Number 16 - October 01 to October,15 2002

Brazil's Election Something to Celebrate

But have Washington and Wall Street evolved enough to appreciate the country's triumph of democracy?

Need cheering up? Here's a good news story. The world's fifth largest country — with a history of military rule and endemic corruption — holds a free and fair presidential election. All voters, even in remote villages, cast their ballots on high-tech electronic machines of a kind that make the conduct of elections in, say, Florida, look shamefully outmoded. The candidate who wins the most support in the first round of voting has made his name criticizing the nation's power elite. But the results are accepted by all, and the country begins a three-week campaign before the top two candidates square off in a second round.

Worth raising a glass to, right? But all last week's election in Brazil got from Wall Street was a Bronx cheer. The Brazilian currency, the real, continued a slide that, apart from a brief rally after an International Monetary Fund (IMF) rescue package last August, has gone on all year. In the markets, interest rates on Brazilian bonds (a proxy for the extent to which Wall Street regards investment in Brazil as a risk) are running more than 20 percentage points above comparable U.S. securities.

No prizes for guessing why the markets are jumpy. The winner of the first round, with 46.4% of the vote, was Luiz Inacio Lula da Silva — universally known as Lula — the candidate of the Workers' Party, which has in the past flirted with repudiating Brazil's massive external debt. Lula, 56, a former labor-union leader running for the presidency for a fourth time, is likely to defeat Jose Serra, the candidate of the governing coalition, in the runoff on Oct.27. Following the economic catastrophes in Argentina and Uruguay, American bankers fear that the commitment of Latin America to the Washington Consensus, the bundle of free-market policies that has been adopted on the continent since the late 1980s, may be in jeopardy. Given the exposure of U.S. banks and exporters to Latin America, that could translate into lost jobs and profits north of the Rio Grande.

As it happens, the man who coined the term Washington Consensus, John Williamson of the Institute for International Economics in Washington, is a longtime expert on the Brazilian economy. When I spoke with him last week, Williamson sounded a lot more relaxed about the prospect of a Lula government than Wall Street seems to be. After years of failure, says Williamson, the Workers' Party is now electable precisely because its policies have "converged on the middle ground." Whatever its program may have been in the past, the party now seems ready to accept the strictures of the IMF and U.S. Treasury, including tight government budgets and a commitment to pay off the debt. Given the economic constraints, a Lula government would be likely to concentrate on those areas that the Workers' Party has stressed when it has run state and local governments, especially expanding educational opportunities and improving health care.

Still, Lula's election, should it happen, would be no small matter. Brazil has the largest economy in Latin America; some of the trends that seem likely to propel Lula to power are visible elsewhere on the continent as well. Peter Hakim, president of the Inter-American Dialogue, a Washington think tank, says that Lula's success reflects widespread "unhappiness with the results of economic reform and the quality of leadership." Lula will be nobody's stooge, least of all Washington's. "The U.S. thinks first and foremost of the U.S.," he told Time recently. "It is up to us Brazilians to think more about ourselves. I always say a human being will never be respected if he is a servant but rather for the fight he has in him." Though Lula says he is a free trader, he is unlikely to agree to the Free Trade Agreement of the Americas — before Sept. 11, 2001, a priority for the Bush Administration — on anything like the terms sought by business lobbyists in Washington.

If Lula is elected and Washington is wise, the U.S. will accept occasional annoyances with Brazil (Lula will doubtless make nice with Fidel Castro) as a price worth paying for something rather remarkable. It has been 20 years since, in her unwitting gift to Latin America, Margaret Thatcher defeated the Argentine junta in the Falklands war and revealed the bankruptcy of politics run by men in dark glasses and military uniforms. Democracy in Latin America is robust; Hakim calls last week's election "tremendously clean, competent and decent." One mark of health in any democracy is the election of those who once opposed a regime. That is why the election to the Mexican presidency of Vicente Fox, a right-winger, was so important in 2000, and that's why it will be worth cheering if Brazil chooses a man of the left later this month. "Brazil has changed," Lula told Time. "I am the result of the political evolution of Brazilian society."

So he is. But have Washington and Wall Street evolved enough to celebrate Brazil's triumph of democracy? (BY MICHAEL ELLIOTT)(Time, 14 October 2002)

Brazil Candidate Seeks New Economy

Brazilians resoundingly rejected U.S.-backed free-market reforms and demanded a new direction for South America's largest economy, the leftist winner of presidential elections said Monday.

"Seventy-six percent of the electorate voted against the current model of economic dependency," Luiz Inacio Lula da Silva told reporters at a news conference Monday.

Silva, a former union boss, got 46.4 percent of Sunday's vote but fell shy of the absolute majority he needed for a first-ballot win. He now goes to a runoff on Oct. 27 against government-backed candidate Jose Serra, who won 23.2 percent.

Two other left-of-center opposition candidates were eliminated: former Rio de Janeiro state Gov. Anthony Garotinho, who got 17.9 percent of the vote, and former Finance Minister Ciro Gomes, who had 12 percent.

Siva said that with those two candidates' showing plus his own, voters issued a clear mandate for change after eight years of market reforms under President Fernando Henrique Cardoso.

Cardoso eliminated four-digit inflation but left the country's economy stagnated.

The prospect of a Silva victory alarmed investors, who speculated that he might lead Brazil to default on its approximately $230 billion in public debt - even though he pledged not to. Brazil's currency, the real, tumbled more than 30 percent as Silva appeared close to winning, which raised the cost of imports and put pressure on inflation.

"The market has been pernicious for the economies of emerging countries," Silva said. "The market is very nervous, and we want to calm the market."

Promising to turn the situation around, Silva blamed Brazil's economic troubles on what he called greedy quick-hit investors who fed off markets but didn't invest in productive industries. The government raised interest rates as high as 45 percent to attract foreign capital during a 1999 currency crisis.

"Against the greed of those who want to make easy money, we want to offer the chance to make making money by producing - producing food, cars, clothes, and other goods," Silva said. "It's production that determines the greatness of a country."

While investors around the world anxiously awaited signs of who might be appointed to run economic policy in a Silva government, the candidate said other posts wouldn't take a back seat to finance.

"The economic area will not be not an all-powerful god," he said. "We won't subordinate the government's policy only to the economy or we'll spend four years doing nothing. We want to make profound changes in Brazil, especially in social questions."

Looking abroad, Silva said Brazil's first concern was helping embattled neighbor Argentina and strengthening the Mercosur trade bloc, made up of Brazil, Argentina, Uruguay and Paraguay, with Chile and Bolivia as associated members.

"I have special affection for Latin America and Mercosur," he said. "We have to help Argentina at this moment, and we must revive Mercosur and bring in Chile, Peru and Venezuela."

He added that a strong Mercosur would lead negotiations with the United States over the creation a hemispheric free-trade zone by 2005 - which Silva has denounced as a proposal to "annex" Latin America.

Despite the presidential-like proclamations, Silva acknowledged he must first win the runoff, and said he already was negotiating for the support of Gomes and Garotinho in the second round. He appealed to Cardoso to help calm markets, although unrest could indirectly benefit his hand-picked candidate, Serra.(...)

Serra said he was not discouraged by the beating he took in the first round. "The stuggle continues and the conditions are different, but we will win this round," Serra predicted early Monday.

(...)Analysts said a turnaround will be difficult but not impossible.

"The second round is a new ball game altogether," said David Fleisher, a political science professor at University of Brasilia. "Just like in a baseball doubleheader, the team that wins in the morning doesn't necessarily win in the afternoon." (By STAN LEHMAN)(Associated Press , October 10, 2002)

Paraguay's V.P. Resigns After Spat

After months of political feuding, Paraguay's vice president resigned Wednesday to meet a deadline to run for the presidency.

Julio Cesar Franco, a bitter rival of President Luis Gonzalez Macchi, said his time in office was made difficult by frequent clashes between the two.

"I'm leaving after 25 months on the job. But my task wasn't easy," said Franco, who has accused the president's ruling Colorado Party of bungling its efforts to govern this poor, landlocked South American nation. Franco belongs to the opposition Liberal Radical Authentic Party.

Franco, elected vice president in August 2000, has long been on the offensive. In March 2001, he led a group of lawmakers in an unsuccessful bid in Congress to unseat Gonzalez Macchi.

Asked about Franco's departure, Gonzalez Macchi had no immediate comment other than to say he intended to serve out his term, which ends next August. The president has vehemently rejected accusations of mismanagement.

The constitution now requires Congress to nominate a successor to Franco before Oct. 27.

Paraguay has sputtered along from one crisis to another since civilian rule was restored in 1989, ending the 35-year right-wing dictatorship of Alfredo Stroessner.

Democratic institutions remain fragile and the country is frequently wracked by popular uprisings, military mutinies, anti-government demonstrations and bitter political infighting.

The economy, based heavily on agriculture and contraband, has been in a freefall since 1995, leaving one out of three Paraguayans in this nation of 5 million living below the poverty line.

That, in turn, has generated popular disenchantment with the government. Presidential and legislative elections will be held in April 2003.(By PEDRO SERVIN)(Associated Press, October 15, 2002)

Argentina reopens border with Paraguay

Argentine Vice Foreign Minister Martin Redrado on Tuesday confirmed the reopening of its border with Paraguay, closed last week on suspicion of an outbreak of foot-and-mouth disease in Paraguayan territory.

The reopening occurred at 12:00 p.m. local time (1500 GMT), oneday after Paraguay threatened to recall its ambassador to Argentina.

"strong preventive sanitary measures will be applied," Redrado said, adding that Argentina's "National Agricultural Sanitary Service will inspect every Paraguayan container," and will be spray them with disinfectant.

The inspections could be made "in Paraguayan territory, and notonly when meat products are at the border," he said.

Paraguayan Foreign Minister Jose Antonio Moreno expressed his "satisfaction", and officially announced that "the ambassador to Buenos Aires will not be recalled."

On Tuesday at noon, some 20 Paraguayan refrigerated trucks stranded for a week in Formosa province, on the border with Argentina, were allowed to continue their way to their final destination, Chile.

The Argentina-Paraguay border had been closed by Buenos Aires since October 7, on a suspicion of the foot-and-mouth disease. Argentina declared early last week a state of "sanitary alert" while Paraguayan authorities have denied any foot-and-mouth outbreak.

A delegation of experts from the Panamerican Foot-and-Mouth Disease Center is visiting Paraguay this week to verify the existence of the disease in the country. (Xinhuanet, 15 October 2002)

Ancom, MERCOSUR open free trade negotiations in Peru

The Andean Community (Ancom) and the South American Common Market (MERCOSUR) on Wednesday began free trade agreement (FTA) negotiations here, Ancom Secretary General Guillermo Fernndez de Soto said on Wednesday.

Both parties would like to conclude the FTA negotiations beforethe end of 2002. The aim of the negotiations is to reach a Fixed Trade Preference Agreement and a Free Trade Agreement.

The latest Ancom-MERCOSUR talks took place in May in Buenos Aires, Argentina, and focused on issues such as the commercial liberalization program, technical regulations, sanitary measures and the automobile sector. The first concrete step towards the materialization of an Ancom-MERCOSUR FTA were taken with the signing of a framework agreement on April 16, 1998, which established the foundations for its structure.

In 2001, the export volume of Ancom was 50 billion US dollars, and that of MERCOSUR was 87.880 billion dollars. In the same year,Ancom imports amounted to 45 billion dollars, while the figure for MERCOSUR was 80.952 billion dollars.

Ancom comprises Bolivia, Colombia, Ecuador, Peru and Venezuela and MERCOSUR comprises Argentina, Brazil, Paraguay and Uruguay. (Xinhuanet, 16 October 2002)

U.S. pushes free trade at Americas Conference

U.S. officials Tuesday urged Latin America countries to complete a Free Trade Association of the Americas encompassing the Western Hemisphere's 34 democratic countries. A hemisphere-wide free-trade zone was first called for in 1994.

Deputy Treasury Secretary Kenneth W. Dam told the Americas Conference that hemisphere-wide free trade would benefit Latin American economies. It would be similar to the North American Free Trade Agreement, which governs trade between the United States, Canada and Mexico.

"Our top priority for the countries of the hemisphere is to generate growth and raise productivity," Dam said during a conference on the state of Latin American economies. "Most countries are not growing at their potential." (...)Dam said told the business leaders that economic difficulties in Argentina and Brazil have continued to contribute to the economic woes of neighboring countries.

Dam said that he had "reasons to be encouraged about Argentina," but warned that International Monetary Fund loans to Brazil would be granted only "if sound policies are observed," which would include fiscal responsibility and changes to the tax code.

Brazil's currency has lost about 40 percent of its value and investors remain jittery that the country might default on its loans, especially if former union leader Luiz Ignacio Lula da Silva -- popularly known as Lula -- is elected.

"We will work with whoever is elected in a democratic election. That's been our policy and that will be our policy. If Mr. Lula does win, we will work with him," Dam said. "We will work with a democratically elected government of Brazil in a serious, hardheaded, friendly way."

Otto Reich, the State Department's top diplomat for the Western Hemisphere, said the United States would work to help Brazil prosper.

"It is extremely important for the hemisphere to have a democratic, prosperous Brazil," Reich said. Asked about whether the United States had any plans if Brazil defaults on its loans, Reich said: "You have to look at contingencies," but refused to elaborate. "Our ability to influence events is not as large as people as people think it is, especially when you're dealing with a country as large as Brazil," Reich said. (Associated Press, 15 October 2002)

Brazilians could delay trade talks

Brazil's front-running presidential candidate will need extra time to develop the country's negotiating stance in hemispheric trade talks if he wins the election on Oct. 27, according to a senior aide.

Antonio Prado, an economist and executive co-ordinator of Luiz Inacio Lula da Silva's policy platform, said in an interview that a da Silva government would seek an extension of the Feb. 15 deadline for delivering opening positions in five negotiating areas.

(...)Mr. Prado's statement and Mr. da Silva's repeated criticisms of the FTAA add uncertainty to talks aimed at concluding an Americas-wide trade pact by 2005 -- at a time when the negotiating agenda is moving into a delicate stage.

Brazil and the United States are to take over the joint chairmanship of FTAA talks at a trade ministers' meeting Nov. 1 in Quito, Ecuador. By then Brazilian President Fernando Henrique Cardoso will be a lame duck, and whatever his aides say will be measured against the election result.

The 34 nations participating in the FTAA process, formally launched last year at the Summit of the Americas in Quebec City, have from Dec. 15 to Feb. 15 to deliver opening positions on timetables for lowering trade barriers.

Mr. Cardoso has said he will rule as President until Dec. 31, but has also promised a smooth transition. Mr. Prado said it "would not set a good tone" if the outgoing government commits its successor to trade talks strategy. He added: "It's not reasonable to ask a new government that is apprehensive . . . to send off the list of positions without looking at what is necessary."

Mr. da Silva, once a militant socialist who called for a moratorium on foreign debt payments, has moderated his economic outlook. He says he favours lower interest rates to fire up Brazil's sluggish economy and work with industry to boost exports.

But he has criticized the FTAA as a project for "annexation" of Latin America economies to the United States. Instead, he says, trade and economic co-operation in the hemisphere should work toward European-style integration.