed in 2004 and legislation to
promote research and development. The GoB also had undertaken
measures to reduce collection risks for lenders and improve the
workings of the financial markets. Brazil's financial sector,
Pereira noted, would need to become more competitive as it adjusted
to life with lower real interest rates. Pereira stated the GoB was
working to introduce a flat tax on small businesses and that the GoB
well aware that social security reform was necessary.

4. (SBU) The Ambassador suggested that the USG and the private
sector might be able to support the GoB as it pushes forward with
its reform agenda. There was interest from both the USG and private
sector in the promoting infrastructure investment through PPPs. The
Russell Equity 20/20 group was planning major Brazil-focused events
in the coming year and New York Stock Exchange Chairman John Thain
was planning a trip as well. Among others, these contacts should
create opportunities to discuss what sort of improvements could be
made to the business environment. The Ambassador noted that the
U.S. Small Business Administration (SBA) had worked closely with the
government of Mexico on an SME program, the results of which the GoB
might find could serve as an example of what could be done. He
suggested that the Treasury-Fazenda Group for Growth could usefully
consider some of these issues. The Ambassador noted that Secretary
Paulson strong private sector background on these issues, including
PPPs, could invaluable.

Ethanol
-------

5. (SBU) The Ambassador and Pereira agreed on the transformational
potential that ethanol production could have on many of the smaller
economies of the Caribbean and Africa. Sugar-cane based ethanol had

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the potential, Pereira noted, to provide jobs, reduce oil imports
and enhance energy security. The issue was one where bilateral
cooperation made eminent sense, he said.

Tax Treaty
----------

6. (SBU) Noting that there have been ongoing informal contacts about
the potential for a Bilateral Tax Treaty (BTT), Pereira said that
the fundamental issue for the Finance Ministry is the issue of
revenues. The Ambassador observed that in improving the climate for
business in both countries, a BTT could enhance tax revenues over
time. Moreover, as Brazilian investment in the U.S. was growing
apace, there would be substantial Brazilian private sector benefit
as well.

7. (SBU) Comment: While Pereira is correct that the GoB has a
well-articulated reform agenda, he dwelt very little on how much
difficulty the GoB has had in moving reforms through Congress in the
last two years. With so little progress since December 2004, much
remains to be done. This places a certain urgency in pushing
reforms through the Congress early in the next administration, when
the winner's mandate and political capital is at its strongest. To
a great extent, this is not a question of defining what needs to be
done, which Brazilian policy makers are well aware of, but one of
working to enhance the public debate over these measures. A key
issue is the tendency of the Brazilian political system to water
down reforms. To the extent that the USG can bring resources to
bear, whether it be through supporting private sector dialogue with
the GoB, through high-level visitors or through discreet
behind-the-scenes contacts, we may have success in tipping the
balance towards more ambitious measures. In either case, it is time
not simply to praise Brazil for what it has accomplished on
macroeconomic stabilization, but for the USG to support it with some
specific policy and knowledge-based expertise to support its
microeconomic reform agenda.

SOBEL

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