[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]
BRAZIL'S ECONOMIC CRISIS AND ITS IMPACT FOR INTERNATIONAL TRADE
INTERNATIONAL ECONOMIC POLICY AND TRADE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
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/
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
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,
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
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
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
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
Mr. Delahunt. Thank you, Madam Chairlady. I have no opening
statements. I welcome this hearing, and look forward to the
Ms. Ros-Lehtinen. Thank you so much.
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,
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
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
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.
STATEMENT OF PAOLO DA CUNHA, SENIOR VICE PRESIDENT AND SENIOR
LATIN AMERICAN ECONOMIST, LEHMAN BROTHERS GLOBAL ECONOMICS
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
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
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.
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
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
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
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.
Mr. Manzullo. Thank you very much.
STATEMENT OF SIDNEY WEINTRAUB, WILLIAM E. SIMON CHAIR IN
POLITICAL ECONOMICS, CENTER FOR STRATEGIC AND INTERNATIONAL
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
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
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.
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
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
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
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
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.
STATEMENT OF GILBERT LEE SANDLER, ESQ., SANDLER, TRAVIS, AND
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
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
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
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
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
Mr. da Cunha. I think that if there are reasonable economic
policies, the outlook for growth in Brazil continues to be very
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
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
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-
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
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
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
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
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
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
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
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
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
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
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
Mr. Smith. What I am talking about is people who don't pay
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
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
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
Mr. Delahunt. That was my question.
Mr. da Cunha. No, it is not a funded system. Out of the
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
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
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
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
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
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
Mr. Manzullo. OK. Of that 50, how many would receive this
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
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
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
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
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
Mr. Manzullo. What is happening in Brazil is directly
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
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
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
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
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.
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
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
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
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
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
[Whereupon, at 4 p.m., the Subcommittee was adjourned.]