NotiSur - 01/25/02 - Brazil, Ecuador Via NY Transfer News * All the News That Doesn't Fit [Reminder: This is a private reading copy for your personal use only. It may not be redistributed under the terms of our subscription with LADB. Thanks -- NY Transfer] ------------------------------------------------------------ L A T I N A M E R I C A D A T A B A S E NotiSur - South American Political & Economic Affairs ISSN 1060-4189 Volume 12, Number 3 January 25, 2002 ------------------------------------------------------------ Copyright 2002, Latin America Data Base (LADB), Latin American Institute, University of New Mexico Director: Rebecca Reynolds Bannister Editor: Patricia Hynds Staff writers: Carlos Navarro, Robert Sandels LADB ARCHIVES: Back issues are referenced to provide historical background relevant to the articles in this newsletter. These can be accessed with a subscription to the LADB searchable on-line archives at http://ladb.unm.edu/ by clicking on Search Archive. 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In This Issue: BRAZIL: NEITHER GOVERNMENT OFFICIALS NOR CITIZENS ENTHUSIASTIC ABOUT FREE TRADE AREA OF THE AMERICAS (FTAA) * Brazil as a global trader * MERCOSUR's turn toward the EU * Fear of being overrun by US imports and businesses * Growing discontent about free trade ECUADOR: PRESIDENT GUSTAVO NOBOA BEGINS FINAL YEAR IN OFFICE WITH MIXED REVIEW OF DOLLARIZATION * Noboa reports to the nation * Critics challenge Noboa's assessment of dollarization * Argentine crisis casts shadow over Ecuador ____________________________________________________________ ********************* BRAZIL ********************* BRAZIL: NEITHER GOVERNMENT OFFICIALS NOR CITIZENS ENTHUSIASTIC ABOUT FREE TRADE AREA OF THE AMERICAS (FTAA) By Matthew Flynn [The author writes for the International Weekly Edition of the Gazeta Mercantil, a Sao Paulo-based financial newspaper.] Brazilian government officials' reaction was lukewarm to the news that the US House of Representatives voted to give the administration of President George W. Bush Trade Promotion Authority (TPA) to negotiate trade deals. The lower house of Congress passed the measure, previously known as "fast track," by a one-vote margin, yet included many protective measures that directly harm Brazilian exports to the US. "The US has recently passed fast track for FTAA negotiations, but with conditions which, if they are followed to the letter, would mean there would be no FTAA," President Fernando Henrique Cardoso said after the vote in Washington. Because of its need to increase exports, Brazil is unlikely to exit negotiations that would create the world's largest trade bloc with 800 million people and a combined GDP of US$11.4 trillion. But South America's largest country, which will co-chair the 34-nation group discussing the creation of the FTAA, will prove to be the toughest negotiator facing the Bush administration. "What's in it for us?" Brazil's Foreign Minister Celso Lafer asked in a meeting with foreign journalists after the congressional vote on the TPA. Currently, the US imposes average tariffs of 3% on Brazilian goods, compared with Brazilian duties of 16% on US imports. That comparison is misleading, however, since the 15 most important Brazilian exports to the US are charged, on average, a 45.6% tariff. Many Brazilian exports also face phytosanitary barriers and quotas. And when these are passed, US tariffs reach as high as 350%, such as with tobacco. The protective measures attached to the TPA hit directly at those industries in which Brazil has a competitive advantage, including soybeans, sugar, and orange juice. Because of the obstacles tied to the TPA, Brazilian officials refer to it as "slow track." "For the FTAA to advance," Lafer said, "there has to be an understanding between Brazil and the US." The first test of US resolve in improving US-Brazil trade relations concerns steel. The US International Trade Commission will rule in coming months on whether to impose quota and tariff restrictions on Brazilian steel imports. "It is clear that if the US position on steel is absolutely inflexible, there will be a response," Lafer said. Government leaders and members of civil society also see labor and environmental clauses as forms of protectionism. Kjeld Jacobsen, international relations secretary of the Central Unica dos Trabalhadores (CUT) labor federation, believes that international mechanisms are needed to deal with "social dumping"--the use of child or prison labor, and even the destruction of whole communities as a result of the abusive practices of companies free from accountability. "Instead of governments acting unilaterally to protect their home-based industries, we need sanctions that reward companies that respect workers rights," Jacobsen said. He said it is ironic that developed countries like the US and the European Union (EU) members push for these standards while the multinational firms based in those countries do not even respect workers rights. Italian-based car manufacturer Fiat, for example, will not allow trade-union representatives into its factories in Brazil. Nevertheless, environmentalists and those demanding restrictions on corporate power can celebrate the removal of the notorious Chapter 11 in the North American Free Trade Agreement (NAFTA) from the negotiating table. Sources from Itamaraty, Brazil's Foreign Ministry headquarters, said Brazilian negotiators told their US counterparts that a trade deal that allows a foreign investor to sue the government where they are investing because a regulation or government action threatens their profits would never be approved by the Brazilian Congress or accepted by the country's citizens. Brazil as a global trader Brazil has been searching for more markets in which to sell its goods. It needs to offset recurring trade deficits and supplant the reduction in foreign direct investment used to finance its foreign debt and the profit remittances of US$25 billion annually. Last August, President Cardoso summed up the country's predicament as "export or die!" Brazil considers itself a global trader, although, like other large countries, only about 10% of the country's GDP is derived from exports. Its export markets are diversified, with 25.6% going to the EU, 24.7% to the US, and 21% to the Asociacion Latinoamericana de Integracion (ALADI). One of Brazil's most important weapons to increase its bargaining position with foreign trade partners is the Southern Cone Common Market (MERCOSUR) trade bloc. Members of NAFTA--the US, Canada, and Mexico--are each negotiating the FTAA separately, while the MERCOSUR countries (Brazil, Argentina, Uruguay, and Paraguay, with Bolivia and Chile as associate members) bargain collectively. This strategy has already proven successful when Brazil garnered enough support from other Latin American countries to overturn a US motion to inaugurate the free-trade zone in 2003 instead of 2005. Negotiating as a bloc was strengthened in December when Domingo Cavallo, Argentina's all-powerful economic minister, fell from grace (see NotiSur, 2002-01-11). Cavallo had been advocating that Argentina leave MERCOSUR and negotiate directly with the US. Ever since Brazil devalued its currency, the real, in 1999, trade disputes stemming from the two countries' incompatible macroeconomic policies had been growing. With Argentina's recent currency devaluation, a rapprochement between the two countries appears to be taking place regarding the future of the customs union, though Argentina's situation remains volatile. MERCOSUR's turn toward the EU One reason the US wanted to start the FTAA earlier was to have a trade pact in place before MERCOSUR clinches a trade deal with the Europeans either this year or next. One stumbling block in the trade talks with the EU has been access to the continent's subsidized agricultural sector. But recently there has been growing political will in the EU to stop supporting crop prices with half its budget and instead use the resources in less market-distorting ways. EU negotiators complain that negotiations have dragged on because their MERCOSUR counterparts have yet to submit a set of concrete proposals listing the products on which they would like to see tariff and quota reductions. MERCOSUR's turn toward Europe has to do with more than just trade and investment, although as a whole Europe has more investment in the trade bloc than does the US. There is already talk of the need for a "little Maastricht" for MERCOSUR countries, and European know-how and experience is being sought in this regard. With the recent devaluation of the Argentina peso, discussions of establishing a single currency have resurfaced. President Cardoso has even challenged the US to imitate Europe's commitments to its neighbors. "If we wish to move toward effective integration in the hemisphere, the task should be to eliminate the unjust differences between nations and the profound inequality of income and quality of life within nations as well as between nations," he said. Fear of being overrun by US imports and businesses While gaining greater access to the US market has its attractions, fear remains that Brazil will be swallowed up by an economy 18 times its size. Like many other developing countries, Brazil faces many disadvantages competing head-to-head with firms from advanced countries. These include inadequate infrastructure, heavy taxes, high cost of capital, and lack of investment in export industries. "Almost everything that we export from steel to orange juice, from paper and pulp to iron ore, is the product of investments from the end of the 1970s to the early 1980s," said Rubens Ricupero, former finance minister and current secretary-general of the UN Conference on Trade and Development (UNCTAD). Many Brazilian citizens also have worries. "The FTAA is Brazil's surrender to the Monroe Doctrine," said Paulo Sergio Monte Alto, a historian and an attorney. Brazil's development strategy has been to buy time to allow domestic industry to retool while advancing its trade interests on a variety of fronts. The country has a number of budding high-tech industries including aircraft, genetics, and software. Recent trade statistics show that Brazilian goods have been performing well in the US market. Recent data from the Secretaria de Comercio Exterior (Secex) reveals that exports of manufactured goods to the US grew 15.4% between January and September of last year, compared to the same period in 2000. The CUT's Jacobsen says, however, that the increase in manufactured exports mainly stems from the shoe and textile industries. Along with achieving better conditions for its goods through FTAA and MERCOSUR-EU trade negotiations, Brazil is fighting at the World Trade Organization (WTO) to see that agricultural subsidies, anti-dumping legislation, and other forms of wealthy-country protectionism are placed on the negotiating table. Growing discontent about free trade Though grateful for the end of hyperinflation, many Brazilians are tired of the government's neoliberal policies and doubtful that free trade will improve their situation. At the end of last year, Brazil's lower house of Congress unanimously passed a nonbinding resolution to withdraw from the FTAA talks. "If the US can pull out of the Anti-Ballistic Missile Treaty because it doesn't suit its interests, why shouldn't we pull out of negotiations that are not going to benefit us?" asked Aloizio Mercadante, a legislator from the left-leaning Partido dos Trabalhadores (PT), who sponsored the motion. The alternative is to prioritize regional integration. Ambassador Samuel Pinheiro Guimaraes, who was dismissed as the director of the Foreign Ministry's research institute (Instituto de Pesquisa de Relacoes Internacionais, IPRI) for his outspoken criticism of the FTAA, would like MERCOSUR to be transformed into the Free Trade Area of South America. In the view of Guimaraes and many others, US competition will destroy the country's industrial base and lead to greater balance-of-payments problems in the future. For the latter, the logic goes that there will no longer be any incentive to invest in Brazil once the MERCOSUR common external tariff, which reaches 35%, is removed. Transnational companies would instead establish their factories along the US-Mexico border and export to Brazil. A step toward greater Latin American solidarity took place in September 2000 when President Cardoso hosted the first summit of South American presidents. Unfortunately, Brazil has much less to offer its South American neighbors than does the US. A recent blow to MERCOSUR was Chile's announcement that it was negotiating a free-trade deal with NAFTA. While no true hemispheric trade deal will be achieved without South America's largest economy, Brazil also fears being left standing alone. Establishing a hemispheric free-trade zone is a top priority for the Bush administration. Not only has there not been any important commercial breakthrough since NAFTA, but there are also 50 million middle-class consumers in MERCOSUR--roughly the size of France's market. Yet Brazil, as the world's ninth-largest economy, has considerable bargaining strength and will not buckle to US demands. In Brazil, discontent is growing about US unilateralism and the forsaken promises of neoliberalism. With presidential elections in October of this year and the PT's Luiz Inacio Lula da Silva leading the polls, there could be a dramatic shift in economic and trade policy. ********************* ECUADOR ********************* ECUADOR: PRESIDENT GUSTAVO NOBOA BEGINS FINAL YEAR IN OFFICE WITH MIXED REVIEW OF DOLLARIZATION As Ecuadoran President Gustavo Noboa began his last year in office, he gave a report to the nation extolling the successes of his administration. Two years after Ecuador dollarized its economy, Noboa faces growing public discontent and a shaky economy. Presidential elections are scheduled for October, and the new president will take over in January 2003. Then President Jamil Mahuad (1998-2000) announced the decision to dollarize the economy on Jan. 9, 2000, and began the process two days later, setting off widespread protests that forced him from office within a week (see NotiSur, 2000- 01-14, 2000-01-28). When Noboa took office, Ecuador was in the worst economic crisis in the country's history. Noboa continued the dollarization process in an effort to halt the rapid devaluation of the sucre currency and stem rampant inflation. The results, say experts, have been mixed. Noboa has been able to reduce inflation and put the economy on the path to recovery, although his successes have not been felt by the poor, whose discontent is growing. On Jan. 9, Economy and Finance Minister Carlos Julio Emanuel said, "Dollarization is here to stay." He said dollarization has given Ecuador stability, improved the buying power of people's salaries, increased the wealth of individuals and businesses, and stimulated private investment. The minister said dollarization had also improved the nation's image abroad, increasing the value of Ecuador's global bonds on international financial markets. Noboa reports to the nation In his report to the nation Jan. 15, Noboa said his administration had brought stability to the economy through dollarization and the reduction of the nation's foreign debt. He said inflation had dropped from 91% in 2000 to 22.5% in 2001, and unemployment had gone from 16.8% when he took office to 9.5% now. He said the foreign debt had been reduced from US$14.3 million in March 2000 to US$11.3 million now, thanks to the restructuring of the country's Brady bonds, which were exchanged for 20- and 30-year global bonds. "Ecuador has a future," said Noboa. "Inflation is the worst tax...the worse enemy of the people." He vowed to reduce inflation to a single-digit before he leaves office. Noboa said GDP grew 2.5% in 2000 and 5.4% in 2001, despite a worldwide economic downturn. It was the highest growth rate in Latin America, where overall growth barely reached 0.4%. The president said he would create a Fondo de Estabilizacion Petrolero, to be set up with money from the sale of crude. The fund would devote 20% of its resources to social development and 80% would be held in reserve to offset periods of international economic downturn that bring volatility in the price of oil. Noboa did not mention the latest round of protests set off by a 13.9% increase in the price of gasoline, nor did he discuss the allegations of corruption that have tainted the highest levels of the armed forces and the police. Critics challenge Noboa's assessment of dollarization Most of the Ecuadoran business class rate dollarization positively, saying it has provided a favorable climate for investment. And supporters say the drop in inflation is a direct consequence of dollarization. Mauricio Pozo, writing in the economic magazine Gestion, said the absence of a devaluation, plus the Central Bank's inability to print money, helped tame inflation. But he said that dollarization, the currency-board system, fixed exchange rates, flexible exchange rates, or bands in which currencies are allowed to float are neither good nor bad, but simply useful depending on what is done in the overall management of economic policy. "If public finances are not sorted out, if the financial crisis is not resolved, if the foreign reserves fall short, if productivity does not improve, if we fail to keep economic decisions independent from political ones, no exchange regimen will last," he said. Leaders of indigenous and opposition groups said little has changed since Noboa took office. While some economic indicators show improvement, that improvement is built on a fragile foundation. They said 80% of Ecuadorans still live in poverty, and, official statistics notwithstanding, un- and underemployment affect 50% of the work force and salaries do not cover the cost of the basic necessities. While economic analysts point to different macroeconomic indicators to back up their arguments supporting or opposing dollarization, many Ecuadorans have drawn their own conclusions about its impact, citing the rise in the cost of the basic basket of consumer goods. Instituto Nacional de Estadisticas y Censo (INEC) figures show it costs US$313 a month to support a typical family in Ecuador, while the minimum monthly salary is US$115. Prominent economic analyst Alberto Acosta said dollarization has failed to bring concrete benefits to the Ecuadoran population. He said employment possibilities have not improved, imports of consumer goods have been favored over national production, and the buying power of most people has not increased. Other critics say dollarization has been supported by oil revenues and remittances sent by Ecuadorans living outside the country. Were it not for oil revenues and remittances, they say, the economy would be in serious trouble. The sustained growth that the export sector enjoyed from 1998 to 2000, despite the economic crisis in the country, has stopped. Ecuador had a trade deficit of US$508 million in 2001, something not seen in a decade. Economy Minister Emanuel admitted that one of the principal problems in the dollarized economy is Ecuador's reduced competitiveness. He said one measure the government was considering to offset that was reducing interest rates. Interest rates are about 16%, a level some economists consider excessive for a dollarized economy. Economists warn that if Ecuador does not improve its competitiveness and diversify its exports, it could have problems similar to those in Argentina. Argentine crisis casts shadow over Ecuador The crisis in Argentina has brought calls for measures to protect Ecuador from similar problems. Critics note that Argentina also saw strong growth in the first few years following the implementation of its convertibility system that pegged the peso to the US dollar, but fell into bankruptcy and devaluation, and the biggest sovereign debt default in history. Acosta sees Argentina as an example of the consequences of a "straitjacket" like dollarization or a currency-board scheme. Opponents also cite Ecuador's trade deficit. "That is very similar to what happened in Argentina, where convertibility led to an increase in imports at the expense of national production, and many local companies went under, thus triggering even higher unemployment," said analyst Gerard Coffy of the Institute of Studies on Globalization. Coffy said Argentina has moved one step closer to adoption of the dollar, which the International Monetary Fund (IMF) wants. "Both the US and the IMF would like the countries of Latin America to move toward adoption of the dollar before the Free Trade Area of the Americas (FTAA) is implemented, and Argentina is on its way," he said. "What is happening [in Argentina] is what already occurred in Ecuador, where devaluation preceded dollarization." The Pachakutik indigenous movement has called on Noboa to adopt a plan for an "orderly exit" from dollarization, a proposal supported by Acosta. Acosta said such a move would not only imply a change in the monetary system but also the adoption of an integral economic policy that protects determined sectors of the economy. Acosta said abandoning dollarization would not necessarily mean returning to the sucre, but could mean the adoption of a regional currency to be used among countries with relatively equal economic development. An undeniable effect of the Argentine crisis on Ecuador is increased nervousness and fear that eventually Ecuador's dollarization will suffer the same fate as Argentina's convertibility scheme. (Sources: Inter Press Service, 01/10/02; Associated Press, 01/16/02; Spanish news service EFE, 01/07/02, 01/10-12/02, 01/14/02, 01/15/02, 01/18/02, 01/19/02; Notimex, 01/06-09/02, 01/11/02, 01/19/02, 01/21/02, 01/22/02) ================================================================= NY Transfer News Collective * A Service of Blythe Systems Since 1985 - Information for the Rest of Us 339 Lafayette St., New York, NY 10012 http://www.blythe.org e-mail: nyt@blythe.org ================================================================= pvtsa-01.26.02-16:44:13-18428