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P 031749Z JUL 06
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TO RUEHC/SECSTATE WASHDC PRIORITY 5357
INFO RUEHBR/AMEMBASSY BRASILIA 6445
RUEHAC/AMEMBASSY ASUNCION 2658
RUEHBU/AMEMBASSY BUENOS AIRES 2330
RUEHMN/AMEMBASSY MONTEVIDEO 2057
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RUEHLP/AMEMBASSY LA PAZ 2889
RUEHRI/AMCONSUL RIO DE JANEIRO 7239
RUEHRG/AMCONSUL RECIFE 3018
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC 2509
RUEHC/DEPT OF LABOR WASHDC
RHMFISS/CDR USSOUTHCOM MIAMI FL

UNCLAS SECTION 01 OF 05 SAO PAULO 000734 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR MSULLIVAN 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
NSC FOR FEARS 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/USFCS/OIO/WH/SHUPKA TREASURY FOR OASIA, DAS LEE AND DDOUGLASS DOL FOR ILAB MMITTELHAUSER SOUTHCOM ALSO FOR POLAD USAID/W FOR LAC/AA 
E.O. 12958: N/A TAGS: PGOV PREL PINR ECON ETRD BR
SUBJECT: ALCKMIN UNVEILS GOVERNMENT PROGRAM 
REF: (A) SAO PAULO 573; 
(B) SAO PAULO 316 SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 

------- SUMMARY ------- 

¶1. (SBU) The opposition PSDB government program unveiled at the party's June 11 national convention cannot be characterized as a page-turner, but it contains a number of interesting proposals and initiatives. Its centerpiece, as is to be expected under the circumstances, is economic development and growth with more opportunity and a reduction of regional disparities. These goals are to be achieved via lower taxes and more investment. For all his talk of "management shock" and "capitalist shock," the party's presidential candidate, former Sao Paulo Governor Geraldo Alckmin appears to see an active role for the state in promoting entrepreneurship, development, and growth, and directing resources so as to reduce inequality. He is perhaps on strongest ground when criticizing Lula's foreign policy, but his own proposal for "sovereign integration" is not elaborated in much detail. Alckmin's supporters regularly cite his record of accomplishments as Governor of Sao Paulo (and his consistently high approval ratings) as an example of the kind of leadership he would bring to the national government. That record, while not spectacular, contains a number of important achievements. What remains unclear is how Alckmin's ability to provide good, clean government - his much-touted "Ethics and Efficiency" - would play on the national scene. 

¶2. (SBU) At this moment, the question seems almost academic, as he 
continues to trail President Lula in the polls by a wide margin. The most recent poll, released June 30 by Datafolha, offers Alckmin some hope, as he is shown trailing Lula by "only" 17 percentage points, 46 to 29 percent. A "Vox Populi" poll also published June 30, shows Lula's lead falling from 26 percentage points to 13 (45 percent for Lula to 32 for Alckmin). This is an improvement and, if nothing else, may diminish the aura of inevitability that was beginning to grow around Lula's re-election prospects. Still, even the new Datafolha poll shows Lula poised to win in the first round (with 54 percent of the valid votes to Alckmin's 35), and many of Alckmin's own supporters acknowledge that he has run a lackluster campaign and failed to get the voters' attention. Alckmin is described by many who know him as a cautious, risk-averse politician, though he demonstrated considerable determination and boldness in winning the PSDB nomination away from front-runner Jose Serra (ref B). He may find that his best chance in this election is to try something bold and unexpected to shake things up; otherwise, although we agree with the pundits who insist that "anything is possible," at this point, it is difficult to see how he can overtake Lula. END SUMMARY. 

--------------------------------- 

THE RECORD - FINANCIAL MANAGEMENT --------------------------------- 

¶3. (U) According to statistics published by the Sao Paulo state government, when Alckmin was elected Lieutenant Governor of Sao Paulo on the ticket with the late Mario Covas in 1994, the state's finances were in ruins, due largely to years of mismanagement (some say corruption as well) by Governors Orestes Quercia (1987-90) and Luiz Antonio Fleury Filho (1991-94). The fiscal deficit reached 25.6 percent of budgetary receipts in 1993 and 21.7 percent in 1994. By 1996, Governor Covas had the budget balanced, and he and Alckmin, who succeeded him as Governor in 2001, have run small surpluses ever since. Alckmin and his handlers have worked energetically to portray Alckmin as the protege and political heir to Covas, who died of cancer in March 2001 and is treated in 

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Brazilian Social Democracy Party (PSDB) circles as an infallible patron saint, and to credit him with the major accomplishments and achievements of the Covas period, which many look back on as a golden era. How much credit Alckmin actually deserves for helping to put Sao Paulo on a sound fiscal footing is difficult to judge at this remove; however, it is clear that his management over the past five years has promoted stability and predictability in the state's public finances. 

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TAX REDUCTION AND COST CONTROL ------------------------------ 

¶4. (U) Alckmin also takes credit for a tax reform at the state level, citing significant reductions in the ICMS (tax on the circulation of goods and services - rough VAT equivalent) in certain key sectors of the economy. In his campaign platform, he calls for "doing away with many contributions and taxes and creating a simple tax system to de-bureaucratize, reduce costs, and make life easier for business enterprises." He notes that Brazilians pay "almost 40 percent of GDP" in taxes but do not receive corresponding government services. (NOTE: The figure was 36.5 percent in 2005 and has been growing steadily for almost twenty years. END NOTE.) He believes it is possible to "cut irrelevant expenditures, reduce the weight of useless public apparatus, define priorities in the allocation of resources, and make society's money deliver. To the extent that costs are rationalized, the tax burden will be decreased, contributing to stimulate growth yet more." 

---------------- GROWTH AND TRADE ---------------- 

¶5. (U) Alckmin inherited the governorship of Sao Paulo in 2001, a year when the state's nominal GDP contracted by almost 15 percent due in large part to the Argentine economic crisis, which deprived Brazil of a major export market. In any given year, Sao Paulo state's GDP represents between 30 and 35 percent of Brazil's total GDP. It contracted further in 2002 but then began growing, achieving the figure of slightly over USD 190 billion in 2004 (economic statistics for 2005 broken down by state are not yet available). During Alckmin's tenure as Governor, the economy grew at an average rate of 3.6 percent, considerably more than the national average. He is especially proud of the fact that total state exports grew from USD 20.62billion in 2001 to 38 billion in 2005, and increse of more than 84 percent. As is the case withGDP, Sao Paulo generally accounts for between 30 an 35 percent of Brazil's total exports. In 2005,as in previous years, the U.S. was the major desination of the state's exports, accounting for 23 percent, followed by Argentina, Mexico, and Chile 

---------------- MICRO-ENTERPRISE --------------- 

¶6. (U) An important component of the PSB program involves fixing the economy on the micro level. It calls for assisting small and medium-sized enterprises by "de-bureaucratization and reducing encumbrances, and promoting access to credit and to services in general," and recognizes the need to "promote the competitiveness of small businesses and feed the immense potential of wealth generation and income distribution of micro- and small enterprises." The platform, however, offers few details about how about how an Alckmin administration would achieve these results. 

--------------- SOCIAL PROGRAMS --------------- 

SAO PAULO 00000734 003 OF 005 

¶7. (U) In the area of social programs, Alckmin is going to have a difficult time competing with Lula. As has been widely reported, shortly after taking office, Lula fused several existing anti-poverty programs into one and gave it the name "Bolsa Familia." His supporters assert he gave the programs sound management and a consistent implementation that was previously lacking. Critics contend he relaxed eligibility requirements and turned the program into a political cash cow. The Lula administration announced June 28 that the number of participants, 3.6 million families in 2003, has grown to 11.1 million this year. The program has been an enormous political boon to President Lula, whose name is everywhere closely associated with it. Several other programs involving jobs for youths, access to prescription medication, and rural electrification also redound to Lula's benefit. However, perhaps nothing is as dramatic as the cumulative 35 percent increase in the real minimum wage approved by Congress in several increments and implemented during Lula's four years in office. Critics worry about budgetary implications, since many minimum-wage employees are in the public sector, and since social security is indexed to the minimum wage, but the benefit to the working poor is substantial. 

¶8. (U) Alckmin touts a number of programs the Sao Paulo state government has implemented under his leadership - the provision of hundreds of thousands of residential units to families of modest income; Youth Action, which provides education for low-income youth; Good Dish, consisting of restaurants that offer subsidized meals for poor people; programs for the aged; and others - but none of these appears to arouse popular excitement. As a physician, he claims an insider's knowledge of the strengths and weaknesses of the public health system and talks about making it work more seamlessly, and about ensuring universal access to medications. Similarly, he asserts that the entire social services apparatus can be made to deliver more services to more citizens at less cost, but again does not provide specifics as to how. 

---------------------- MAKING GOVERNMENT WORK ---------------------- 

¶9. (U) More generally, Alckmin's public discourse suggests that reducing taxes and bureaucracy, and stimulating economic growth, will bring benefits to the poor. He believes that one role of government is to define regulatory norms that will stimulate investment, while strictly limiting the role of the regulator. He also sees the national government as intervening to invest in infrastructure and human capital in Brazil's below-average regions - the Center-West, Northeast, and North - with the goal of bringing them up to the level of economic development of the south and southeast. 

¶10. (SBU) Alckmin is in a difficult position with respect to Lula's macro-economic policies. Because they are a continuation of the policies of Fernando Henrique Cardoso, Alckmin can hardly turn his back on them or suggest he would do things differently. All he has been able to do is suggest that the orthodox anti-inflation policies could be managed more efficiently and in such a way as to allow for a reduction of interest rates, thus generating more growth. This is part of what he means when he talks about a "management shock." He thinks the GoB should be able, literally, to do more with less, to operate transparently, to establish performance goals, incentives, measurements, and accountability mechanisms, and generally to function in an effective manner. In this context, the PSDB's government program criticizes the federal judicial system, its procedural bureaucracy, archaic structure, and inaccessibility to citizens in some parts of the country. 

-------------- 

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FOREIGN POLICY 

-------------- 

¶11. (SBU) Where Alckmin is perhaps on the most solid ground is in his criticism of Lula's foreign policy. In his acceptance speech at the PSDB national convention, he asserted that "Disaster is a mild adjective to characterize the foreign policy of Lula's government. Without an idea and hostage to ideological fantasies, the current government spent its term in acts of mere marketing, in quests for positions in international organizations and in dangerous relations with upstart adventurers. Much show, much drama, and no results." Here, it is difficult to argue. His diagnosis of Mercosul's problems is also on point: "Instead of more protection, Mercosul needs more competition via a serious timeline for the removal of protectionist barriers and the many exceptions and loopholes that deprive the agreement of its credibility and predictability." He doesn't say exactly what he would do to fix these problems, but perhaps he doesn't need to. In our conversations with Alckmin and several of his advisers, we have been told that he would be interested in re-opening FTAA negotiations, or at the very least in re-invigorating economic and trade relations with the U.S. He doesn't say much about this publicly, but this may be simply because of the prevailing wisdom that foreign and trade policy does not make a good campaign issue. Alckmin does say a great deal about technology, innovation, and education and training to make Brazil more competitive in the global economy. 

-------------- INFRASTRUCTURE -------------- 

¶12. (U) Alckmin boasts of certain large infrastructure projects in Sao Paulo state, but nothing dramatic. The "Rodoanel," a ring of highways circling metropolitan Sao Paulo that is supposed to ease commuting and traffic headaches, is one such, but so far only one of its four tranches has been completed. A great deal of work has been done on decontamination and flood control of the Tiete River, which runs through the northern part of the city, with support from Japanese Bank for International Cooperation (JBIC). In December 2005, Alckmin announced what he claimed was the first Public-Private Partnership to be implemented in the entire country, the extension of one line of the Metro into western Sao Paulo with financing from the World Bank and the JBIC. On the national level, he does not propose specific infrastructure improvements, but rather limits himself to observing the damage to global competitiveness caused by Brazil's inadequate infrastructure. 

--------------- PUBLIC SECURITY --------------- 

¶13. (SBU) During the mid-May wave of violence in Sao Paulo (ref A), Alckmin stirred up controversy by publicly criticizing his successor, Governor Claudio Lembo, for not accepting President Lula's offer of federal assistance to help quell the violence generated in streets and state prisons by the criminal gang First Capital Command (PCC), and to restore order. Many observers pointed out that the gang problem had germinated on his watch, and a certain amount of political finger-pointing and recrimination followed. In his acceptance speech, Alckmin reiterated his view that organized crime, "especially trafficking in drugs and arms that crosses state and national boundaries," belongs, according to the Constitution, under federal police jurisdiction. He then proceeded to outline measures he would take to promote better cooperation among federal agencies, and between federal and state authorities, to combat organized crime. 

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COMMENT: BOLDNESS REQUIRED NOW 

------------------------------ 

¶14. (SBU) One observer commented recently to Poloff that Alckmin's problem is that, as a small-town doctor, he just doesn't know how to think big. Furthermore, as an anesthesiologist, he knows how to prepare the patient for surgery, but is accustomed then to sitting back and letting someone else do all the hard work while he contents himself with monitoring the vital signs. Over the past few weeks, during the political convention season, he has stepped up his rhetoric somewhat, amplifying his criticism of Lula and "the forty thieves" who have been indicted in the political scandal and his calls for a wholesale political reform. This may be one factor in his recent improvement in the polls. However, as many political analysts have pointed out, Brazilians tend towards an anti-reformist culture; moreover, the politicians who would have to design, negotiate, pass, and implement any such reform are the very people most invested in the system the way it operates now. It is hard to reconcile the prudent, reserved, almost timid Alckmin with the politician who proposes to present to Congress in the first week of January 2007 draft legislation for tax, social security, labor, and political reform, and to expend political capital getting them passed. At the same time, Alckmin showed considerable boldness, determination, and imagination in challenging and ultimately defeating Jose Serra to win the PSDB nomination. If indeed he still has that sort of boldness in him, he might well consider calling upon some of it between now and October, because as things stand now, without some kind of dramatic action, he appears increasingly likely to run a competent but uninspired campaign and lose. END COMMENT. 

¶15. (U) This cable was coordinated/cleared with Embassy Brasilia. 

MCMULLEN