Geraldo Alckmin Discusses Economic Growth and Brazilian Foreign Policy

Interview with Geraldo Alckmin
Former Governor of São Paulo and PSDB Candidate for President of Brazil
September 25, 2006

On October 1, Brazilians will go to the polls to choose a new president. According to opinion polls, the three leading candidates are President Luiz Inácio Lula Da Silva (Workers’ Party-PT), former São Paulo Governor Geraldo Alckmin (Brazilian Social Democracy Party – PSDB), and Senator Heloisa Helena (Socialism and Freedom Party-PSOL). If no candidate secures 50 percent of the vote in this first round, the top two candidates will move on to a second round of elections on October 29.

The Americas Society and Council of the Americas (AS/COA) interviewed PSDB candidate Geraldo Alckmin to understand his views on economic growth, state reforms, foreign policy, trade and investment. Among other things, former Governor Alckmin would recast Brazil’s international priorities and seek to expand the country’s trade agenda. The AS/COA has also requested an interview with President Lula.

AS/COA: This election comes at a critical point for Brazil. Macroeconomic stability and moderate growth have contributed to low inflation and job creation, but security, high unemployment and corruption continue to hinder Brazil’s full development potential. What do you see as the central differences between your platform and vision for the future of Brazil versus those of your challengers?

Alckmin: My main objectives include higher economic growth, along with better income distribution, and the creation of new jobs. Since 1994, thanks to the work of the previous PSDB (Brazilian Social Democracy Party) government, macroeconomic stability has been achieved in Brazil. Our priority now is to accelerate economic growth and reduce the rate of unemployment, which means reaching a GDP (gross domestic product) growth rate of at least 4% per year.

In the last few years, Brazil has seen a tremendous adjustment in its external sector as a result of the floating exchange rate regime and increases in our total factor productivity. These achievements can be attributed to investments made in the 1990s when Brazil embraced trade reform and privatization under the PSDB government of Fernando Henrique Cardoso. The current government can take credit for the positive external account figures only so far as it relates to maintaining the economic policy of the PSDB government.

Since the external sector is no longer a barrier to our economic growth, our challenge to faster growth now lies in the domestic sector. In this area, the current government has adopted many measures that have hampered our growth including increasing tax burdens, raising public expenditures, weakening the independent role of regulatory agencies, and cutting public investment in half. Therefore, my government’s agenda for faster growth will be based on doing the exact opposite of the PT (Workers’ Party) government. I will cut public expenditures, promote a statewide reform to cut red tape, strengthen the independent role of regulatory agencies, and increase trade through multilateral, regional and bilateral trade negotiations. These measures will allow us to substantially reduce interest rates, maintain a more competitive exchange rate, and remove current restrictions that stifle private and public investment.

AS/COA: During the presidential campaign both you and your main opponent have spoken about the need to reform the size of the state. While critical for competitiveness and prosperity, successive Brazilian governments have historically been unable to implement the full range of necessary reforms. If elected, what structural reforms would you prioritize for creating a more efficient state? How would you plan on working with the Brazilian Congress to pass these reforms?

Alckmin: I do not agree that previous governments in Brazil have been unable to approve and implement necessary reforms. In the previous PSDB government, we adopted many important reforms that have accounted for Brazil’s economic growth. For instance, the Fiscal Responsibility Law of 2000 was an important institutional innovation for balancing fiscal accounts.

The problem with the reform agenda is that it stopped in the second year of the current government; meanwhile, since 2004, government expenditures have increased at 10% per year in real terms. The size of Brazilian state is too large. In the last year, government expenditures reached 44.7% of GDP, while public investment was only 2.3% of GDP. Government consumption must decrease to open room for a lower tax burden and higher public investments.

As governor of the state of São Paulo (2002-2006) I reduced the state tax burden and increased state investments by adopting measures to increase state efficiency and reduce waste. For instance, my administration’s adoption of the electronic auction allowed the state to save over R$4 billion per year – money that was then spent to build highways, schools and hospitals. I know that promoting state reform at the federal level in Brazil is more difficult than at the state level, but I am taking the necessary steps to do that by building a strong political alliance with major political parties. The PSDB has already built a political alliance with two major parties (Liberal Front Party-PFL and Socialist People's Party-PPS) for the coming election, and I have the support of a large part of the PMDB (Party of the Brazilian Democratic Movement) - the largest political party in Brazil.

If I win, on the first day of my mandate as president, I will send to the Brazilian Congress proposals for generating tax reform, reducing the number of ministries, decreasing political appointees in government, regulating the state social security reform approved by the Brazilian Congress in 2003, and taking the necessary steps to effectively promote regulatory agency independence. In addition, I intend to devote 100% of my time as president to changing the Brazilian state by adopting a modern managerial model based on rationality, efficiency and more effective mechanisms of accountability. As governor, I focused on e-government, transparency and results-driven public policy to accomplish these goals. If elected president of Brazil, I will do the same.

AS/COA: From its founding of the G-20 bloc of developing nations to aspirations for a permanent UN Security Council seat and its central role in the Haiti peacekeeping force, Brazil continues to carve out a leadership position both hemispherically and globally. Would an Alckmin government continue the current South-South orientation of Brazilian foreign policy or move it in a new direction?

Alckmin: The current government’s foreign policy is based on an out-of-date vision of the world. They see a world divided between rich and poor countries in permanent confrontation. They want to change the world economic and political order and oppose unilateralism. Brazilian foreign policy has become politicized and ideological, and, as a result, the South-South orientation is a priority. Africa, the Middle East, Russia, and China are at the top of the agenda. Within the region, Cuba, Venezuela and Bolivia are treated in a different and special way. On the other hand, trade relationships with the most developed economies in the world (the United States and European Union) have taken a backseat. This year, trade between Brazil and the U.S. and EU has decreased. Beginning in January 2007, I will change this perspective. Brazil will give priority to establishing relationships with the most dynamic and most developed partners in Europe and in North America. At the same, time, the relationship with the South will continue to expand and complement efforts with the larger economies.

In addition, it is legitimate for Brazil to seek a permanent seat on the United Nations Security Council; this hemispheric and global leadership position will carry a powerful weight when the time comes. But since the issue is not high on the agenda of the international community, I will concentrate my attention on other matters of greater importance to the Brazilian national interest. As for the Brazilian peacekeeping force in Haiti, I will make a careful reassessment of the situation and decide if Brazil will continue to keep its military presence in that country.

AS/COA: Brazil had pinned its hopes for moving forward on key trade issues, such as agricultural subsidy advancements, on progress in the Doha Round of trade talks. However, with the Doha Round stalled, Brazil is now left to decide whether it will join the tide of bi and tri-lateral agreements or continue holding out for an eventual global agreement. Given regional and global developments, what do you see as the most important short and long-term trade priorities for the country and for the Mercosul trade bloc? Do you envision progress on a Free Trade Area of the Americas?

Alckmin: Beginning in January 2007, I will discuss with the private sector a new strategy for Brazil’s multilateral, regional and bilateral trade negotiations. We will continue to give priority to completing the Doha Round, but we will not push it as Brazil’s only priority. Brazil will keep all options open. I will try to conclude the Mercosul-EU bilateral negotiation and deepen bilateral trade agreements with our partners in South America.

Mercosul is of great concern, and for that reason, I will lead a comprehensive discussion with all interested sectors of Brazilian society about the regional trade bloc’s future. We have to review Mercosul as a customs union in light of Brazil’s national interest. With China, our third largest trade partner, we will try to be more pro-active in exploring business opportunities and more rigorous in defending our trade interests. As far as the FTAA (Free Trade Area of the Americas) is considered, we have to recognize that not even the United States is interested in its progress, making it difficult to revive in its present form. The Brazilian private sector and the national Congress won’t accept resumption of FTAA negotiations if, as the U.S. is demanding, NAFTA (North American Free Trade Agreement) is used as a basis for the agreement. Having said that, I will begin conversations with U.S. authorities to discuss concrete trade issues of mutual interest (increasing trade and investment, identifying issues of common interest such as ethanol and bio-diesel, and analyzing generalized system of preference products, intellectual property rights, and business facilitation) as part of a renewed priority to expand our relationship with the world’s most dynamic economies.

AS/COA: The World Bank’s recently released Doing Business 2007 continues to show Brazil ranking in the bottom third of countries (121 out of 175) worldwide in regard to the ease of doing business – a ranking that takes into account ten indicators ranging from starting a business to employing workers and enforcing contracts. How do you propose to work with the private sector to improve the business environment in Brazil?

Alckmin: I believe that improving the business environment in Brazil requires working on multiple fronts, and I intend to work closely with business associations and the Congress toward this end.

It is clear that we need to cut the red tape for opening and closing firms, but we also need to have clear rules, fast contract enforcement and increased investor protections. The problem with the PT government is that it has taken contradictory actions to improve the business environment. At the same time that the government works with the opposition to approve a new bankruptcy law, it acts openly to weaken regulatory agencies, thereby increasing the uncertainty for new investments.

Although it is necessary to change some laws to improve the business environment in Brazil, I believe that the business environment is also linked to citizen and foreign investor perceptions of the government. Unfortunately, the current government in Brazil is involved in many scandals ranging from a sophisticated scheme to bribe congressmen for political support to the violation of an employee’s bank account confidentiality who testified against the Ministry of Finance. How can any investor trust a government involved in such scandals? These scandals have even led the independent Brazilian attorney general to begin criminal court action against forty individuals directly or indirectly linked to the PT government.

It is impossible to improve Brazil’s business environment under a government whose actions, as stated by the attorney general, sometimes resemble those of organized crime. In fact, a PSDB government is by itself a major step towards improving the business environment in Brazil. As an example, look at the reforms embraced by the PSDB in the 1990s, which included removing foreign investment restrictions and creating regulatory agencies. I will continue this agenda interrupted by the current government. In addition, increasing government efficiency, such as setting a deadline for federal agencies to provide business registration licenses, is something we can accomplish under current law if federal agencies were staffed based on meritocracy and not political party ties.