[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




 
    BRAZIL'S ECONOMIC CRISIS AND ITS IMPACT FOR INTERNATIONAL TRADE

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                INTERNATIONAL ECONOMIC POLICY AND TRADE

                                 OF THE

                              COMMITTEE ON
                        INTERNATIONAL RELATIONS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 25, 1999

                               __________

                           Serial No. 106-152

                               __________

    Printed for the use of the Committee on International Relations


        Available via the World Wide Web: http://www.house.gov/
                  international--relations

                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
67-671 CC                   WASHINGTON : 2000





                  COMMITTEE ON INTERNATIONAL RELATIONS

                 BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania    SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa                 TOM LANTOS, California
HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska              GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey     ENI F.H. FALEOMAVAEGA, American 
DAN BURTON, Indiana                      Samoa
ELTON GALLEGLY, California           MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina       ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California         SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois         CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California          ALCEE L. HASTINGS, Florida
PETER T. KING, New York              PAT DANNER, Missouri
STEVEN J. CHABOT, Ohio               EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South     BRAD SHERMAN, California
    Carolina                         ROBERT WEXLER, Florida
MATT SALMON, Arizona                 STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York               JIM DAVIS, Florida
TOM CAMPBELL, California             EARL POMEROY, North Dakota
JOHN M. McHUGH, New York             WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas                   GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina         BARBARA LEE, California
PAUL E. GILLMOR, Ohio                JOSEPH CROWLEY, New York
GEORGE RADAVANOVICH, Califorina      JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
                    Richard J. Garon, Chief of Staff
            Michael H. Van Dusen, Democratic Chief of Staff
            John P. Mackey, Republican Investigative Counsel
                     Parker Brent, Staff Associate
                                 ------                                

        Subcommittee on International Economic Policy and Trade

                 ILEANA ROS-LEHTINEN, Florida, Chairman
DONALD A. MANZULLO, Illinois         ROBERT MENENDEZ, New Jersey
STEVEN J. CHABOT, Ohio               PAT DANNER, Missouri
KEVIN BRADY, Texas                   EARL F. HILLIARD, Alabama
GEORGE RADANOVICH, California        BRAD SHERMAN, California
JOHN COOKSEY, Louisiana              STEVEN R. ROTHMAN, New Jersey
DOUG BEREUTER, Nebraska              WILLIAM D. DELAHUNT, Massachusetts
DANA ROHRABACHER, California         JOSEPH CROWLEY, New York
TOM CAMPBELL, California             JOSEPH M. HOEFFEL, Pennsylvania
RICHARD BURR, North Carolina
             Mauricio Tamargo, Subcommittee Staff Director
        Jodi Christiansen, Democratic Professional Staff Member
                Yleem Poblete, Professional Staff Member
                     Camilla Ruiz, Staff Associate




                            C O N T E N T S

                              ----------                              

                               WITNESSES

                                                                   Page

Paolo da Cunha, Senior Vice President and Senior Latin American 
  Economist, Lehman Brothers Global Economics Group..............     5
David Konfino, Executive Vice President, International Division, 
  Union Planters Bank............................................     7
Sidney Weintraub, William E. Simon Chair in Political Economics, 
  Center for Strategic and International Studies.................     9
Mark Smith, Executive Director, U.S. Section, U.S.-Brazil 
  Business Council...............................................    11
Gilbert Lee Sandler, Esq., Sandler, Travis, and Rosenberg 
  Attorneys at Law...............................................    13


     BRAZIL'S ECONOMIC CRISIS AND ITS IMPACTFOR INTERNATIONAL TRADE

                              ----------                              


                      THURSDAY, FEBRUARY 25, 1999

              House of Representatives,    
         Subcommittee on International Economic    
                                      Policy and Trade,    
                      Committee on International Relations,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:04 p.m. in 
room 2172, Rayburn House Office Building, Hon. Ileana Ros-
Lehtinen [Chairwoman of the Subcommittee] presiding.
    Ms. Ros-Lehtinen. The Subcommittee will come to order. 
Thank you so much for being with us. We do not have any more 
votes on the floor today, so with this snow coming in in the 
Northeast, a lot of the Members are trying to get flights home, 
but I am sure that some will come as the meeting continues.
    Shakespeare would say ``All the world's a stage, and all 
the men and women merely players.'' Well, in today's global and 
interdependent economy this phrase takes on a whole new 
connotation, whereby one could readily say the world is one 
market and we are all but investors or economic indicators.
    Certainly the aftermath of the Asian crisis, the ensuing 
Russian economic turmoil, and the current problems being faced 
by our hemispheric neighbor, Brazil, is a prime example of the 
interlocking nature of the global economy. It also illustrates 
the impact and the pressure of the markets; the power wielded 
by speculators and leading international investors; and 
perhaps, more importantly, the inevitable consequences of 
delaying reforms and the implementation of effective policy 
responses.
    No one will dispute the fact that Brazil's clinging to its 
pegged exchange rate mechanism, its failure to cut spending in 
the face of huge fiscal deficits, its growing dependence on 
foreign capital sustaining a larger debt with shorter 
maturities, are the root and the cause of Brazil's current 
problems and, if not addressed effectively, could signal a new 
round of financial crisis in the near future.
    No one will dispute that the tremors in Brazil do send 
shock waves throughout the world. For example, on Wednesday, 
January 13, Brazil's crisis and the specific decision to 
devaluate its currency shook U.S. investors, as the Dow 
Industrial average sagged more than 260 points in early 
trading. It is argued that United States investors are 
concerned because approximately 20 percent of United States 
exports end up in Latin America, primarily in Mexico and in 
Brazil.
    The United States also underscores that as Brazil's 
currency loses value, Brazilians cannot afford to spend as much 
abroad for goods and services; that United States jobs in 
export-related sectors such as industrial machinery, software, 
and hospital equipment will be affected, as will other sectors.
    An example of how Brazil's situation is affecting trade 
flows is the action taken by Italian car maker Fiat, which will 
start producing a model in Brazil which previously had been 
manufactured only in Argentina. Previously it had been reported 
that the company planned to increase production at its 
Brazilian plant. Analysts contend that such moves would reduce 
Argentina's exports to Brazil and will reinforce fears that the 
acute devaluation of the rial has begun to create a significant 
imbalance with the Mercosur trading bloc.
    However, some would question whether this crisis is 
necessarily a bad thing. In most instances crises are 
interpreted as negative. However, many would argue that without 
such crises, one cannot fix the financial system. Speaking 
beyond Brazil, this was the message a few weeks ago from Jerry 
Jordan, president and CEO of the Federal Reserve Bank of 
Cleveland, a message echoed by many economists and bankers.
    The fact is that the financial crisis of the mid-1970's 
meant the end of the gold standard and led to floating rates 
based on market mechanisms. The Mexican peso crisis led to some 
IMF reforms, as well as forced the Mexican government to 
implement much needed structural and fiscal reforms. The Asian 
crisis illustrated that Japan should not be the model and led 
to greater transparency in financial transactions and policies, 
all obviously positive outcomes.
    Specifically relating to Brazil, we will hear testimony 
about how United States investors are not in a state of panic, 
contrary to some of the assertions made by analysts which I 
referred to earlier. The prospectus of United States investors 
in Brazil and similar countries is long-term, with 
contingencies to ride out the storms. In fact, according to one 
of the leading indicators, one of the firms, Brazil represents 
a moderate risk for investors.
    Further, on January 20 it was reported that the Brazilian 
government was studying a cut in import tariffs to offset 
inflationary pressures brought on by the devaluation. To help 
United States businesses Argentina, unilaterally cut tariffs on 
capital goods from outside Mercosur from 14 percent to 6 
percent. Certainly I can't think of any U.S. exporter who would 
be upset about a further opening of markets which would make 
American products more competitive.
    Perhaps this move toward a more free-trade, market-driven 
policy could spill over to some Brazilian orange juice 
producers who have been penalized by the U.S. International 
Trade Administration for unfair trading practices.
    In essence, it was the crisis which allowed market forces 
and pressures to take over in Brazil and drove the Brazilian 
Congress to vote on deep cuts in spending and approve reforms 
agreed to under the IMF assistance package. Parenthetically, 
that illustrates a dichotomy regarding the IMF's role, one 
which will be discussed further during the hearing.
    In essence, the prognosis for Brazil's recovery from its 
economic ailments depends on the policy responses, and there 
certainly is a divergence of views of what is the best approach 
for Brazil.
    Some economists and financial experts have stated that the 
policy of raising interest rates to defend Brazil's currency 
has been disastrous. Others expound that, due to volatile 
capital flows, Brazil's powerless to use interest rates to 
support its domestic economy. There are warnings about a fierce 
recession in sight for Brazil. Others focus on solutions such 
as the establishment of a currency board to set new monetary 
and fiscal discipline, similar to the one that Argentina 
adopted just a few years ago in 1991.
    There has been no specific response from IMF officials or 
leaders from lender countries on these. However, several trade 
missions, including an IMF delegation, have been in Brazil in 
the last 2 or 3 weeks trying to negotiate terms for a new 
agreement which will allow for an early release of the IMF 
assistance, in particular the $9 billion of credits which 
Brazil is asking for as a sign of goodwill in order to 
stabilize its currency and curtail capital flight.
    To reiterate, Brazil's importance as Latin America's 
largest economy and the world's eighth largest, mandate that 
this Subcommittee hold a hearing on the issue to gain a better 
understanding of the causes of the crisis, the current 
situation, and the prospects for the future.
    I would like to also state, before I recognize our other 
Members of the panel, that we had rescheduled this hearing once 
because administration officials withdrew the day before the 
hearing, fearing that their testimony might have a negative 
impact on the markets.
    We had secured administration witnesses for today's 
hearing, but Treasury officials became unavailable and the 
Department of Commerce was forced to withdraw their witness a 
day and a half before the hearing. We certainly hope that this 
does not continue with administration witnesses, nor does it 
become the operating procedure, so we hope to have a better 
cooperation from the agencies.
    Now I am pleased to recognize Mr. Delahunt to make some 
opening statements.
    Mr. Delahunt. Thank you, Madam Chairlady. I have no opening 
statements. I welcome this hearing, and look forward to the 
testimony.
    Ms. Ros-Lehtinen. Thank you so much.
    Mr. Manzullo.
    Mr. Manzullo. No.
    Ms. Ros-Lehtinen. Thank you. I would like to then introduce 
our panelists who are joining us today. Our first witness is 
Paulo da Cunha, who is a senior vice president and senior Latin 
American economist for Lehman Brothers Global Economics Group. 
Prior to joining Lehman Brothers in June 1998, he was the lead 
economist from Mexico at the World Bank, among other positions 
he held at the bank. He has served as the chief financial 
officer of a large state enterprise in the State of Sao Paulo, 
as well as an advisor to the Secretaries of the Budget and 
Finance on issues regarding the renegotiation of wage 
contracts. He has also been researcher, associate professor of 
economics, editor in chief of the leading Brazilian academic 
publication on economics, and has served on the boards of 
several public and private institutions and corporations. We 
welcome Mr. Paulo da Cunha to our country.
    Next I am pleased to introduce a constituent of mine, Mr. 
David Konfino--thank you, David, for being here--who is 
executive vice president of Union Planters Bank, International 
Division, and is also representing the Florida International 
Bankers Association. He manages all international lending 
activities for the bank's International Division, which is the 
leading provider of trade-related financing and other 
international products and services in the South Florida 
market. Prior to joining Union Planters Bank, Mr. Konfino was a 
senior vice president at NationsBank and served in various 
positions with that institution and its predecessor, the 
Citizens and Southern National Bank. We welcome you here, 
David.
    Our third witness is Dr. Sidney Weintraub, who holds the 
William E. Simon Chair in Political Economics at the Center for 
Strategic and International Studies. He is also a professor 
emeritus at the Lyndon B. Johnson School of Public Affairs of 
the University of Texas at Austin. He was a member of the U.S. 
Foreign Service from 1949 to 1975, serving in various 
capacities, including Deputy Assistant Secretary of State for 
International Finance and Development, and is Assistant 
Administrator of USAID. He is widely published and is 
considered one of the foremost experts in his field. We welcome 
Dr. Weintraub to our Committee.
    He is followed by Mark Smith, executive director of the 
U.S. Section of the Brazil-U.S. Business Council, and the 
regional director for Mercosur Affairs and Associate Director 
for Latin America at the U.S. Chamber of Commerce. Mark also 
serves as the director for Latin America on the Chamber's 
Global Telecommunications and Information Technology Task 
Force. Prior to assuming his current position, Mr. Smith worked 
in the Brazilian Embassy in the Trade Promotion Office as a 
trade analyst responsible for promotion of Brazilian exports of 
manufactured goods and information technology products. We 
welcome Mark as well.
    Last but certainly not least, we will hear testimony from 
Gilbert Lee Sandler, founder and senior partner at Sandler, 
Travis and Rosenberg, South Florida's first firm to concentrate 
its practice in customs and international trade regulation. I 
am pleased to have Lee as a constituent and welcome his 
testimony here today. He has recently been appointed to his 
sixth term as an advisor to the U.S. Government on 
international trade negotiations under the Federal Advisory 
Committee Act, and elected to three terms on the board of the 
American Association of Exporters and Importers. He was 
recently appointed to serve on the Treasury Advisory Committee 
on Customs Operation, and is currently awaiting the completion 
of the process. He also serves as general counsel to numerous 
trade associations.
    Congressman Bob Menendez and I welcome all of our witnesses 
here today. We commend you for all of your many accomplishments 
and the expertise that you bring to our hearing.
    Before we hear from our panelists, I am very pleased to 
recognize the Ranking Member, Congressman Menendez.
    Mr. Menendez. Thank you, Madam Chairlady. I am sorry I got 
here a few minutes late. I was on the Senate side but speaking 
to constituents, so I regret that I couldn't be here at the 
very start. In the interest of time, I am going to ask that my 
statement be included in the record.
    Since this is our first meeting, Madam Chairlady, let me 
just state for the Members on the Democratic side of this 
Committee that we look forward to working with you on the 
issues that this Committee has jurisdiction over, on the Export 
Administration Act, on OPEC and Eximbank and others, and 
overview of trade issues. We think that this is an incredibly 
important Subcommittee to America's vitality and opportunities 
in the next century, and we hope to work in the spirit of 
bipartisanship that best meets our goals in terms of the 
jurisdictions that we have. We will be suggesting to you in the 
days ahead maybe some of the things our Members would like to 
see us cover.
    With that, I look forward to the testimony of our 
witnesses.
    Ms. Ros-Lehtinen. Count on that. Thank you, Bob. 
Congressman Menendez and I have to go to a meeting in a few 
minutes, but we would like to turn the hearing over to Mr. 
Manzullo at this time. Thank you.
    Mr. Manzullo [presiding]. I can't pronounce some of these 
names as easily as the Chairman, but I will try, if you would 
bear with me. Mr. da Cunha.
    Mr. da Cunha. Yes.
    Ms. Manzullo. The rules are--they are relatively easy 
rules. Try to limit your testimony to 5 minutes. There will be 
a green light and then a yellow light will go off. That means 
you have 1 minute left. The red light goes off, that means 
would like you to sum up as soon as possible. You could keep 
your testimony in a conversational style if you want. You don't 
have to read it. However you prepared it, we are anxious to 
read your remarks. Let me say here that all of the remarks of 
each of the witnesses will be made part of the permanent 
record. Pull the microphone up to you as close as possible, Mr. 
da Cunha.

 STATEMENT OF PAOLO DA CUNHA, SENIOR VICE PRESIDENT AND SENIOR 
  LATIN AMERICAN ECONOMIST, LEHMAN BROTHERS GLOBAL ECONOMICS 
                             GROUP

    Mr. da Cunha. Wonderful Chairperson, Congressman, ladies 
and gentlemen, it is an honor and a privilege to be here today. 
I have been asked to provide the Subcommittee with answers to 
several questions. I prepared the background paper and will 
focus this statement on two issues, the implementation of 
stabilization policy and its likely success.
    Having lost its exchange rate anchor, the nominal price 
system in Brazil is adrift and needs to be reanchored. It is my 
understanding that a program to this effect will be announced 
shortly. Price expectations will be anchored on the rate of 
money growth, and that in turn will be based, it appears, on 
explicit inflation targets set by the monetary authority. The 
floating exchange rate system will be maintained, fiscal policy 
will be adjusted further to compensate for some of the losses 
over the past months, and the key instrument of active policy 
will be the level of the interest rate.
    The challenge the program faces in money markets is clear 
enough. Presently, not only is the rate in the interbank market 
high, on the order of 39 percent for repurchase agreements, it 
rises on future contracts. The rate on April contracts was 44 
percent, and in excess of 46 percent for May contracts. What 
these rates tell us is that markets have a negative expectation 
about inflation in the future. At least they are uncertain.
    What the program must do is change the shape of this yield 
curve. The critical measure of success is lower rates on future 
contracts. Why is this trend critical? Because it affects the 
interest costs under the domestic debt of the government. Today 
nearly three-quarters of the Federal debt is tied to the 
interbank overnight rate. The rate--the pace changes every day.
    This means, should the rate remain high and in effect 
increase to the mid-40's by May and June, the interest bill of 
the Federal Government would increase by an amount beyond what 
it could pay through savings elsewhere in the budget. To pay 
this bill, the government would issue more debt, destabilizing 
the ratio of debt to GDP.
    The market would expect at some point in the future the 
government would have to pay its interest bill by raising taxes 
or, more likely, printing money. Anticipating that outcome, it 
would charge today a rate that is consistent with the inflation 
expected for tomorrow.
    It is important to note that we are dealing with a problem 
of expectations. The underlying rate of inflation is low, close 
to zero. The pass-through effect of the devaluation in January 
is limited, and there are no other cost push pressures in the 
economy. Nevertheless, because the government debt is priced 
daily at a market set by expectations, this price matters, and 
more so because the government is placing new debt every week. 
The maturity structure of the debt is so short that about one-
third of the stock expires every 60 days.
    Let me now turn to the issue of implementation. I believe 
that the new program will have faced two critical tests. The 
first will be given by its friends, that is, by the financial 
markets. The issue here will be the inversion of the yield 
curve and I believe the program will pass this test. In any 
event, we will know the outcome in 2 or 3 weeks after the 
program is announced.
    The second test will be given by its opponents, that is, by 
the coalition of industry and labor, helped by the forces of 
the political opposition. I am afraid that the program may 
flunk this test.
    The first issue has to do with the working of 
destabilization programs. We tend to think that the real rates 
are high after a monetary contraction because there are normal 
rigidities in the price system. Expectations adjust faster than 
actual prices.
    I believe that the opposite will happen in this case. 
Prices may adjust quickly or in fact they may fail to increase. 
Expectations in the interest rate market may be recalcitrant, 
nonetheless. The future rates will fall and the shape of the 
yield curve will change to a downward sloping curve, but the 
size of the fall could be small, in other words, we may see 
rates of 35 percent in April and May.
    The second issue has to do with the pace of the recession. 
Brazil has experienced two quarters of negative GDP growth and 
will experience at least another two, and my feeling is the 
speed of the contraction will increase. This has something to 
do with the level of the domestic real interest rate, but it 
has more to do with what is happening to capital inflows.
    After Russia's default, voluntary lending to Brazilian 
firms nearly stopped, yet Brazil's growth model has been forced 
on foreign financing of the private sector. The more devalued 
currency and recession at home will stimulate exports but the 
response may take some time, and in any event world demand is 
depressed. I believe the output will continue to shrink and 
unemployment to expand, perhaps to as much as 14 and 15 percent 
in Sao Paulo in May and June.
    The third issue and final one has to do with the political 
and economic timing. We often hear that financial markets move 
quickly and politics slowly, yet it may be that to solidify low 
inflation in a economy such as Brazil takes not 8 months but 8 
years.
    President Cardoso thought after the first 2 years of his 
first administration he could move beyond stabilization. He 
later recognized that this could not be so. He spent the last 
year and a half of his first administration fighting for and 
eventually winning reelection. On winning, he tried to 
accelerate the transition from stabilization to growth through 
a controlled devaluation. That experiment failed miserably and 
dealt a mortal blow to the Real Plan, the cornerstone of his 
popularity. He will try to regain his popularity by insisting 
on growth and rightly so.
    The problem in my view is that he is likely to 
precipitate--my sense is that by midyear if not before, when 
inflation is low, the currency relatively stable, the external 
environment reasonably tranquil, but unemployment high and 
growing and political discontent thriving, then he will lose 
his pulse and in that environment a simple hesitation produces 
a shock. In January of this year, he pushed Humpty-Dumpty off 
the wall and now we are trying to put him together again. 
Another fall and the patches will break.
    When faced with another episode of inflationary 
uncertainty, the financial market will look for the 
introduction of inflation indexed government debt. It will 
probably get it, and because by then we would see a return of 
adverse inflation expectations and because it will prove to be 
politically impossible to restrain indexation to government 
bonds, the economy will lose its nominal anchor with a return 
to uncontrolled inflation.
    Thank you.
    Mr. Manzullo. Thank you. I didn't know that Humpty-Dumpty 
would find his way into this equation.
    Mr. David Konfino, Executive Vice President, International 
Division of Union Planters Bank. Thank you for coming.

     STATEMENT OF DAVID KONFINO, EXECUTIVE VICE PRESIDENT, 
          INTERNATIONAL DIVISION, UNION PLANTERS BANK

    Mr. Konfino. I would like to thank the Chair and Members of 
this Committee for inviting me to speak with you today. Let me 
briefly tell you about my company so you may understand why the 
resolution of Brazil's problems are so important to us.
    The Union Planters Bank was founded in Memphis, Tennessee 
some 130 years ago, and today is the 25th largest bank in the 
Nation in terms of assets. The bank's international operations 
are based in Miami due to that city's importance as an 
international financial center. Last year we issued some $700 
million in letters of credit and carried out over $2 billion in 
trade finance operations.
    International trade and U.S. exports are particularly 
important to our company because nearly 25 percent of all U.S. 
trade takes place within the 12-state franchises that our bank 
has. Brazil's $800 million economy is the world's ninth or 
eighth largest. It depends on what terms it is measured at. It 
accounts for nearly half of Latin America's total output of 
goods and services. In addition, it has become a very important 
magnet for capital investment, with some 9 out of the top 10 
privatization and capital investment deals last year in Latin 
America taking place in that country.
    Brazil's current problem was initially sparked by the 1997 
Asian crisis followed by Russia's debt moratorium in August of 
last year and the subsequent erosion of investor confidence 
that finally ignited the current crisis that spread through 
developing countries. The event that finally ignited the 
current crisis was when the State of Minas Gerais declared a 
moratorium on the debt that it owes the Federal Government of 
Brazil on January 7.
    Brazil's problem is in part due to a lack of governmental 
fiscal discipline and huge expenditures for political purposes 
which created enormous budget deficits, reaching some 8 percent 
of GDP. The cost of financing these mounting deficits drove up 
domestic debt to over $270 billion, which in turn has increased 
domestic interest rates to an unsustainable 40 percent.
    Brazilian currency came under severe pressure in the months 
leading up to the current crisis and the government was forced 
to spend nearly $40 billion, or over half of its foreign 
reserves, in defending the currency. Finally, the government 
decided to stop defending the rial on January 13 and allowed it 
to flow freely. Since then the currency has plunged by some 70 
percent.
    Economists are forecasting that Brazil will go through a 
serious recession this year, with the economy shrinking up to 6 
or 7 percent. It is likely that unemployment could run in the 
double digits for the first time in a number of years. Also 
with the recent devaluation of the currency, inflation, which 
was under control, is once again a major concern and is also 
expected to be in double digits.
    Brazil's current difficulties will impact the United States 
and especially South Florida, one of Brazil's largest trading 
partners. Latin America accounts for nearly 10 percent of all 
U.S. exports, but in the case of South Florida that number is 
closer to 70 percent, so any region-wide downturn could cut 
deeply into profits of U.S. companies and severely impact South 
Florida's economy.
    Brazil could have up to a $40 billion detrimental economic 
impact on United States companies if things deteriorate 
seriously, which could substantially slow United States profit 
growth this year. Moreover, United States banks have some $25 
billion of loans to Brazil and would obviously be very severely 
impacted if Brazil were to declare a moratorium.
    Brazil's problems could impact South Florida even more 
significantly. In 1998 over half a million Brazilians visited 
our area and spent over $700 million. Brazil's devalued 
currency immediately reduced the buying power, and industries 
such as travel, tourism, banking, stock brokerage, commercial 
real estate are all going to be affected.
    Unfortunately Brazil's troubles are occurring at a very 
inopportune time for Miami. We have only recently begun to 
share in the boom and expansion of the United States economy. 
Even with job growth of around 2 percent for the last 
consecutive 2 years, the unemployment rate in the Miami area is 
in excess of 6 percent, which is well above the national 
average.
    Brazil's neighbors are also likely to feel the impact of 
its problems. Argentina, for example, whose economy is very 
closely linked to Brazil, is likely to suffer a 4 percent 
decline in its growth. Overall, Brazil's current crisis could 
potentially cause Latin America's economies to shrink by at 
least 3 percent during the year.
    We need to avoid, at all costs, a repeat of the 1992--I am 
sorry--repeat of the 1982 Latin American debt crisis which 
resulted in what has been called the lost decade--and I am 
almost finished--the lost decade for Latin America. For nearly 
10 years we saw economic stagnation, high unemployment, a rise 
in poverty, corruption and misery.
    This period, however, also gave rise to a strong movement 
for economic and political reform in the region. Great inroads 
have been made by almost all countries in Latin America in the 
last few years, and today's picture is a lot brighter than 
during the last region-wide economic crisis.
    Every single country in the region, with the notable 
exception of Cuba, is ruled by a democratically elected 
government. Much of the inefficient state ownership of 
industrial production has been dismantled through massive 
privatization efforts. A middle class has begun to emerge in 
most countries, and progress has been made in fighting 
corruption, and judicial reform and much, much more.
    However, if Brazil's crisis is allowed to get out of hand 
and spread throughout neighboring countries, within days or 
weeks the labor and progress of an entire decade could be 
erased. The United States needs to build a strong bridge of 
support for Brazil like we did for Mexico. We must use our 
influence with the IMF and other multinational organizations to 
assure a rapid resolution of the problem. United States and 
international investors must regain confidence and once again 
view Brazil and Latin America as attractive investment 
opportunities, and we must lend our expertise to Brazil in 
helping it to manage and restructure its huge internal debt and 
to avoid a default which could have disastrous consequences.
    Thank you.
    Mr. Manzullo. Thank you very much.
    Dr. Weintraub.

   STATEMENT OF SIDNEY WEINTRAUB, WILLIAM E. SIMON CHAIR IN 
  POLITICAL ECONOMICS, CENTER FOR STRATEGIC AND INTERNATIONAL 
                            STUDIES

    Mr. Weintraub. Thank you very much. I am going to make six 
points from the longer paper I gave you.
    Mr. Manzullo. Before you begin, I would like to welcome 
Congressman Brad Sherman from California who has just joined 
us.
    Mr. Weintraub. I try to keep them in sound bites so, more 
or less, I get it in in the 5 minutes.
    First, the point stressed by the first witness about 
expectations, I want to emphasize that over and over again 
because I think it is a critical element of what is going on in 
Brazil. The vote in December on pension reform which failed, 
after he had made a commitment--this was one of the conditions 
of the loan from the IMF. It failed. I won't go into why but 
immediately, as soon as it failed, there was a sense that 
Brazil couldn't meet its obligations.
    Put it differently, there was a sense that the President 
was not in full control of the political situation, and that 
was a bit unnerving. It got worse, as was stated just a few 
moments ago, when the Governor of Minas Gerais, Itamar Franco, 
raised problems about meeting his obligations to the central 
government. That conflict is still going on.
    The legislation which is in progress, is now likely to 
pass. When faced with reality and disaster, the legislature 
began to think in a slightly different fashion.
    Second, it was quite clear that a corrective devaluation 
was needed. Brazil was overvalued. They were trying to delay 
it. They have used about $40 to $45 billion in reserves in 
trying to protect the exchange rate. They couldn't protect it. 
They began to run out, and my own judgment is that the floating 
exchange rate they are now using is the correct policy. I 
really don't think they have any other real option.
    There is a price to pay for all of this. The decline in the 
GDP I think will be about 5 percent. The rise in inflation, I 
don't know what it will be but it will be substantial, and that 
onus in itself destroys the objective of the Real Plan when it 
was introduced to get rid of inflation.
    The third point is, despite a lot of criticisms of the IMF, 
I don't see any alternative but to reduce the large budget 
deficit that Brazil has. Failing to do that, they won't get 
confidence. I don't think Brazil can spend its way out of its 
problems the way some of the critics of the IMF are saying. 
There are problems. The interest rate is crushingly high. It 
may cause some defaults. It may require some later, in addition 
to rescheduling--to refinancing, it may need some 
restructuring, but I don't see any way out except to deal with 
the problems that brought on the crisis.
    The fourth point would be the impact on Latin America. I 
don't think it will be as bad as the previous witness said. It 
will be very bad in Argentina. About a third of Argentina's 
exports go to Brazil. Argentina has been doing extremely well. 
Its exports are going to go down. But keep in mind that all of 
Argentina's exports are less than 10 percent of its GDP, so the 
total damage is not as bad as the damage that is implied by 
one-third of exports going to Brazil.
    Having said that, I don't expect Argentina to grow this 
year. I don't think that will happen. The bigger danger I see 
is to keep Mercosur, the regional integration agreement going, 
and I think both countries will do everything possible to make 
sure that happens. There is too much in it for them.
    My fifth point deals with the impact on the United States 
as a whole. Florida is a special case, and I admit that, but 
let me look at it as a whole. United States exports to Brazil 
are about $15 billion. It is not Mexico. United States exports 
to Mexico were $80 billion last year. There is a big 
difference. It is important but not crucial. Bank exposure to a 
good many banks in Brazil is high, but United States exposure 
as a whole is much less than European. United States foreign 
direct investment in Brazil is extremely high, and just how it 
works out depends a good deal on how quickly Brazil gets out of 
its problems.
    On the recovery, I think the most important thing the 
Brazilians have to do is demonstrate that the government has 
control over its fiscal problems, which it still has to do, and 
only then can they get those crushingly high interest rates 
out, and I assume their policy will be as described by the 
first witness: inflation, inflation, inflation. In other words, 
they are going to inflate and they are going to target 
inflation. They can succeed. They can succeed by performance of 
control of their situation, and I think that can happen before 
the end of this year.
    Mr. Manzullo. Thank you, Doctor.
    Mr. Smith.

  STATEMENT OF MARK SMITH, EXECUTIVE DIRECTOR, U.S. SECTION, 
                  U.S.-BRAZIL BUSINESS COUNCIL

    Mr. Smith. Good afternoon. I am Mark Smith, executive 
director of the U.S. Section of the Brazil-U.S. Business 
Council. The Brazil-U.S. Business Council is a bilateral trade 
organization that works to provide a high-level private sector 
forum for the business communities of both countries to engage 
in substantive dialogue on trade and investment issues and 
communicate private sector priorities to both governments. The 
U.S. Section of the council represents the majority of the 
largest United States corporations invested in Brazil, and 
operates under the administrative aegis of the U.S. Chamber of 
Commerce.
    My remarks today will cover three subjects: No. 1, the 
importance of Brazil to the United States economy; No. 2, the 
perspective of United States direct investors on Brazil's 
current economic problems and the measures taken by the 
Brazilian government and Congress to address them; No. 3, 
actions that can be taken by the United States and Brazil to 
strengthen an important commercial relationship.
    I would like to start by talking about Brazil's importance 
to the United States economy and the trade picture. Brazil is 
for the United States the 11th largest export market in the 
world. The United States exported over $15 billion of products 
and services to Brazil last year, over 6 percent more than we 
sold to China, and in a tough year like 1998. In 1997, when we 
didn't have falling economic growth, we exported over 25 
percent more to Brazil than we did to China. The United States 
has its third largest trade surplus in the world with Brazil, 
over $5 billion in 1998.
    Now, I would like to look at exports to Brazil at the State 
level, and the key point I would like to make here is. Florida 
is not the only one who is really at risk here. Brazil is 
Florida's No. 1 export market in the world, accounting for over 
$2.6 billion in exports. Texas is the 8th largest, $1.2 
billion. Illinois is the 9th largest, $1.1 billion. New York is 
the 11th largest, $1.2 billion, and California is the 17th 
largest, $1.4 billion.
    That is the current picture, but if you look at the future 
picture, that is where the importance of Brazil really comes 
out if you look at the growth trends. From 1993 to 1997, 
Florida's exports to Brazil as a percentage of total exports 
grew from 3 percent to 11.3 percent. In the same period exports 
to Brazil as a percentage of total exports went from 1.5 
percent to 3.1 percent in Illinois, from 1.1 percent to 2.2 
percent in Texas, from 1.1--I am sorry, from 1.4 percent to 2.4 
percent in New York and .9 percent to 1.3 percent in 
California. So you see that Brazil is becoming more and more 
important to the United States economy, particularly in these 
States.
    The investment picture: The United States is the No. 1 
foreign direct investor in Brazil. American companies have 
increased their presence significantly in the Brazilian market 
during the Cardoso administration by making winning bids on 
several major privatizations and telecommunications and 
electric power sections.
    Now I would like to turn to what the members of the U.S. 
Section of the Brazil-U.S. Business Council think about 
Brazil's economic prospects. Clearly 1999 is going to be a very 
difficult year for Brazil. The IMF and the Brazilian government 
are basing the renegotiation of the IMF-led financial 
assistance package for Brazil on expectations of a 3 to 4 
percent recession and over 11 percent inflation. Despite these 
projections, our members remain firmly committed to the 
Brazilian market and plan to maintain and even in some cases 
increase their investments. Why? Our members are committed to 
Brazil for the long term. They are not engaged in speculative 
investing, but are instead basing their investments on the 
medium- and long-term prospects for Brazil which they believe 
are extremely bright.
    Now I would like to turn to the impact on U.S. trade. We 
believe that United States exports will decline significantly 
this year due to the lack of affordable credit for Brazilian 
companies and consumers, and the general decrease in Brazilian 
purchasing power resulting from the devaluation of the rial. In 
analyzing the impact on the U.S. economy, it is important to 
take into account two factors:
    One, United States exports are tied to privatizations and 
the exports of the subsidiaries of United States multinationals 
in Brazil. Capital equipment accounts for over 70 percent of 
Brazil's imports. Many of these capital equipment purchases are 
tied to infrastructure investment commitments made as a part of 
the privatization process. These commitments will help 
ameliorate the impact on U.S. exports somewhat. United States 
companies are not only the largest investors in Brazil but they 
are among Brazil's largest exporters. The increased exports of 
these subsidiaries should help cushion the impact on U.S. 
corporate profits somewhat.
    How has the Brazilian government responded? To date the 
Brazilian Congress has passed 90 percent of the 28 billion rial 
fiscal package connected to the IMF-led financial assistance 
package. This January, during an extraordinary session of the 
Brazilian Congress, measures were passed that will cut 9.6 
billion rials off the public sector deficit. During the new 
session of Congress opened this week, we expect the additional 
10 percent will be passed quickly.
    The key thing is that the Brazilian democratic system has 
reacted positively and convincingly to Brazil's fiscal 
challenges. As in every democracy, there is give and take, but 
the fact that the measures are being implemented with the 
support of the Brazilian people through democratic means is 
extremely important.
    What can be done by the Brazilian and U.S. Governments to 
strengthen the Brazil-United States commercial relationship? 
First and foremost, the expansion of the Free Trade Era of the 
Americas negotiation through the approval of Fast Track 
negotiating authority limited to trade issues. We expect that 
there will be increased cause here in the United States for 
protection against Brazilian exports. Our current trade laws 
are important safeguards for ensuring that Brazil engages in 
fair trade, but we believe that the United States should move 
quickly to cement the terms of our commercial relations through 
the accelerated negotiation of the Free Trade Era of the 
Americas.
    The United States does not have a trade agreement that 
ensures preferential access for United States exports in good 
times and in bad with Brazil, as we do with Mexico through the 
NAFTA. When Mexico went through a similar devaluation in 1995, 
our trading preferences were protected by NAFTA. As Mexico's 
GDP plunged 8 percent, the United States actually gained market 
share vis-a-vis European and Asian competitors. During these 
tough times, U.S. market share increased from 70 to 75 percent 
and our exports only decreased 8.9 percent, while the exports 
of European and Asian competitors fell 20 percent.
    Second, the negotiation of a bilateral investment treaty 
and a bilateral tax treaty with the United States. These 
treaties would reinforce investor competence in Brazil by 
ensuring full protection for United States investments and 
eliminating double taxation of United States companies doing 
business in Brazil respectively.
    Third, aggressive movement in Brazil's privatization 
program. Particularly we would like to see the opening of the 
Brazilian reinsurance market, as well as improved tax 
treatment, concession rules and foreign exchange rules for 
private investors in the Brazilian petroleum section.
    Last, broad-based tax reforms in Brazil that would lower 
Brazil's excessive tax burden on business and create an 
environment conducive to economic growth.
    I would like to thank the Chair and the Members of the 
Subcommittee for the opportunity to share my thoughts, and 
welcome any questions.
    Mr. Manzullo. Thank you, Mr. Smith.
    Mr. Sandler.

 STATEMENT OF GILBERT LEE SANDLER, ESQ., SANDLER, TRAVIS, AND 
                           ROSENBERG

    Mr. Sandler. Thank you very much. I too wish to thank the 
Committee for giving me the opportunity to appear today. I 
thank you for the opportunity to appear last today, because you 
have given me the opportunity to listen to the other speakers 
and change my remarks so many times that I really don't know 
what I am going to say right now.
    This is a remarkable process and a very important issue for 
this Committee to be taking up, and I appreciate having an 
opportunity to contribute to your deliberations. I too am from 
South Florida, and I certainly subscribe to the comments of Mr. 
Konfino about the importance of this issue there, and I also 
agree with what Mr. Weintraub has said about we are something 
of a special case.
    In my written remarks I emphasize that this is a local 
economic issue for us, not simply an international issue. 
Whatever the figures are you are looking at in terms of the 
United States-Brazil trade, I doubt very seriously that they 
take into account the major sales by the retail establishments 
in downtown Miami to the Brazilian tourists that are regularly 
down there, and we can see already that there is a diminution 
already in the tourism figures, in the cargo figures. We have 
already seen the impact of the problems in the world and 
particularly in Brazil.
    We would subscribe certainly to the Committee doing all 
that it can with respect to encouraging the lowering of 
interest rates, the impact of the IMF moving forward with its 
funding processes, the lowering of tariffs and the continued 
growth of Mercosur, as a part of making certain that the 
problems in Brazil are not visited on all of our trading 
partners and that we are building the strength of the economies 
of Latin America.
    I would also subscribe to Mr. Smith's comments that we 
can't measure the importance of Brazil to this country strictly 
based upon the trade figures from the past. That is the 
opportunities of the future. It is the growth and strength of 
that country, the size of that marketplace.
    What struck me in preparing the testimony today, in talking 
to my clients and to others about the Brazil marketplace, there 
was, despite all of the rhetoric about the crisis, all the 
problems that we know are real, there is a continued and 
important optimism about trade in the long term, about 
investment in the long term. We need to encourage that and get 
over this hurdle as quickly as possible.
    My background is not that of an economist. My background is 
that of a trade lawyer. I have represented historically U.S. 
companies involved with customs and other types of regulations 
affecting their imports. Over time that practice has changed 
because business has changed. The customs managers have become 
not import managers, they become global customs managers. The 
rules that govern trade, that regulate trade have been 
harmonized and globalized, and the lessons that we have learned 
in the United States are lessons which need to be learned 
throughout the country.
    The issue that I would like to address and make sure that 
the message is heard here is that as we work on the macro 
issues of the economic problems in Brazil and throughout Latin 
America, it is most important that we not lose sight of the 
not-so-macro issues about the day-to-day regulation of trade 
and how it impacts upon businesses. As you stabilize the 
economy, as the problems are dealt with in Brazil, we can't 
restore them to a situation in which we continue the problems 
that were visited upon trade prior to the crisis and during the 
crisis.
    Think about some of these examples. So much is talked about 
in terms of the finance situation and the finance rules that 
require advanced payments in Brazil. At the same time that the 
payments are required in advance, the cargo doesn't get 
released for 2 to 4 months--2 to 4 weeks very, very typically, 
instead of having the quick release of cargo that is so 
important to capital movement of goods or to the consumer 
products that move into commerce.
    We have got to be able to streamline those processes. The 
customs valuation code adopted in Brazil should conform to 
Article 13 of the customs valuation code in the GATT which 
provides for quick release through customs, bonds or other 
types of processes. It is a very important to not just lower 
the tariffs but to lower those barriers. If licensing and 
labeling requirements are to be adopted, they have to be done 
in a transparent fashion so that traders on both sides of the 
transaction can prepare for them, can anticipate them, and can 
comply with them.
    Meaningful and appropriate trade issues need to be those 
that people can anticipate and comply with, and that has been 
an historic problem not just with Brazil but certainly with 
others of our trading partners. We need to attack those. The 
FTAA process has been slowed by a variety of issues, including 
lack of Fast Track and what have you, but the negotiators have 
focused upon trying to smooth the regulation of trade by year 
end and identifying the problems that affect businesses on a 
day-to-day basis.
    We would encourage this Committee to make certain that 
Brazil is at the table discussing those issues and trying to 
create systems that are streamlined, efficient, serve the needs 
of the countries, but also make trade legitimate, possible, 
effective, efficient, and economic. Thank you very much.
    Mr. Manzullo. Thank you very much. What an interesting 
panel. All the various perspectives. Mr. Sherman.
    Mr. Sherman. Thank you, Mr. Chairman. Brazil has always 
been called a country that has a great future and always will 
have a great future. You can find articles on Brazil from every 
decade predicting that it will have a rush to First World 
status and world prominence just 5, 10 years down the road, and 
now there are a lot of reasons to be optimistic about Brazil. 
It is a vibrant society and a country with a lot of natural 
resources.
    I wonder if one or two members of the panel can comment on 
what you think Brazil is going to look like 5 or 10 years down 
the road. Is this a correction or is this a depression, to use 
market terms?
    Mr. da Cunha. You want me to go first? I will take a stab 
at that. I think that presently, although there are many 
international issues dealing and impinging on Brazil, and 
certainly it has made huge strides to belong to the global 
economic sphere, the problems that Brazil faces now are really 
domestic issues. You are right: It has been, I think, a 
disappointing history of promises.
    My sense is that if there is any way this vacillation and 
wavering in the determination to implement this stabilization 
program--it is almost inevitable, given the structure of the 
debt and the fact that I don't think there is a danger of that 
repudiation or default.
    Brazil has had six stabilization programs since the early 
80's. In all of them the financial system has been spared, not 
only spared, it grew in strength, so I don't think that is the 
issue. The danger would be the return of indexation and with 
indexation the return of high inflation, and after high 
inflation the inherent instability in that system, and 
therefore the need in another 18 to 22 months to do another 
sort of miraculous type of program, which at that point I think 
will be some sort of a convertibility program, since monetary 
policy will clearly have become discredited completely.
    Mr. Sherman. It is clear that your profession and mine have 
a history of--I am a lawyer by training--have a history of 
being paid by the word. Bottom line, is Brazil going to be in 
better shape? And I realize there is a substantial risk for 
error here and you may have just been getting to this, in which 
case I apologize for interrupting. But is Brazil going to be 
renewing its promise and its upward trend 5 or 10 years from 
now, assuming, as you predict, they may stick with reasonable 
economic policies?
    Mr. da Cunha. I think that if there are reasonable economic 
policies, the outlook for growth in Brazil continues to be very 
positive.
    Mr. Sherman. Of the panel members here who either manage 
money or who advise people who do, how many of you are 
anticipating putting your own money or your clients' or your 
investors' money into Brazil, additional investments in the 
next 6 months?
    Mr. Konfino. As a bank that finances trade with Brazil, we 
certainly expect to continue to do that and to do a lot more of 
it. I think your comment about Brazil being a country of the 
future and the future never comes is beginning to change. I 
think the future is beginning to come.
    Brazil today looks very much different than it did a decade 
ago, and I think 5 years from now it will look even stronger. I 
do think that this is a correction. It may be a major 
correction. I don't see it being a major depression.
    Mr. Sherman. Your bank will do a letter of credit on goods 
that are on the way, but how about some financing for a new 
power plant, nice 20-year payout? Your bank ready to make those 
loans?
    Mr. Konfino. We wouldn't. Not even if Brazil looked a lot 
better would we do that. Our strategy is to finance trade. Our 
role as a regional bank is to help our exporters export their 
goods, so we wouldn't do that regardless of the situation.
    Mr. Weintraub. May I jump in? You asked two questions. 
First you asked 5 to 10 years out. Then you shifted that to 6 
months out.
    Mr. Sherman. No, no, no. I am still 5 to 10 years out. The 
gentleman next to you finances trade. I am looking for long-
term investment.
    Mr. Weintraub. If I could stick to the 5, 10 years out, I 
think the probabilities are very high, about 90 percent or so, 
that Brazil will recover. The crisis is going to be rough, 
going to hurt a lot of people, but it is a country of 
tremendous industrial base, well-trained people, unfortunately 
a very unequal society and that is one of the things they must 
deal with.
    But United States investors, if you look at what they have 
been doing, they have been putting tremendous amounts of money 
into Brazil. There may be a pause. That is why I am a little 
nervous about 5, 6 months, but I doubt whether the pause is 
going to be that long. It is a guess anyhow.
    Mr. Sherman. Mr. Smith, you have my 401K in your hands.
    Mr. Smith. Well, I think that, as I mentioned in my 
remarks, that the investments that are being made, and those 
are very significant investments, are being made based on 
medium-term and long-term expectations. Now, this year is 
obviously going to be very difficult.
    I don't know how many of you read the Wall Street Journal 
every day, but as you see, GM is going to be putting another $4 
billion in Brazil. Now, they are losing tons of money right 
now. Why are they doing that? Because versus the United States 
where there is 1.3 people per car, there are nine people per 
car in Brazil versus the United States. Where we use 13,000 
kilowatts per hour, there you are seeing about 1,300 kilowatts 
per hour per person in Brazil.
    Now, these are things that are going to take time for it to 
get up to First World levels, but if you look at what has been 
happening ever since the Collor administration and particularly 
since the Cardoso administration, many of the fundamental 
changes that needed to take place in order for Brazil to really 
take off have been made. They have opened a lot of--they have 
really been transforming, most importantly, the public sector's 
participation in the economy. As we all know, government 
doesn't do good business.
    I think that is the key in analyzing what is going to 
happen here within the next 5 to 10 years, is that you are 
going to have--you are seeing a process that is going to be 
difficult, it is getting to be painful at times, but it is a 
process that is moving forward. I think that we have already 
seen a lot of positive impacts and that that will continue, 
that we will continue to see continued United States investment 
in Brazil, and if I was your financial advisor, I would say go 
for it.
    Mr. Sherman. Let me now ask you folks to be political 
advisors, if I still have time. What are the political 
ramifications and this is not over the next 5 or 10 years but 
really over the next year, what are the political ramifications 
of this fiscal crisis? Has there been a decline in support for 
President Cardoso, and is there a tangible risk to democracy 
continuing in Brazil?
    Mr. Weintraub. Let me go first because I do try to look at 
these things. Yes, the popularity of Cardoso has declined quite 
precipitously since he was reelected to the second term. It 
will get even worse and maybe even unrecoverable if inflation 
gets out of hand, because that is why he was elected in the 
first instance and reelected, because he defeated that.
    Your third question is whether democracy is in danger. I 
don't think so. It is democracy that got them into trouble this 
last go around in that, if you know the political system, it is 
a little chaotic. A lot of people, each one on his own, had he 
controlled the legislature, for example, the way his neighbor 
next door Carlos Menem does, the legislation would have gone 
through the Congress because Menem controlled both houses. If 
you control both houses, it helps.
    Mr. Sherman. The guy down the street on Pennsylvania Avenue 
agrees was that. But you don't see elements of the military or 
elements in the more conservative and money parts of society 
deciding that democracy got them into this problem and they 
need a general to lead them out of it? There isn't evidence of 
that problem? I see several people shaking their heads now.
    Mr. Weintraub. I hope these are not famous last words. No, 
I don't expect it to.
    Mr. Sherman. Thank you, Mr. Chairman, and thank you for 
letting me ask questions first.
    Mr. Manzullo. Mr. Delahunt.
    Mr. Delahunt. Thank you, Mr. Chairman.
    I think it was Mr. Smith that indicated that--maybe it was 
Mr. Konfino. I forget who it was, but in any event there was a 
reference that--maybe it was you, Dr. Weintraub--that 90 
percent of the reforms have been enacted and only 10 percent 
remain to be addressed.
    Mr. Smith. That was my remarks, yes.
    Mr. Delahunt. What were the 90 percent that were enacted?
    Mr. Smith. Well, most recently there was, I think you 
referred to a tax, an additional tax on social security 
recipients and those who are receiving government pensions. 
There have been also a large degree of cuts that have been done 
on Brazilian government spending. They have significantly 
slashed the budget for last year and this year, I think around 
a third, and there is more to come.
    Mr. Delahunt. In other words, what we have done, the 
Brazilian government has increased taxes and reduced spending.
    Mr. Smith. Exactly.
    Mr. Delahunt. Much of what the U.S. Congress did back in 
1983.
    Mr. Smith. From my perspective there has been a little too 
much of increase in taxes and we would like to see more of----
    Mr. Delahunt. More cuts, less taxes.
    Mr. Smith. More cuts, less taxes because we think that----
    Mr. Delahunt. I think that goes back to, maybe this was Dr. 
Weintraub talking about it was going to be painful. I have 
never had the opportunity to visit Brazil but my sense is for 
many, many years it has been a nation, as many Latin American 
countries have, of ``have and have not'' society. Can anyone 
present any information in terms of if it exists, which I 
presume it does, the disparity of wealth that exists in Brazil?
    Mr. Smith. Well, it is--if you look at last year, I think 
they do an indicator of the most unequal countries in the world 
and I think Brazil is No. 1.
    Mr. Delahunt. No. 1. So the pain to put their fiscal house 
in order is going to be, I presume, visited on pensioners and 
the poor in Brazil. Am I correct, Dr. Weintraub?
    Mr. Weintraub. Well, let me just play a little bit with it. 
Your point about the inequality is accurate. Your point--you 
didn't call it that. Even more serious is the poverty, people 
who live below a reasonable line. In that sense Brazil may be 
the worst country in Latin America, even more so than Mexico. 
Those problems are deep, they are hard, they are not going to 
be solved the next year, over time.
    Will these people suffer more from the increase in taxes 
and the reduction in expenditures? Possibly, but they are not 
pensioners, these people, so they are not the ones who are 
going to get some of the hit. A lot of that hit is going to go 
to the people who have moved up somewhat into the middle class, 
and they will suffer from it and they will suffer over a period 
of time.
    Mr. Delahunt. Reference was made to the emerging middle 
class. In terms of percentage of the population, how would you 
define the middle class in Brazil? What percentage of the 
population would it be fair to state is middle class in that 
particular society?
    Mr. da Cunha. You have to understand in Brazil 40 percent 
of the population earn less than two minimum wages. Now, two 
minimum wages is less than $200 a month. The richest 5 percent 
of the population has 30 percent of all the income. So the 
middle class is large, sizable in the same sense that India's 
middle class is sizable because the population is relatively 
large, but proportionately it is quite small.
    Furthermore, and this is the great benefit that President 
Cardoso did, it is true that in Brazil the most insidious tax 
has always been the inflation tax. Because Brazil has developed 
very good mechanism of indexation, the population that has 
access to the banking system and so on can protect itself. It 
is those that do not that get the full brunt of it.
    Mr. Delahunt. That leads me to a comment that I think Mr. 
Konfino made about in their most recent budget, which seemed to 
anticipate the crisis, with a huge expenditure for political 
purposes rather than exercising some sort of fiscal restraint. 
It appeared that in Congress there were, as you said, large 
amounts of money appropriated for political purposes. What 
political purposes?
    Mr. Konfino. Well, first of all, the states--Brazil in many 
ways is a federation of independent countries, and the states 
act in many ways very independently. The Governors of the 
states have tremendous autonomy and spend huge amounts and 
there is cronyism, there is all sorts of things that go on in 
Brazil. So I believe that one of Brazil's major problems is 
bringing that kind of expenditure under control.
    Also, going back to the previous comment, I think Brazil's 
major problem is poverty. It is not the current problem or the 
economic adjustments, because those are temporary issues that 
can be dealt with very quickly. But for Brazil to become a 
first level nation, it needs to deal with its poverty, and it 
is an almost insurmountable problem.
    Mr. Delahunt. I thought--and I misinterpreted your comment 
about huge expenditures, because I just wonder if the 
government there is faced with this almost intractable problem 
of maintaining its popular support by funding an appropriate 
social safety net, if you will.
    Mr. Konfino. There is some of that. The array of poor 
decisions in spending is very wide. It ranges from 
municipalities to states to the Federal Government.
    Mr. Delahunt. Because I know I for one, we see this problem 
in different nations, whether it be Brazil or Haiti, and it is 
constantly the same problem, this need to have--to understand 
that these particularly emerging democracies, if you will, have 
to balance between dealing with their structural poverty and 
raising living standards at least somewhat while they go to a 
more free enterprise system, and it has got to be a tough call.
    Again, I was unaware of the structure of the government 
itself. I mean, where does President Cardoso stand, where does 
the Federal Government stand in terms of its securing the debt 
obligations of these various states? I mean, I think I heard 
one of the precipitating causes was a refusal to pay by one of 
the states to the Federal Government its IOU. Has that been 
addressed? Has that been resolved? Dr. Weintraub.
    Mr. Weintraub. Not yet. That Governor is still holding out. 
It is the Governor of Minas Gerais, former president of the 
country actually. That has not been resolved. They are working 
on it with all the other states. That is--it is not as hard an 
issue, even though it causes unease, as the overall size of the 
government deficit that was building up, which was about 8 or 9 
percent of GDP. It was getting to that level, which is--and we 
never had anything like that. Let me make----
    Mr. Delahunt. I am trying to get the--why did that deficit 
increase? That is what I am trying to understand.
    Mr. Weintraub. Part of it was lack of government control. 
It was lack of government control over itself. I think 
expenditures were made very unwisely in order to buildup 
support for the President to get a constitutional change so 
that he could succeed himself as President.
    Now Brazilians supported that. He is a man of considerable 
virtue. He may be the most or until now the most admired 
President in all of Latin America. In other words, he is--I 
don't want to leave the implication that I think he is not a 
constructive man who intends well. The only point I wanted to 
make, I don't know how any country like Brazil reduces the 
level of poverty in its population except by increasing growth 
rates year in and year out. I don't see any other solution. I 
think that is what he is trying to do, obviously without 
success this year.
    Mr. Delahunt. But I guess it is my sense that there has to 
be almost a transition period of time where that poverty rate 
and people's expectations who find themselves on that lower 
rung have to in some ways be appeased, have to be met to 
maintain that political support that is so necessary to 
initiate and implement the kind of initiatives that I think we 
are talking about here. I mean, that is the balancing act. That 
is the political skill that is needed.
    Mr. Weintraub. I don't quarrel with that. I think that is 
correct. When he was reelected it was really quite remarkable. 
He won quite handily. He is now not popular, for reasons that 
are self-evident. Whether or not he can regain that popularity 
I think depends on how well he manages the balancing act.
    Mr. Delahunt. How can we help him? I mean, how can the 
United States help in----
    Mr. Weintraub. I will let some of the others answer. I 
don't think we can very much. I will allow some of the others 
to answer.
    Mr. Delahunt. Mr. Smith.
    Mr. Smith. Some of those points I mentioned before, I mean, 
from my perspective the only way that Brazil is going to really 
be able to talk about the kind of distribution of wealth that 
we would like to see and making Brazil a more equal society is 
economic growth, and economic growth is going to come through 
investment and it is going to come through the kind of--which 
has really taken off since President Cardoso has opened up many 
key infrastructure markets for private investment.
    If you look at the trends on investment, last year we had 
$13 billion worth of direct investment--I am sorry--$21 billion 
worth of direct investment. We are probably going to look at 
$24 billion, even in a year like this. But if you go back a 
year before in 1996, you are looking at $13 billion, and the 
year before, 1995, you are looking at $9 billion. So you are 
seeing a trend as Brazil opens its economy.
    Mr. Delahunt. You are suggesting even this year with the 
fiscal----
    Mr. Smith. Even this year with the problems because of the 
long-term prospects that I was talking about. What we can do is 
we can promote a more secure investment environment and a more 
secure trade environment.
    Mr. Delahunt. What kind of investments are you talking 
about?
    Mr. Smith. I am talking about foreign direct investment. 
You put a factory there. You employ people.
    Mr. Delahunt. We are not talking trade----
    Mr. Smith. I am not talking about putting hot money into 
Brazil. I am talking about making a brick-and-mortar 
investment. Those type of things I mentioned, a bilateral tax 
treaty, which we were very close on when President Clinton went 
to Brazil, but we have some problems with the tax issue. We 
have a bilateral investment treaty that I believe Brazil, and 
there may be two countries that haven't signed them in the 
hemisphere. Those are very important, concrete moves that we 
can make in this period whether some unease, to make the 
environment more secure for direct investment.
    Mr. Delahunt. Talking about taxes, if I may, Mr. Chairman, 
in terms I understand, part of the problem was they had a very 
inefficient tax collection, if it existed at all in Brazil. Is 
that part of the 90 percent that you are referring to? Has that 
issue been addressed?
    Mr. Smith. No. That is an issue that is going on be 
addressed this year, and we are going to be working very 
closely with the Brazilian Congressmen to tell them exactly 
what sort of tax situation needs to be put together.
    Mr. Delahunt. I am not talking about a bilateral tax 
treaty.
    Mr. Smith. I am not talking about that either. I am talking 
about putting together a tax program that allows--brings new 
taxpayers into the system, is----
    Mr. Delahunt. I would just like to see those that are doing 
well now paying their fair share.
    Mr. Smith. Well, there is a huge informal economy in 
Brazil. One of the benefits of the Real Plan is they brought a 
lot of those people into the formal economy, which means they 
pay taxes. I think you will probably see this year, as the 
recession takes hold, a lot of those people falling out of the 
formal economy, so that is another problem that needs to be 
addressed as well.
    Mr. Delahunt. Thank you.
    Mr. Manzullo. Could you yield a second? Stay on. I am 
intrigued. Informal economy, is that what you said, Mr. Smith?
    Mr. Smith. Excuse me?
    Mr. Manzullo. You said there is a huge informal economy out 
there?
    Mr. Smith. What I am talking about is people who don't pay 
taxes.
    Mr. Manzullo. All right. It is an interesting way to 
characterize it. When Mr. Delahunt started talking about the 
tax issue, it brought remembrance that just this past month as 
part of IMF's restructuring, that there was a tax placed upon 
the civil servants in Brazil for the first time.
    Is this a per capita tax? Is it a penalty tax for being a 
member of the civil service? Is this the first time they were 
taxed on their income? Mr. da Cunha.
    Mr. da Cunha. First, I mean, I think just to answer your 
question, but really if you want to go to some of the routes of 
these fiscal Federalist issues in Brazil, you have to look at 
the 1988 constitution which was a product of the transition 
from the dictatorship to the democracy, so it has a lot of 
peculiarities that you wouldn't find in other constitutions. 
Everybody knows in Brazil or the political system knows that 
that is an anachronism and it has to change, but it has to 
change in a slow process because part of that constitution was 
to work so that that transition could happen peacefully. So the 
constitution has a number of problems.
    But on your specific question of the issue is the 
following: The issue is, the civil servants and all wage 
earners pay taxes, and they are the most heavily taxed because 
the tax is collected at source so you can't avoid that tax. The 
issue is that the social security, the pension system of the 
civil service is, as was the case in the former Soviet Union, 
is inordinately generous and people don't pay for their pension 
system. They pay very little for their pension rights. You have 
a 100 percent replacement on retirement and you get all of the 
wage benefits continued after your retirement and you make very 
low payments. There was an adjustment to try to make the system 
actuarially a little bit sounder.
    Mr. Delahunt. Is it a contributory system, social security 
system?
    Mr. da Cunha. The social security system for the civil 
service, there are very different levels of government. But for 
the Federal civil service, in the past you paid only 6 percent 
of your current wage for your social security retirement plus 
all of the other social security benefits that you have.
    Mr. Delahunt. You say it was a 100 percent replacement. So 
upon retirement you would receive 100 percent of your----
    Mr. da Cunha. Yes.
    Mr. Delahunt. You receive your salary? It would just 
continue?
    Mr. da Cunha. Plus you have the right to the la cinquenia. 
So even though you retire, every 5 years you are bumped up.
    Mr. Weintraub. If your question is whether it was a funded 
system, no.
    Mr. Delahunt. That was my question.
    Mr. da Cunha. No, it is not a funded system. Out of the 
general tax.
    Mr. Delahunt. That has been addressed?
    Mr. da Cunha. Partly.
    Mr. Weintraub. That is part of what the legislation----
    Mr. Delahunt. That is part of the 90 percent.
    Mr. Smith. No, the 90 percent I referred to are measures 
that were stipulated in the original----
    Mr. Delahunt. IMF.
    Mr. Smith. Exactly.
    Mr. Delahunt. I am just sitting here and I am new to the 
Subcommittee, I am new to this Committee, but I have had a 
particular interest in Haiti during the past 2 years. My sense 
is that we have relationships with countries, we support 
international agencies such as IMF and the World Bank, etc., 
and yet internally their tax collection is abysmal. We find 
ourselves in situations where there are a variety of financial 
crises that are homegrown because of their system, because of 
their culture in terms of taxes.
    I wonder if we look at it in the macro level, you know, I 
think it was Mr. Sherman that stated earlier Brazil always has 
a future. Again, you need those revenues. If I may for a 
moment, you need those revenues to secure the funding to deal 
with the pressing social issues that these nations have so that 
you have stability in these countries. I mean, that is just an 
observation, and I would be anxious to hear your response.
    Mr. da Cunha. The revenue collection in Brazil, the problem 
is not the overall level of revenue collection. The taxes--
current revenues last year were 24 percent of GDP, which is, 
you know, not a bad type. The problem is the incidence of the 
taxes. There are many problems in there, but the government has 
proposed an omnibus tax reform bill that is running through the 
Congress this year as part of the adjustments measures. It is, 
generally speaking, a good bill if it makes progress through.
    Let me further correct an impression here. The deficit, the 
fiscal deficit is 8 percent of GDP, but the cause of that 
fiscal deficit, of having it increase that much, the 
federation, the central government actually had a primary 
surplus. That is, if you don't consider interest payments on 
the debt and you consider all the other expenditures and the 
revenues, there are actually--it was the size of the interest 
bill that increased to be 6 and a half percent of GDP.
    Now, it is that which is crushing the system, and it has a 
lot to do with the monetary management and the adverse 
expectations about inflation and the process in which this debt 
is being rolled over. So a lot of it has to do with a capacity 
to really bring stability back to the macro system.
    Mr. Weintraub. Let me, at the risk of lecturing, be careful 
about Haiti and Brazil in the same breath. All of Haiti could 
fit in a few blocks, square blocks, of Sao Paulo in terms of 
what the economy is like. Brazil has by far the biggest economy 
in Latin America. I don't know where it fits in the world, 
eighth or ninth or something of that nature.
    If you went and saw the industrial structure outside of Sao 
Paulo, it is immense. It would compare with the most 
industrious countries around the world. It is a major player 
throughout the hemisphere. It is the most important player in 
South America, and this is the reason people are nervous about 
it.
    I share the point that was just made earlier. They collect 
as much in taxes as we do here, but they don't collect them 
quite as efficiently. How the law is, no one is equally 
collected, either.
    But anyhow, in other words, I think you have to be careful. 
This President, a lot of the measures he took didn't need 
legislation. They were administrative measures in cutting back 
on expenditures, and he was able to take them and he took most 
of them. The IMF program that gets developed, now I don't know 
what it will be but it is going to focus on the primary 
surplus, that is, the surplus before you count interest 
payments.
    Mr. Manzullo. If I could take one of your questions and 
turn it on its head, is there too much social spending going 
on, and therefore an inability to meet those obligations with 
the type of tax that the people are willing to pay? I hear 
about this great pension system. That sounds pretty good, but 
with inflation the way it is----
    Mr. Delahunt. What you and I got.
    Mr. Manzullo. That got eliminated in 1980, Bill. But 
anybody--the payment of a pension plan that is not being 
funded----
    Mr. da Cunha. If I may say, sir, there is definitely not 
too much social spending. The problem is not social spending, 
it is where it is spent. The social spending is going to a--it 
is difficult to speak it that way, but a relatively privileged 
wage class.
    Mr. Manzullo. Including the pensions.
    Mr. da Cunha. Primarily in the public sector and in a small 
segment of the wage-earning private economy, but huge segments 
of the society don't have any sort of a social safety net, and 
they don't get much support from the government, except through 
the provision of some basic services which have increased in 
their supply very significantly under the Cardoso 
administration, like basic education and health and so on. But 
there is a problem in the allocation of social spending.
    Mr. Delahunt. Thank you for clarifying that issue. I think 
we lapse into this problem frequently because I think your 
reference to Social Security immediately conjures up in our own 
mind, our own simple minds, a social security system that is 
national in scope. But I thank you for that clarification.
    Mr. Manzullo. I have a couple of questions here. Let's say 
for every 100 people you have 50 kids who are not of the age 
where they work and 50 adults that are eligible to be in the 
work force. That is a rather crude model. Of those 50 adults 
that are eligible to be in the work force and are in fact--
first of all, how many of those are actually working?
    Mr. Konfino. Probably all of them are working but maybe an 
underground economy. They may all be working but very few are 
paying taxes.
    Mr. Manzullo. OK. Of that 50, how many would receive this 
full pension?
    Mr. da Cunha. I mean, first of all, the underground economy 
is large but I wouldn't say is actually that large, because 
Brazil still has a relatively important rural sector and that 
rural sector is not--by definition is not in the same labor 
legislation as the urban proletariat is, as the historical 
system developed in Brazil.
    If you look at the urban system, I would say that of the 
share of employment in a city like Sao Paulo, the share of 
employment that is not covered by the labor laws, which is the 
law of two-thirds are employed by the private sector--by the 
public sector, would be something like 40 percent of the total 
employment.
    Mr. Manzullo. So that----
    Mr. da Cunha. And they wouldn't therefore have the rights 
to the social security legislation.
    Mr. Manzullo. That answered my question. So 40 percent of 
the 50 adults who are working have no pension plan aside from 
what they store in their underground economy, and who knows 
what goes on there.
    Mr. da Cunha. Or unless their sons or daughters provide for 
them.
    Mr. Manzullo. Did you want to followup on that?
    Mr. Delahunt. I would just like to, you know, I think it 
was Dr. Weintraub that said that, you know, our relationship 
with Mexico in dollar terms is $80 billion; with Brazil it was 
$15 billion. was that----
    Mr. Weintraub. The U.S. merchandise exports.
    Mr. Delahunt. You know, I--I mean, clearly it doesn't 
directly affect the United States nationally. Clearly in local 
terms--and southern Florida is, you know, obviously very dear 
to those of us in the Boston area since we like to go there in 
February. Today many of my constituents are flying down, 
leaving a blizzard, going to Miami, I hope. So we do understand 
and respect the concern that Floridians have about that impact.
    But I think, Dr. Weintraub, it goes back to the question 
Mr. Sherman posed about the political stability issue. I am 
concerned, and just before coming down I read a report by CRS 
on the relationship with Argentina, Paraguay, the Mercosur, and 
the strain that the crisis in Brazil is putting on their 
economies in terms of their trading relationships.
    I don't know how you evaluate--let me put it this way: Does 
anyone on the panel have concern about what is occurring in the 
neighboring countries, in those three countries? Because one 
can imagine in a worst case scenario this problem becoming the 
Latin American problem, and again, given the social and 
political history of that continent, it has only been 10 
years--in a historical timeframe that is a very short period of 
time--when Brazil had a dictatorship. These are all emerging, 
not just emerging economies, they have had very little 
experience with democracy.
    I think that is the point that, you know, our colleague Mr. 
Sherman was talking about, is this whole social and political 
instability brought about by return to hyperinflation and 
things we talked about and, you know, and I welcome any 
comments, particularly on those other three nations. What is 
happening in Argentina, for example, and Paraguay?
    Mr. Weintraub. Let me make a brief comment. I share the 
concerns, you know, that you are mentioning. The country that 
is most likely to be hit hardest is Argentina. Argentina has 
gone through--I don't know how much you followed it--quite a 
remarkable economic performance in recent years. They brought 
runaway inflation down to close to zero. They had a 
convertibility plan in which each peso equals one dollar, all 
of that supported, which means they really can't appreciate 
their currency because if they do, that whole convertibility 
plan, everything that made the current government popular would 
go to hell.
    They rely tremendously--about a third of their exports go 
to Brazil. So Argentina has to go through this difficult period 
when there is a collapse in their main market plus the shift of 
the exchange rate relationships. Yet, I don't think it is going 
to put Argentine democracy under tremendous strain. You may get 
a lot of social unrest and people complaining and more strikes 
and more problems dealing with the daily problems, but I don't 
think Argentina, for example, is ready to go back to the 
military dictatorship that they had earlier.
    I would be less confident of countries like Paraguay, a 
smaller one, and I am pretty certain that Uruguay, which the 
other members of--the impact of the Brazilian decline on the 
economies of most of the other countries is much harder to 
assess. I don't have a good assessment, and I welcome something 
from people who do.
    In the case of Mexico, their exchange rate has actually 
depreciated since this whole thing started. Mexico has a 
floating system and their exchange rate fluctuates, but not all 
that much, and it is under control mainly because Mexico's 
economic policies are quite strong.
    In other words, my own instincts are that even though it is 
short, in most of the countries, not all of them, the idea of 
returning to the kind of military or other dictatorships is not 
unthinkable but would be--is unlikely in most of them. I would 
welcome comments from the others.
    Mr. Konfino. I agree with that assessment. I think the 
military in most of Latin America is probably in the barracks 
for good. A couple of exceptions: Venezuela is of concern these 
days, possibly places like Paraguay.
    But I think Brazil's importance to the region needs to be 
looked at on a couple of levels. As far as trade with 
neighboring countries, I agree Argentina would be most 
negatively impacted. It doesn't rule out Peru, for instance, or 
Ecuador, but the impact of problems in Brazil regardless of the 
amount of direct trade are going to be great on the region.
    There is a psychological impact. We have seen how problems 
in Malaysia and Indonesia have impacted Brazil. The ``tequila 
effect'' of 1994 when Mexico had a problem, it caused a huge 
amount of capital to leave Argentina, which was the other end 
of Latin America. So I think Brazil can have a very negative 
psychological impact on investments in Latin America, on trade 
finance, a whole range of things.
    Mr. Smith. If I may, I just wanted to comment on the 
statement that Brazil is only very important for certain 
regional economies. If you look at 1997 exports, the United 
States exported as much or more to Brazil, it exported more to 
Brazil than it did to France. Now, I don't think any of us up 
here would be saying that France is insignificant to the United 
States economy. So I just--that, I think, puts it in 
perspective there.
    Now, there has been some negative growth in the last 
quarter so Brazil has slipped a little bit, but we--even in 
1998 where you had two consecutive quarters of falling growth, 
I mean, Brazil is really still in that league. So I would 
caution you in terms of trying to look at the impact of 
Brazilian's economic problems in just places like Florida. 
Because if you look at the major exporters, the major exporting 
States, you know, Brazil ranks in the top 10 in a whole lot of 
them.
    Mr. Delahunt. I think I was picking up on a statement by 
Mr. Weintraub when he was comparing Mexico to----
    Mr. Smith. Right. Mexico is the second largest trading 
partner. In terms of democracy, there is a situation in which 
the leftist candidate was in the lead and was beating the 
President during the first election and almost in the beginning 
of the second election. So what that shows is that those 
elements that don't necessarily share the government's 
perspective on things are included in the political system, so 
that they don't need to go outside of the system to promote the 
kind of change that you would talk about.
    Now, if there is going to be significant political and 
significant economic impact on lower-income Brazilians that 
don't necessarily--aren't necessarily represented by Cardoso, 
you may see some other candidates come up and through the 
democratic system assume power. But I think we are pretty safe 
in saying that the democratic system is a system through which 
that sort of change would take place.
    Mr. Delahunt. I think that is a--I think you are on the 
mark. These are growing pains politically in terms of 
democratic institutions, as well as they are being tested by 
adversity in the economy.
    Mr. Manzullo. Bill, if I may, I want to ask a couple of 
questions. I really appreciate your questioning. You asked most 
of my questions and I didn't want to stop the continuous drive. 
I appreciate those questions. I also appreciate the answers.
    I represent a city in Illinois, the 16th District, which is 
one of the most exporting congressional districts in the 
Nation, heavy in machine tools, and things aren't good in 
exports. The machine tool industry domestically is off by about 
10 percent. That is not good either, because what happened in 
1981 was the first sector to dry up domestically and 
internationally with machine tools.
    Rockford, Illinois, led the Nation in unemployment at 26 
percent. We lost a hundred factories in a town of under 140,000 
people, 10,000 highly skilled jobs, and the machine tool 
industry was the last to recover, first to fall behind and the 
last to recover, and we are very much concerned about that. In 
fact, we have--in the past 4 weeks we have lost four companies. 
People can crow all they want about the economy in the United 
States. I see some real hemorrhaging taking place.
    I noticed--Mark, I want to ask you this question--your 
paper states that Illinois is the eighth or ninth largest 
exporter to Brazil; is that correct?
    Mr. Smith. Yes.
    Mr. Manzullo. It is at the bottom of your first page. The 
total amount of exports from the United States to Brazil is 
about $15 billion; is that correct?
    Mr. Smith. Right. If you look at Illinois in 1997, they 
account for basically around $1.1 billion.
    Mr. Manzullo. That is about 20,000 jobs.
    Mr. Smith. If you take $1 billion equals 20,000 jobs, which 
is sort of the equation that has been thrown around, it is 
quite significant.
    Mr. Manzullo. What is happening in Brazil is directly 
impacting Illinois?
    Mr. Smith. Oh, yes. If you look at where Illinois's exports 
to Brazil were in 1993, you are talking a good $295 million 
versus $1.1 billion that we are talking about in 1997, so 
Brazil is a whole lot more important. That is 262 percent 
growth, OK. So Brazil has over these 4 years become 
increasingly important to the economic well-being of your 
constituents.
    Mr. Manzullo. Mr. Smith, would I be correct in saying that 
a significant amount of that $1.1 billion would be in the area 
of machines and machine tools?
    Mr. Smith. As I mentioned before, 70 percent of Brazilian 
imports of capital equipment are going into the kind of--when 
you establish a factory, obviously you need a lot of machine 
tools, etc. So I would say that that would be a significant 
portion of those capital equipment imports.
    Mr. Manzullo. The frustration is, what do you do? We have 
economists, we have the people here representing American 
companies doing business in Brazil. Is that what your company 
does, Mark?
    Mr. Smith. We represent the largest United States companies 
invested in Brazil.
    Mr. Manzullo. Mr. Sandler, you are on the legal end with 
regard to the duties, etc. How do you fashion--watch this 
question--how do you fashion a common sense remedy that doesn't 
have so many holes in it? This is your opportunity for 
creativity. We are very much concerned because we pump all this 
money in, IMF money into it to stabilize the currency, and then 
we find out that you don't want to pay taxes, just don't pay 
taxes, do it underground. That is U.S. dollars that are 
guaranteeing those IMF loans. Anybody?
    Mr. Konfino. It is very difficult to answer. I don't know 
that there is one.
    Mr. Manzullo. I knew it would be.
    Mr. Konfino. First I would say that the billion dollars in 
Illinois that you refer to, it is probably a much higher 
number. There is a magnifier effect, if you will, because 
exports to other countries are suffering. I know that in our 
bank, and I am sure many of my colleagues that I have talked to 
have cut back on the amount of credit they provide to United 
States exporters because of fears of what is going on in Brazil 
and fears that the problems of Brazil will contaminate other 
countries. So the real effect on your constituencies is much 
greater than the $1 billion in Brazil. That is why I think 
Brazil is very, very important beyond the $15 billion that is 
exported.
    The second part, I don't know that there is anything that 
we can really do from a standpoint of aid or--I think the 
solution lies in expertise and moral support. I think we need 
to lend our expertise in areas where it can help, where--you 
know, in tax collection, tax reform, you know, and a whole 
range of other areas where we have got the benefit of several 
centuries of experience and Brazil is just now beginning to 
tackle those issues, only really in the last 10 or 15 years.
    I also think we should work very closely with international 
multilateral agencies to perhaps cushion the blow of the 
reforms that Brazil needs to take, because the impact on the 
lower segments of the population is going to be severe. The 
people most hurt will be the emerging middle class, which will 
revert back to poverty, and the very poor people. So my answer 
is, I think it is moral support and expertise in any way we 
can.
    Mr. Manzullo. How do you lend moral support to a country?
    Mr. Konfino. By moral support, I mean working in 
international forums to help Brazil work its way out of the 
crisis. I don't advocate increasing aid or pumping taxpayer 
money into Brazil or any other country.
    Mr. Manzullo. Patience?
    Mr. Konfino. Patience and working--let's share the burden 
with other countries, and let's spread the tax burden not only 
on our people but some of the other contributors to the IMF and 
the World Bank and so on.
    Mr. Manzullo. Anybody else want to take a stab at that? Mr. 
Smith.
    Mr. Smith. I think if you look at what is going to be 
necessary for Brazil to really get out of this funk, it is 
going to be--first of all, there is going to need to be in 
terms of international lenders some--there is going to need to 
be some flexibility. Without access to financing, it is going 
to be really, really tough for Brazil to get out of this 
crisis, and to the degree that the international financial 
community can extend loans or put longer financing terms, those 
sort of things, can respond in that manner, that is going to be 
very, very helpful in terms of allowing Brazilian companies to 
finance the improvements or exports, etc., that they would need 
to grow.
    I would also say that, as I mentioned, the direct 
investment is going to be very, very key, and the measures that 
I mentioned in terms of a bilateral tax treaty and a bilateral 
investment treaty are key components that investors look at 
when they are evaluating when to make an investment decision, 
and we are really not that far off on those two measures. I 
think that given a concerted effort, we could certainly make 
those two things happen.
    Third, if you look at--you mentioned your district, and it 
is very well put. This is the current situation. This is 
without Brazil moving its tariffs at all. Brazil's WTO tariff 
buyings are around 40 percent. Brazil's current tariffs are 
around 12.5 percent. Now, if the crisis gets any worse, what 
are we going to be left with? What are Brazil's options going 
to be?
    Now, you can imagine the scenario where--and we don't think 
that this is going to happen, but imagine if things do get 
really, really bad and Brazil is forced to raise those tariffs. 
Your constituents in your district are going to be hurt a whole 
lot more. We think the Free Trade Era of the Americas and the 
Fast Track negotiating authority necessary to really make that 
thing happen is the key thing that you can really do to ensure 
that your constituents aren't hurt any further.
    Those are very concrete measures that you can take right 
now. They are not pie-in-the-sky type things and, you know, if 
we really put some force behind this, we can make this happen.
    Mr. Manzullo. I like that answer also. Doctor.
    Mr. Weintraub. Let me make a few comments. Let me just make 
a few comments. What we are really talking about is what are 
the short-term measures--short-term is now the next 6 months--
that Brazil can take to get out of its current problems? 
Assuming they do that, then some of the longer term issues of 
investment and trade and growth can resume.
    The IMF program which is still under negotiation is 
designed in part to help Brazil reach that point, and if the 
IMF money is never that great for all of the needs, it is 
intended to be a catalyst to get money from some of the other 
investors in the banks and the investment banks. The World Bank 
comes in and supports under those conditions, as does the 
Inter-American Development Bank. That is the game going on now.
    Earlier when I was asked what I thought the United States 
could do and I said ``not much,'' it is really that I don't 
mean--what I meant by it is not that the multilateral 
institutions which we contribute to do nothing, but I don't 
think there is really--it would be wise for the U.S. Congress 
to suddenly appropriate money to send out to Brazil to correct 
a problem that was mostly made in Brazil.
    Now, it was complicated by a lot of other factors, the ease 
with which capital could move. Once Brazil was in trouble and 
investors and people who manage money felt uneasy, they acted 
rationally and they got as much out as they could, and to kind 
of protect their exchange rate. They lost about $45 billion 
over a period of about 4 or 6 months. They made some big 
errors.
    I guess the reason I find it hard to answer your question 
is there is no one easy answer as to what should be done about 
these things. Mr. da Cunha said Brazil should move to a 
currency board. I think the best exchange rate for them is a 
flexible exchange rate, free-floating, more or less. There are 
disagreements among experts as to what the percentage of 
measure should be, but the ones who are going to determine 
those measures are the Brazilians. We are going to provide some 
advice as to how it should be done, but my own instinct tells 
me if the program that gets put together now is coherent and 
the Brazilians can meet the necessary measures that make the 
short-term program effective, we will get out of this issue. We 
will get out of it within 6 months to a year, I think. But to 
expect anything more rapid than that, I think is unwise.
    Mr. Manzullo. Quickly, I have got to adjourn this at 4 and 
go to another hearing. Go ahead, please.
    Mr. da Cunha. I just wanted to clarify something and then 
make another point. I don't advocate a currency board right 
now. In fact, I would advocate a currency board if the current 
program or the program that will be announced doesn't work.
    I actually don't think that the problem is that difficult 
from a purely macroeconomic sense. If the right set of policies 
are pursued, and I believe that the right set of policies, I 
think that the current economic team is quite capable and will 
try to put them in place, what I see as a danger is that there 
will be impatience with the time it takes for that process to 
work through.
    Brazil has suffered from a long period of very high 
inflation that distorted many aspects of the economy that take 
a long time to be corrected. I believe that because most of the 
problem today is adverse expectations, the kind of orthodox 
monetary program that I think will be put in place should work 
reasonably well, but it cannot be expected to work that fast.
    Moreover, I think that the recession that the country is in 
right now was in a way the product of a separate set of issues 
which had to do with the fact that foreign capital, because 
there was a shock post-Russia and etc., stopped flowing in. The 
model in Brazil since the 1990's was that you funded investment 
abroad, and that model is now under threat because of changes 
in the perception of risk in the general international market.
    There are issues here, but I think that if there is enough 
political leadership right now, it is a domestic problem and it 
could be resolved. What can the United States do? I agree with 
the proposals that were made here. Trade, as we have seen in 
Mexico's case, trade is really a natant of growth, and if we 
can stimulate trade, that will only help the Brazilian economy 
now and in the future.
    I also believe that if the multinational institutions like 
the World Bank, IDB and others can help with putting in place a 
minimum safety net, that would make things easier, because it 
is quite clear that there isn't much of one there right now. I 
believe it is a domestic problem.
    Mr. Manzullo. Mr. Sandler, did you want to comment on that? 
You don't have to.
    Mr. Sandler. No, I hesitate to comment on the economic 
issues in which I am not an expert. I can tell you that in 
talking to folks, it is clear to me that we are dealing 
primarily with a domestic policy issue, and I agree that there 
is precious little that the U.S. Congress can do to intrude on 
that. In fact, the efforts to intrude may have the exact 
opposite impact of anything that we imagine would be the right 
way to go.
    Working through our multinational institutions is certainly 
a sensible thing. The concept of making it an environment that 
makes sense for trade and makes it a secure trade environment, 
the types of agreements Mr. Smith was talking about make sense. 
Building Mercosur, because that stabilizes the marketplace so 
that we are not just focused on Brazil, but Brazil becomes a 
platform for trade throughout that region and stabilizes the 
growth, creates the opportunities for investment and for the 
export of the machine tools that you are talking about, because 
it is a larger, more stabilized market and there is more 
flexibility in that market, whether it is Brazilian exports to 
Argentina or Argentine exports going back into Brazil. But you 
have more flexibility as Mercosur has grown and stabilized 
there as well.
    I think that is another area where we can foster that 
growth, and the other is the theme I talked about earlier, 
which is to make sure Brazil is at the table talking to us and 
others about what these trade regimes are and making some sense 
out of them, whether it is through the FTA process or civil 
society process of trying to build some efficiencies in trade 
that don't exist today in this hemisphere, participating with 
U.S. Customs about trying to harmonize systems and globalize 
systems so that there is some communication and good training 
and so that there is predictability. That is the type of 
environment that allows businesses to thrive and to take 
advantage of the marketplaces and to make the decision to trade 
there, to invest there.
    Mr. Manzullo. I want to take this opportunity to thank you. 
Bill and I have had a great opportunity to ask a lot of 
questions and get a tremendous amount of answers and input into 
it. I really want to thank you for coming. As I see it, the 
fact that this Congress has been unable to pass Fast Track is 
just another lost opportunity for us to export more items, and 
I guess I have a very selfish motive in wanting to see these 
treaties entered into because of what happened to my hometown 
back in 1981.
    Mr. Delahunt, thank you for coming. This Subcommittee is 
adjourned.
    [Whereupon, at 4 p.m., the Subcommittee was adjourned.]
  

                                
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