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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