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                                                 TABLE OF CONTENTS — BRAZIL

    MAP ................................................................................................................................................ M-1
    HIGHLIGHTS................................................................................................................................... EX-1
    FORECAST SUMMARIES............................................................................................................... EX-2
    FACT SHEETS............................................................................................................................... FS1-2
    COMPARISON PAGES ................................................................................................................. CP1-2
    CHRONOLOGY............................................................................................................................. CR1-2
    GEOGRAPHY & HISTORY ............................................................................................................... A-1
    INTERNATIONAL RELATIONSHIPS ................................................................................................. A-2
    SOCIAL CONDITIONS ...................................................................................................................... A-3
    ECONOMIC CONDITIONS................................................................................................................ A-4
    SOURCES OF POWER .................................................................................................................... A-7
    CLIMATE FOR BUSINESS................................................................................................................ A-8
    FERNANDO HENRIQUE CARDOSO (PRESIDENT) ......................................................................... B-2
    FERNANDO COLLOR DE MELLO .................................................................................................... B-2
    LUIS INACIO DA SILVA .................................................................................................................... B-3
    DEMOCRATIC LABOR PARTY (PDT)............................................................................................... B-4
    DEMOCRATIC MOVEMENT PARTY (PMDB) ................................................................................... B-4
    DOMESTIC BUSINESS..................................................................................................................... B-5
    ITAMAR FRANCO ............................................................................................................................. B-6
    LABOR .............................................................................................................................................. B-6
    LANDLESS PEASANTS .................................................................................................................... B-6
    LIBERAL FRONT PARTY (PFL) ........................................................................................................ B-7
    PAULO MALUF ................................................................................................................................. B-7
    MILITARY.......................................................................................................................................... B-8
    SOCIAL DEMOCRATIC PARTY (PSDB) ........................................................................................... B-8
    WORKERS PARTY (PT) ................................................................................................................... B-9
    MOST LIKELY REGIME: CARDOSO (55% PROBABILITY) .............................................................. C-1
    SECOND MOST LIKELY REGIME: LULA (25% PROBABILITY) ....................................................... C-2
    THIRD MOST LIKELY REGIME: OTHER OPPOSITION (20% PROBABILITY) ................................. C-2
SECTION D. 18-MONTH FORECASTS OF TURMOIL ............................................................................. D-1
SECTION F. 18-MONTH FORECASTS OF TRADE RESTRICTIONS....................................................... F-1
SECTION G. 18-MONTH FORECASTS OF ECONOMIC POLICIES........................................................ G-1
    MOST LIKELY REGIME SCENARIO: CARDOSO (55% PROBABILITY) ........................................... H-1
    SECOND MOST LIKELY REGIME SCENARIO: LULA (25% PROBABILITY) .................................... H-2
    TURMOIL .......................................................................................................................................... H-2
    INVESTMENT RESTRICTIONS ........................................................................................................ H-3
    TRADE RESTRICTIONS ................................................................................................................... H-3
    DOMESTIC ECONOMIC PROBLEMS............................................................................................... H-4
    INTERNATIONAL ECONOMIC PROBLEMS ..................................................................................... H-5

*Place any updates or revised fact sheets at the beginning

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                               Venezuela Guy.                                                  Fr. Guiana
               Colombia                      Boa
0                                          Ne                                           Macapa                                                   1000 km
     Ecuador                                        zo                              n                              Belem                              1000 miles
                                          Manaus Ama                                                                           Sao Luis
                                                                                            Santarem                                              Fortaleza


                                                                                        Tucurui Res.


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                     a                s             ad                                                                               Campina Grande        Joao Pessoa
                               Puru             M

          Peru                             Porto                                                       Tocantins      Sobradinho                           Recife
10                                                                                                                       Res.
                                           Velho                                                                                                        Maceio

                                                                                                                    Feira de Santana                 Aracaju

                                                                                   Cuiaba         Brasilia                   ancis
                                                                                                                          Sao Fr

                                 Bolivia                                                    Goiania


20                                           Campo Grande                                                                          Belo Horizonte
      Pacific                                            Ribeirao Prato                                                              Juiz de Fora
      Ocean              Chile                       Paraguay                                                             Rio de Janeiro

                                                                                                                     Sao Paulo

                                                                                            Curitiba               Joinville
                                                                                    a   y
                                                                                 gu         Santa                  Florianopolis
30                                                                                                   Canoas
                                                                                                     Porto Alegre                                      Ocean
                               Argentina                                         Pelotas
     80                   70                                 60                                        50                                   40                      30

                                    BRAZIL UPDATE
                                    November 1, 1998

18-Month:    Cardoso 55%
Five-Year:   Cardoso 55%

                                Financial     Direct                                          Export
            Turmoil             Transfer   Investment                                         Market
18-Month:   Moderate               C+           B                                              C+
Five-Year:  High                    C           B                                               C
                                                                 ( ) Indicates change in rating.
                                                                  * Indicates forecast of a new regime.


         Re-elected by a sizable margin and backed by a substantial majority in both
houses of the legislature, President Fernando Henrique Cardoso will pursue a
program of harsh fiscal austerity and structural reforms in an effort to prevent a
precipitous economic downturn. In the wake of declining revenues from private
investors and a significant drain on foreign exchange reserves, Cardoso has
promised to cut the budget deficit by $23.5 billion in 1999 through a combination of
spending cuts and tax increases. The effort is expected to secure support from the
IMF, which should help to restore confidence among investors. Even if Cardoso wins
legislative support for the measures, as is expected, interest rates will be kept high to
limit capital flight and forestall a devaluation. As a result, the economy will continue
to decline through 1998-1999. Reduced government spending will spur an increase
in the already high unemployment rate, raising the threat of a public backlash and
intensified protest against reforms by the country’s labor organizations.

                          REAL GDP                                                    CURRENT
     YEARS                GROWTH %                       INFLATION %                ACCOUNT ($bn)
1994-1998(AVG)                3.3                            433.2                     -22.22
1999(F)                      -2.0                             5.0                      -28.00
2000-2004(F)                  4.0                             5.0                      -18.00

                                                                    1-Nov-1998 BRAZIL UPDATE
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                                   BRAZIL UPDATE
                                    August 1, 1998

18-Month:    Cardoso 55%
Five-Year:   Cardoso 55%

                                Financial     Direct                                            Export
            Turmoil             Transfer   Investment                                           Market
18-Month:   Moderate               C+           B                                                C+
Five-Year:  High                    C           B                                                 C
                                                                   ( ) Indicates change in rating.
                                                                    * Indicates forecast of a new regime.


         President Fernando Henrique Cardoso remains favored to win the presidential
election in October 1998, despite the economic difficulties that have diminished his
popularity. Austerity measures instituted in late 1997 to defend the currency from
speculation succeeded in allaying the fears of foreign investors, but have hurt the
economy. The sale of the state telecommunications firm, Telebras, in late July should
help the country’s debt and budget situations. Nevertheless, growth is expected to be
flat in 1998. Economic conditions are so poor that the chances of actual recession
are one in four. A moderate rise in unemployment will give a slight boost to
Cardoso’s main challenger, Luis Inacio (Lula) da Silva of the Workers’ Party (PT).
Other challengers have emerged as Cardoso’s difficulties have mounted, increasing
the chances of a second-round runoff between Cardoso and Lula. Even though
Cardoso’s popularity may fall even further before the election, the odds still favor his
eventual re-election. Voters are expected to focus on the progress made in trimming
the worst of the economic difficulties. Lula and the PT have yet to present a program
that presents a distinct and attractive alternative to the government’s policies. If he
were to gain power, Lula’s inclination toward higher spending on social services and
unemployment benefits would be constrained by his desire to calm nervous investors.
 His most likely areas of departure from Cardoso’s policies would be to introduce
more restrictions on foreign trade.

                          REAL GDP                                                      CURRENT
     YEARS                GROWTH %                        INFLATION %                 ACCOUNT ($bn)
1993-1997(AVG)               4.2                              818.7                      -15.61
1998(F)                      0.0                               8.0                       -25.00
1999-2003(F)                 4.5                               5.0                       -18.00

                                                                      1-Aug-1998 BRAZIL UPDATE
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                                BRAZIL HIGHLIGHTS
                                   April 1, 1998

18-Month:    Cardoso 55% (50%)
Five-Year:   Cardoso 55% (50%)

                                Financial     Direct                                             Export
            Turmoil             Transfer   Investment                                            Market
18-Month:   Moderate               C+           B                                                C+ (B-)
Five-Year:  High (Moderate)      C (C+)       B (A-)                                             C (B-)
                                                                    ( ) Indicates change in rating.
                                                                     * Indicates forecast of a new regime.


        Maneuvering for the October 1998 presidential and legislative elections will
delay badly needed economic restructuring as President Fernando Henrique Cardoso
struggles with a fractious Congress. Despite his troubles, Cardoso is the favorite for
re-election over Luis Inacio da Silva (Lula) or another left-wing candidate. A win by
Cardoso may allow the moves toward austerity and reform to regain momentum after
1999, especially if the president’s allies gain a congressional majority. A win by Lula,
who has shown himself to be a pragmatist in the Congress, would slow but not
reverse the movement toward free market institutions. More extreme candidates from
the center-left have little chance for victory unless the economy collapses. Although
the expectations for a return to healthy growth beyond 1998 and subdued inflation
make for an optimistic economic outlook, the persistent (but slowly shrinking) current
account deficit leaves sustained progress vulnerable to downturns in Asia or other
regions, reduced foreign investment, and speculation against the currency.

                          REAL GDP                                                       CURRENT
     YEARS                GROWTH %                         INFLATION %                 ACCOUNT ($bn)
1993-1997(AVG)               4.3                               810.7                      -15.37
1998(F)                      0.0                                8.0                       -25.00
1999-2003(F)                 4.5                                5.0                       -18.00

                                                                            1-Apr-1998 BRAZIL EX-1
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                           SUMMARY OF 18-MONTH FORECAST

                                      Cardoso                             Lula            Other Opposition
 REGIMES & PROBABILITIES              55%                                 25%             20%
 Turmoil            Moderate          Same                                SLIGHTLY MORE   SLIGHTLY MORE
  Equity            Moderate          SLIGHTLY LESS                       Same            Same
  Operations        High              SLIGHTLY LESS                       Same            Same
  Taxation          Low               Same                                Same            Same
  Repatriation      High              Same                                Same            Same
  Exchange          Moderate          Same                                SLIGHTLY MORE   SLIGHTLY MORE
  Tariffs           Moderate          Same                                SLIGHTLY MORE   SLIGHTLY MORE
  Other Barriers    Moderate          SLIGHTLY LESS                       SLIGHTLY MORE   Same
  Payment Delays    High              Same                                SLIGHTLY MORE   SLIGHTLY MORE
 Economic Policy
  Expansion         Moderate          LESS                                SLIGHTLY LESS   SLIGHTLY LESS
  Labor Costs       Moderate          SLIGHTLY LESS                       SLIGHTLY MORE   SLIGHTLY MORE
  Foreign Debt      High              SLIGHTLY MORE                       SLIGHTLY MORE   Same

                           SUMMARY OF FIVE-YEAR FORECAST

                                      Cardoso                             Lula            Other Opposition
 REGIMES & PROBABILITIES              55%                                 25%             20%
 Turmoil            Moderate          SLIGHTLY MORE                       SLIGHTLY MORE   SLIGHTLY MORE
  Investment        Moderate          LESS                                SLIGHTLY LESS   Same
  Trade             High              SLIGHTLY LESS                       Same            Same
 Economic Problems
  Domestic          High              LESS                                SLIGHTLY LESS   SLIGHTLY MORE
  International     Very High         SLIGHTLY LESS                       SLIGHTLY MORE   SLIGHTLY MORE

 * When present, indicates forecast of a new regime

EX-2 BRAZIL 1-Apr-1998
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FACT SHEET: Federative Republic Of Brazil                                                                                          October 1, 1998
CAPITAL:                                             HEAD OF STATE:                                          SOCIAL INDICATORS                  _1998 Est.
    Brasilia                                         President Fernando Henrique Cardoso (1995)
CONSTITUTION:                                                                                                ENERGY (KG. OIL EQUIVALENT)
    October 5, 1988                                  HEAD OF GOVERNMENT:                                        Per Capita Consumption:              766
                                                     President Cardoso (1995)                                   Imports as Percent of Exports:        14
    23 states, 3 territories, 1 federal district                                                             POPULATION
POPULATION:                                                                                                     Annual Growth:                     1.2%
                                                     Francisco Sérgio Turra, Agriculture
    1998, 162.22 million                             Luiz Carlos Mendonca de Barros,                            Infant Deaths per Thousand:           43
AREA:                                                    Communications                                         Persons Under Age 15:               32%
    8,511,965 sq. km.                                Pedro Malan, Finance                                       Urban Population:                   76%
OFFICIAL LANGUAGE:                                   Luiz Felipe Lampréia, Foreign Affairs
                                                                                                                Urban Growth:                      2.3%
    Portuguese                                       Jose Botafogo, Industry, Commerce, & Tourism
                                                     José Renan Calheiros, Justice                              Literacy:                           82%
STATUS OF PRESS:                                     Eduardo Amadeo, Labor                                   WORK FORCE DISTRIBUTION
    free                                             Raimundo Mendes de Brito, Mines & Energy                   Agriculture:                        31%
SECTORS OF GOVERNMENT                                Paulo de Tarso Almeida Paiva, Planning                     Industry-Commerce:                  27%
PARTICIPATION:                                       José Israel Vargas, Science & Technology
    petroleum refining, utilities, transportation,                                                              Services:                           42%
                                                     Eliseu Lemos Padilha, Transport
    finance, mining, petrochemicals                                                                             Unions:                             22%
CURRENCY EXCHANGE SYSTEM:                            LEGISLATURE:                                            ETHNIC GROUPS:
    managed float                                    Bicameral National Congress: 81-member                     Portuguese, black, mixed, Italian, German,
                                                     Senate and 513-member Chamber of Deputies.                 Japanese, Amerind
                                                     Distribution of Senate seats: Liberal Front Party       LANGUAGES:
    9/28/98 $1=1.18 real
                                                     (PFL), 24; Democratic Movement Party                       Portuguese, English
ELECTIONS:                                           (PMDB), 22; Brazilian Social Democratic Party
    Presidential elections are held every four       (PSDB), 14; Brazilian Progressive Party (PPB),          RELIGIONS:
    years; last, October 3, 1994; next,              6; Workers' Party (PT), 5; Brazilian Labor Party           Roman Catholic (72%)
    scheduled October 4, 1998. Senate                (PTB), 3; Democratic Labor Party (PDT), 3;
    members serve eight-year terms; two-thirds       Brazilian Socialist Party (PSB), 2; others, 2.
    followed by one-third elected every              Distribution of Chamber seats: PFL, 111;
    alternating four years; last, October 3,         PMDB, 98; PSDB, 94; PPB, 78; PT, 50; PDT,
    1994; next, scheduled October4, 1998.            23; PTB, 22; PSB, 11; others, 26.
    Elections for the Chamber of Deputies are
    held every four years; last, October 3,1994;
    next, scheduled October 4, 1998.

                                                                                                                            1-Oct-1998    BRAZIL     FS-1

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FACT SHEET: Brazil                                                                                                                                                         October 1, 1998

 ECONOMIC INDICATORS                                   1989          1990           1991              1992               1993            1994        1995       1996        1997         1998e
   GDP ($bn)                                              388.35        438.88         407.43             390.62               440.53     546.49      703.91     774.95       806.65          787.76
   Per Capita GDP ($)                                       2730          3035          2770                2615                 2905       3555        4515       4910         5045            4855
   Real Growth Rate (%)                                       3.2          -4.6           0.0                -0.9                  6.0        4.9         3.9        3.0          3.0             1.5
   Inflation Rate (%)                                     1287.2        2937.9          400.0             1020.0               1928.6     2076.4         66.0       15.8          6.9             1.0
   Capital Investment ($bn)                               111.16        100.66          73.65              71.97                84.99     113.38      144.61     148.14       148.41          146.52
   Investment/GDP (%)                                        28.6          22.9          18.1                18.4                 19.3       20.8        20.5       19.1         18.4            18.6
   Budget Revenues ($bn)                                  100.19        146.40         105.36             105.85               133.56     165.89      168.89     175.41       180.13          176.81
   Budget Revenues/GDP (%)                                   25.8          33.4          25.9                27.1                 30.3       30.4        24.0       22.6         22.3            22.4
   Budget Expenditures ($bn)                              172.24        173.46         107.09             120.71               174.63     202.93      218.16     221.13       229.34          234.32
   Budget Expenditures/GDP (%)                               44.4          39.5          26.3                30.9                 39.6       37.1        31.0       28.5         28.4            29.8
   Budget Balance ($bn)                                   -72.05        -27.06          -1.73             -14.86               -41.07     -37.04      -49.27     -45.72       -49.21          -57.51
   Budget Balance/GDP (%)                                  -18.6           -6.2          -0.4                -3.8                 -9.3       -6.8        -7.0       -5.9         -6.1            -7.3
   Money Supply (M1) ($bn)                                 36.56         36.92          32.81              32.02                34.78      39.97       34.96      41.48        47.31           51.14
   Change in Real Wages (%)                                -54.1         -58.9           -1.2                -2.4                 13.0        7.3         6.1        5.9          6.1            -1.4
   Unemployment Rate (%)                                      3.0           3.7           4.0                 6.5                  5.3        5.1         4.6        5.4          5.7             8.0

   Foreign Direct Investment ($bn)                           1.13          0.99          1.10               2.06                 1.29        3.07       4.86       9.89        17.05           22.50
   Foreign Exchange Reserves ($bn)                           7.54          7.43          8.02              22.52                30.60       37.07      49.71      58.32        50.83           59.00
   Total Foreign Debt ($bn)                                   NA             NA        115.60             135.90               151.60      169.50     184.10     173.90       186.20          194.02
   Total Foreign Debt/GDP (%)                                 NA             NA          28.4               34.8                 34.4        31.0       26.2       22.4         23.1            24.6
   Debt Service Ratio (%)                                    21.0          21.0          26.5               49.9                 43.2        38.9       46.1       46.1         54.1            55.9
   Current Account ($bn)                                     1.00         -3.82         -1.45               6.09                 0.02       -1.15     -18.14     -24.30       -34.50           33.00
   Current Account/GDP (%)                                    0.3           -0.9         -0.4                1.6                   0.0        -0.2       -2.6       -3.1         -4.3             4.2
   Exports ($bn)                                           34.38          31.41         31.62              35.79                39.63       44.10      46.51      47.76        53.00           55.54
   Imports ($bn)                                           18.26          20.66         21.04              20.55                25.30       33.24      49.66      53.29        61.30           60.59
   Foreign Trade Balance ($bn)                             16.12          10.75         10.58              15.24                14.33       10.86      -3.15      -5.53        -8.30           -5.05
   Currency Exchange Rate                                 1.0310         24.836         148.0             1641.0                0.032       0.639      0.918      1.005        1.078           1.138
   Currency Change (%)                                       89.2       -2308.9        -495.9            -1008.8                100.0     -1896.9      -43.7        -9.5         -7.3            -5.6

Principal exports: coffee, iron ore, chemical products, soy meal, soybeans, orange juice, footwear, automobiles and parts; mainly to the US, Argentina, Japan, the EU, and Paraguay

Principal imports: crude oil, capital goods, chemical products, foodstuffs, and coal; mainly from the US, Germany, Argentina, Japan, Italy, Saudi Arabia, France, South Korea, Chile, and the UK

FS-2 BRAZIL             1-Oct-1998
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COMPARISON: Brazil                                                                                             April 1, 1998

                    Regional Real GDP Growth (1997): South America












               0          1          2             3               4                5          6        7           8       9

                      Regional Inflation Rates (1997): South America












              0.0   5.0       10.0       15.0            20.0           25.0            30.0   35.0     40.0      45.0   50.0

                                                                                                   1-Apr-1998 BRAZIL CP-1
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COMPARISON: Brazil                                                                                                           April 1, 1998

                         Regional Current Account/GDP (1997): South America












           -14.0      -12.0           -10.0       -8.0             -6.0           -4.0               -2.0      0.0     2.0            4.0    6.0

                                                    Economic Performance Profile
                                              Country's Ranking Relative to All Countries
                                                  Covered by Political Risk Services

 GDP Per Capita ($)                                            u 4146

 Real GDP Grow th (%)                                          u 4.3

 Inflation (%)                                                                                                               u 810.7

 Unemployment (%)             u 5.1

 Capital Investment                                                                                  u 19.4
  (% of GDP)

 Budget Balance                                                                                                              u -6.8
  (% of GDP)

 Current Account                                                                                     u -2.1
  (% of GDP)

 Debt Service Ratio                                                                                                          u 44.6

 Currency Change (%)                                                                                                         u -371.4

                                  BEST 25%                             NEXT 25%                             NEXT 25%             WORST 25%

CP-2 BRAZIL           1-Apr-1998
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May 24, 1997              The government decided to refinance $47.2 billion of debt
                          held by the state of São Paulo. In order to do so, the
                          government privatized Banespa, the state bank.

July 9, 1997              Bell South, the US telecommunications company, and Banco
                          Safra, a private-sector Brazilian bank, secured the right to
                          operate cellular telephones in São Paulo at a cost of
                          $2.47 billion.

August 1997               Congress passed a law to deregulate the petroleum industry,
                          which will for the first time in Brazil's history allow foreign
                          companies to acquire stakes in Brazil-based oil exploration
                          and production operations.

October 1997              Volkswagen, Asian Motors, General Motors, Ford, Mercedes-
                          Benz, Honda, Renault, Chrysler and Peugeot-Citroen
                          individually announced plans to construct plants totaling
                          $4.95 billion.

October 10, 1997          The Senate passed a bill reforming the social security system
                          by setting minimum retirement ages and contribution periods.

November 8, 1997          Votorantim, Brazil's largest private business group, paid
                          $2.73 billion for a controlling stake in CPFL, the state-owned
                          electricity distributor in São Paulo.

November 21, 1997         Congress passed a civil service reform bill, which eliminates
                          lifetime job guarantees for civil servants. The bill is seen as
                          necessary to bring public finances under control.

November 28, 1997         The states of São Paulo and Mato Grosso sold three
                          electricity distributorships in an effort to continue the national
                          privatization program.

December 2, 1997          To improve the country's system of highways and roads, the
                          government franchised more than 1,000 kilometers of roads
                          to private initiatives in the past year, with plans to grant five
                          times that amount by the year 2000.

December 4, 1997          In an attempt to insulate itself from the turbulence of financial
                          markets, the Brazilian Congress approved a package of tax
                          increases. The package includes an increase of 10% on the
                          income tax of anyone earning more than $1,650 per month
                          and an increase of 15% to 20% on fixed income investments.
                          At the same time incentives offered to companies investing in
                          the north and north-east of the country have been reduced by
                          25%. The taxes do not apply to foreign investors.

                                                                          1-Apr-1998 BRAZIL CR-1
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December 4, 1997          Cataguazes Lepoldina, a private company, purchased
                          Energipe, a Brazilian state-owned electricity distributor, for
                          $524.6 million, giving it an 86.42% stake in Energipe.

December 12, 1997         Responding to the crisis in the Asian financial markets, the
                          government doubled the interest rate and produced $18 billion
                          in budget cuts to ease the concerns of investors.

December 16, 1997         Prompted by business interests, the government decided
                          against extending its tariff preference agreement with Mexico.

January 15, 1998          The Senate and lower house of Congress approved a bill to
                          allow employers to offer lower wages when hiring short-term
                          workers, a reform designed to address unemployment.

                                                                          1-Apr-1998 BRAZIL CR-1
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                                        SECTION A


GEOGRAPHY. Brazil is the fifth-largest country                              Caribbean Sea

in the world, and the largest country in Latin                                              VENEZUELA
America. It shares borders with every South                        PANAMA
                                                                                COLOMBIA                           GUIANA
American country except Ecuador and Chile.
Occupying nearly half the continent, its vast                                  PERU
terrain is marked by sharp geographic variations.                                                          BRAZIL
The Atlantic coastline is more than 7,200
kilometers long. About 90% of the population                                                    BOLIVIA
lives on 10% of the land.
Enormous natural resources, new mineral
discoveries, and agricultural developments west
of Brasilia, the capital, are being exploited to aid             ARGENTINA

the country's development, assuring its ranking
as one of the world's leading exporters of raw materials and commodities. Development,
deforestation, and fires in the vast Amazon region raise global concerns because of their
potential impact on world climatic conditions. Brazil imports petroleum, but at declining
rates, as a result of production and substitution programs.

        HISTORY. In 1500, the Portuguese navigator Pedro Cabral made the first
European contact with Brazil. It was ruled from Lisbon as a colony until 1808, when the
Portuguese royal family, having fled from the army of Napoleon Bonaparte, established the
seat of government first in Salvador and then in Rio de Janeiro. Brazil became a kingdom
under Dom João VI, who returned to Portugal in 1821 and left his son, Dom Pedro I, as
regent. Dom Pedro I became emperor after declaring Brazil's independence on
September 7, 1822. Portugal offered little resistance. The second emperor, Dom Pedro II,
ruled from 1831 to 1889, when a federal republic was established.

        From 1889 to 1930, Brazil was a constitutional democracy offering a limited
franchise. During this period, the presidency alternated between representatives from São
Paulo and Minas Gerais, the two dominant states. A military coup in 1930 put Getulio
Vargas into power, where he remained until 1945. Brazil was then ruled by a series of
elected presidents until the military, alarmed by economic and political conditions under
president João Gulart, staged a coup in March 1964. The coup leaders chose as president
Army Marshal Humberto Castello Branco, who was elected by the National Congress on
April 11, 1964.

       During the next 10 years the country was controlled by a military dictatorship that
employed censorship, severe repression, and torture to maintain itself in office. A
resurgence of political liberalization began during General Ernesto Geisel's tenure of
1974–1979. João Baptista de Oliveira Figueiredo, president during 1979–1985, permitted

                                                                                                1-Apr-1998 BRAZIL A-1
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the return of politicians who had been exiled during the 1960s and early 1970s. In 1982,
he allowed them to run for state and federal offices. The first direct elections for governor
since 1966 were also held that year. In 1985, the government voluntarily surrendered
power to a civilian government, which was led by José Sarney until 1990. The passage to
democracy was completed in 1990 with the inauguration of Fernando Collor de Mello, the
first popularly elected president since 1960. Collor was impeached on corruption charges
in late 1992. He later resigned and was replaced by Vice President Itamar Franco.
Peaceful elections in late 1994 brought in Fernando Henrique Cardoso as the new
president on January 1, 1995.


        Cardoso has placed a high priority on good relations with regional neighbors. In
1990, Brazil signed a treaty with Argentina, Paraguay, and Uruguay to create a common
market, Mercosur. When the government decided against extending its tariff preference
agreement with Mexico in December 1997, it did so to concentrate on its own involvement
in Mercosur. In the four years before Mercosur took effect on January 1, 1995, regional
trade had more than tripled to $12 billion in 1994. Since Mercosur came into effect, trade
among the regional partners has increased even more rapidly. Mercosur not only removes
trade barriers but also commits members to the coordination of policies on agriculture,
industry, transport, finance, and monetary affairs. Mercosur expands by 50% the duty-free
area open to Brazilian manufacturers. Once a hostile rival of Argentina, Brazil is now its
largest trading partner.

        However, some concerns exist among Brazil's southern neighbors. Tensions
arising from Brazil's increasing trade surplus with Argentina strain the relationship.
Occasional disputes with Argentina reflect trade tensions as well as conflicts over world
issues such as Brazil’s quest for a UN Security Council seat. Brazil's abrupt imposition of
import quotas on automobiles in mid-1995 nearly provoked a regional trade war. Further
moves to control imports in 1997 also raised protests from Brazil’s Mercosur partners.
However, Mercosur acted as a unit to raise the external tariff in late 1997. Brazil is
undoubtedly a leading force in Mercosur and is spearheading efforts to reach a free trade
agreement between Mercosur and the Andean Community. It is also deeply involved in
negotiations to create a Free Trade Area of the Americas (FTAA).

         During 1996, Brazil joined with Portugal and five other Portuguese-speaking nations
(Angola, Cape Verde, Guines-Bissau, Mozambique, and Sao Tome and Principe) to form a
commonwealth aimed at expanding diplomatic, cultural, and economic influence. The
initiative represents Brazil’s effort to bolster its international prestige, diplomatic weight, and
economic credibility. In particular, it is seeking to strengthen its position in Latin America,
where Spanish is the dominant language. Brazil will draw on this group in its bid to
become a permanent member of the UN Security Council.

       During the late 1980s, Brazil came under increasing pressure from industrialized
countries, particularly the US, to protect its natural environment, especially in the Amazon
region. Cardoso has been sensitive about environmental issues and is careful to avoid
antagonizing industrial countries. International concerns about protecting the Amazon
A-2 BRAZIL 1-Apr-1998
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rainforests meet with a defensive posture from the Brazilian government as when a UN aid
proposal for combating fires that have caused severe damage in the region were rejected
in November 1997.

        Relations with the US have improved since 1990, largely because of Brazil's moves
to deregulate the economy and liberalize trade. In mid-1990, the US lifted trade sanctions
in exchange for cooperation on protection for intellectual property rights and
pharmaceutical patents. The US also dropped its long-running trade case against Brazil's
laws on patents, trademarks, and copyright, praising progress in improving protection of
intellectual property rights. President Bill Clinton made a well-received visit to Brazil in late


          Brazil exhibits one of the world's most disparate income distributions: 1% of the
population holds 60% of the national wealth. An estimated 20% of the population lives in
poverty, while another 20% is barely surviving. Almost one-fifth of the population is
illiterate. The poorer classes have received virtually no benefits from the erratic economic
growth of the 1990s. Chronic inflation, until the Real Plan was instituted in 1994,
intensified economic disparity because only the wealthy could take advantage of indexation
to compensate for inflation. The purchasing power of the minimum wage has been cut in
half since 1945. The growth of poverty and the skewed distribution of wealth and land
have led to high levels of violent crime, ranging from kidnappings in Rio de Janeiro to land
invasions in the rural northeast. A 1997 report by the Organization of American States
(OAS) highlighted the high and rising level of police violence, especially in Rio; another
study found that killings by police averaged 32 per month in 1996.

        Regional imbalances in income and political power aggravate social tensions. The
huge disparity in living standards between the northeast and the developed south has
produced massive migration to city slums. The south and southeast account for about
75% of GDP, but they are overshadowed politically by the center, north, and northeast. A
growing separatist movement in the south reflects these stresses, which are likely to
worsen now that Mercosur is in place. More than 60% of Mercosur’s wealth and population
is within the São Paulo-Buenos Aires area, making the south more likely to attract
investment. While the northeast has attracted higher levels of investment and is showing
signs of revival, it remains badly impoverished.

        Although Brazil is the world’s third largest agricultural exporter, about two-thirds of
its population suffers from malnutrition. Chronic health crises also include widespread drug
abuse and outbreaks of bubonic plague, cholera, and AIDS. Efforts to cope with the
massive health problems are thwarted by shrinking government revenues, political
stalemate, bureaucratic inertia, and the siphoning of government funds.

       Attempts at reform are hindered by a bloated bureaucracy filled with wage-earners
who do no work. Because of widespread inefficiency, poor resource allocation, and
chaotic administration of social programs, only 8% of the government's social spending

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reaches the poorest 20% of the population. Higher income groups receive most of the
benefits from funds allocated for social security, health, housing, and education.

         Unequal land distribution is a serious social problem. About 20% of the farmers
own 88% of the farmland. A land redistribution plan is in place, but progress has been
slow, resulting in protest, rural violence, and marches on the government. Police killed at
least 10 landless farmers in mid-1995, and other violent incidents occurred in 1996–1997.
During the early part of 1997, a lengthy protest march by landless peasants ended with a
demonstration in Brasilia in April, the largest anti-government protest so far under Cardoso.
In all, nearly 1,000 landless peasants and their leaders have been killed in the past
decade. Cardoso has pledged action, making some progress in late 1996 when Congress
approved a bill to substantially raise taxes on unused farmland.

         An estimated 60% of the population is black or of mixed race; deep divisions exist
between whites and blacks. A century after the abolition of slavery, blacks lack adequate
political representation, education, housing, and health care. Their living standards are
also far below those of whites. Illiteracy is twice as high among blacks as whites, and the
average income of whites is more than twice that of blacks. Issues related to race are just
beginning to be debated openly.

        The plight of about 200,000 Amerindians is linked to the futile attempts at land
reform. They are besieged by powerful commercial groups that want to mine the lands
they inhabit. Laws protecting them are poorly enforced, and landowners have been able to
delay legislation to create reserves for indigenous peoples. Motivated by environmental
concerns, Collor has proved more responsive to their plight. He has ordered the
destruction of illegal landing strips built by gold miners in the northern Amazon. He also
decreed that a sizable portion of the Amazon rain forest be set aside as a homeland for the
Yanomami tribe. However, progress may be derailed by a new law governing the
demarcation of Indian land, which has been widely criticized by indigenous and human
rights groups. The law could slow the demarcation process and make it easier for business
groups and politicians to block the transfer of lands rich in minerals and natural resources
to Indian groups. Furthermore, fires raging since late 1997 have destroyed substantial
areas of the Indian reserve.

         Students have traditionally been an important political force. University students
once came mostly from the middle and upper classes, but they are now drawn from diverse
social backgrounds. Students at private universities usually hold jobs. They are seldom
politically active, unlike those at the state-owned universities. The failure to provide
technical training at the post-secondary level as well as chronic economic problems
contribute to student discontent.


        The economy, which seemed to stabilize in 1994–1996 thanks to Cardoso’s
policies, was badly rocked by the spreading effects of Asian currency turmoil in mid to late
1997. Speculators, sensing similarities between Brazil and the stumbling Asian
economies, took aim at the currency. The government reacted forcefully with decisive
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short-term measures aimed at
                                                                                       Brazil: Real GDP Growth
foiling the speculators, and for                              8

the moment the attack has                                     6
been staved off. However, the
siege has highlighted the
structural weaknesses in the

economy. Unemployment in
metropolitan São Paulo, the
nation’s industrial heartland,                                -2

was a record 16.5% in                                         -4
October 1997. Unemployment
has remained high in early                                    -6
                                                               1988     1989     1990      1991    1992    1993   1994    1995    1996    1997
1998. In order to alleviate the
lack of jobs, the Senate and
lower house approved a bill to
allow employers to pay lower                                                                Brazil: Inflation
wages when hiring short-term                     3000

workers.                                         2500

Cardoso's success in taming
inflation during 1994, resulting


from the currency reform plan
he carried out as finance
minister, was the key to his                      500

electoral victory. As president,                          0
he has continued to tame
inflation. However, structural                   -500
                                                    1988               1989     1990      1991     1992    1993    1994    1995    1996    1997
weaknesses such as massive
foreign debt, still hamper
progress. Inflation fell to 66%
in 1995 and to 4.8% by the                        10                                   Brazil: Current Account
end of 1997, its lowest level in
nearly 50 years.

During the same period,                            -5

annual growth has averaged a                     -10

respectable 3.5%. Investment                     -15

poured in as a result of                         -20
Mercosur, which allows                           -25
companies to make decisions                      -30
based on regional strategies.
In addition, the real was                          1988               1989     1990      1991     1992    1993    1994    1995    1996    1997
supported in the early months
of 1997 by almost $60 billion
of foreign exchange reserves.

Despite these signs of progress, doubts about Cardoso's policies were growing even prior
to the Asian crisis. Cardoso was following the difficult and high-risk strategy of combining a
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strong currency with expansionary fiscal and monetary policy. The relaxation of credit
attracted massive imports; in 1996, the trade deficit ballooned to a record $5.53 billion, and
in 1997 the deficit doubled. Ultimately, the success of the reform policies rests on an
overvalued currency, which makes Brazil dependent on volatile foreign capital to balance
its deteriorating trade accounts. Accordingly, the Asian currency turmoil struck at a
vulnerable time for Brazil, when it was ripe for speculative attack. By mid-1997, it had
become clear that no serious protective action on structural reform would be undertaken
until after the October 1998 elections.

        The government’s gradualist approach to reform created an irresistible temptation
to speculators. Brazil was relying on huge capital inflows and privatization proceeds to
finance ballooning current account and budget deficits, while structural reforms were
delayed by political conflicts. The public sector deficit exceeded 4% of GDP, and
international competitiveness was eroding as real wages soared in dollar terms. The
current account deficit, estimated at $33 billion for 1997, also exceeded 4% of GDP.

        The Brazilian government reacted decisively and effectively to the pressure on its
currency. The Central Bank radically boosted annual interest rates to more than 40%,
greatly increasing the cost of speculating against the currency. Cardoso also renewed his
stalled efforts to approve serious budget-cutting legislation including reforms to the
pensions and civil service system. The senate’s reform of social security included setting
minimum retirement ages and contribution periods. Its reform of the civil service system
eliminates lifetime job guarantees. Both bills were seen as necessary to bring public
finances under control. In late 1997, the government announced a package of austerity
measures to slash the budget deficit. The austerity package, which includes pledges to
dismiss 33,000 public employees, cut government investment, and raise taxes, was well
received by the financial markets. Specific measures included doubling the interest rate,
increasing the income tax of anyone earning more than $1,650 per month by 10%, and
increasing the tax on fixed income investments by 15%–20%. Foreign investors are
exempt from the new taxes. At the same time, incentives to companies investing in the
north have been reduced by 25%. The government expects that Brazilians will accept
austerity and even recession as the price of a stable currency and low inflation. This policy
of putting stability ahead of growth ensures a very painful slowdown. Large automobile
manufacturers have already announced plans to slash production and to lay off workers.
Because the auto industry accounts for 12% of the economy, the cutbacks will slow growth
even more.

         These measures have restored stability to financial and currency markets in early
1998, while sharply reducing the prospects for 1998 growth. Foreign exchange reserves,
which plunged by $10 billion in October-November 1997 as the government fought to
defend the real, began to recover in December 1997. The government insists that it can
finance the current account deficit because direct foreign investment inflows, led by
privatization receipts, will raise more than $80 billion by 1999. Nonetheless, the real
remains vulnerable because of Brazil’s stubbornly high current account and budget deficits.
Prospects for stability rest entirely on Cardoso’s ability to push structural reform bills
through a fractious Congress. He probably has a narrow window of opportunity to pass
these measures before electoral campaigning begins for the October 1998 presidential and
legislative elections. In late 1997, Congress approved a bill removing job protection for
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most civil service workers, giving the government significant new power to dismiss workers.
Cardoso will try again to pass vital bills aimed at reducing the public sector deficit by
reforming pensions and the civil service during the first half of 1998. Although the crisis
lends some urgency to his efforts, passage is by no means assured. As long as structural
reforms are not in place, the economy and currency will remain vulnerable to external
pressure and speculation.


         The democratic institutions are fragile; formal transition from military to civilian
political control was completed only in March 1990 when Collor was inaugurated. Two
decades of authoritarianism have led to weak political parties, trade unions, and
professional organizations. Few citizens identify themselves with any of the 32 registered
political parties, which are opportunistic and lack clear goals and ideology. With the
exception of the left-wing Workers' Party (PT), most parties are constructed around
powerful individuals rather than policy goals. No president has enjoyed even a formal
majority in Congress since the return to civilian rule.

        Cardoso was easily elected by more than 50% of the valid votes, giving him clear
credibility. He also had a working majority in Congress. The loose alliance between his
Social Democratic Party (PSDB), the larger Democratic Movement Party (PMDB), the right-
wing Liberal Front Party (PFL), and several smaller groups is holding relatively firm,
generally assuring him control of 350 of the 513 seats in the lower house of Congress.
Cardoso's allies also won governorships in all the major states. Other additions to his
strength arose from the elections for presidencies of the two houses of Congress in early
1997. Legislators chose two close allies of the government for both posts. Michel Tenner
of the PMDB heads the lower house, and Antonio Carlos Magalhaes of the PFL heads the

        This formal majority does not guarantee Cardoso the three-fifths majority needed
for amending the constitution, however. This question of constitutional change is critical,
since the 1988 constitution remains an important obstacle to reform. The document
provides for a fundamental transfer of power from the executive to Congress, abolishing
the decree laws that allowed the president to rule almost unchecked. Congress must
approve all major policy decisions including budgets and other economic decisions. The
constitution is contradictory and confusing in places, setting forth important civil and labor
rights while also sanctioning the power of the military and landowners. It discourages
foreign investment. Moreover, it confers significant power on the states, including a
guaranteed share of federal tax revenues. The constitution virtually ensures a fiscal crisis
by promising generous provisions for social welfare, retirement, and pensions. Cardoso
succeeded in passing some important constitutional reforms during 1995, but the process
has lagged since then. The only exception was Cardoso's success in achieving a
constitutional amendment allowing him to stand for re-election.

        Congress is extraordinarily fractious, greatly increasing the president’s difficulties.
The lower house contains no fewer than 16 political parties, the largest of which controls
only 20% of the seats, and all of which are undisciplined. Opportunistic deputies often
follow the wishes of powerful local interest groups or state governors rather than federal
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party leaders. Moreover, more than 40% of the 594 legislators have switched parties at
least once since the last election, in many cases provoking charges of corruption.

       The economic crisis of 1997 sorely tested the cohesion and effectiveness of the
government coalition. Paulo Maluf, leader of the right-wing Progressive Party (PPB) and
Senate President Magalhaes (both usually staunch allies of the president) both criticized
the government’s responses.

        The leader of the PT, the former metalworker Luis Inacio da Silva (known as Lula)
who was Cardoso's main rival in the 1994 elections, benefited from the corruption scandals
and the impeachment of Collor. The PT's fortunes waned for a period after that, but it
performed respectably in the November 1996 municipal elections and stands to benefit
from the economic crisis of 1997 and expected recession of 1998. The municipal voting
presented a mixed message for Cardoso. Most significantly, rather than supporting
Cardoso’s chosen candidate in the mayoral election of São Paulo, Brazil’s largest city,
voters gave Celso Pitta of the conservative PPB a convincing win. Having defeated
Cardoso's candidate in the first round of voting, Pitta comfortably beat Luiza Erundina of
the PT in the second round. The outcome was a substantial boost for Maluf, the outgoing
mayor. The PPB was overall the biggest winner of the elections, doubling its control of
large cities from 7 to 14, but Cardoso's PSDB also increased its share of mayors in the
major cities.

        Since the re-institution of democracy in 1990, the military leadership has shown little
interest in regaining political power. However, military leaders have issued veiled warnings
because of their extreme disappointment at the government's conduct. The military is
involved in economic policy-making and has accepted austerity measures reluctantly. It
remains politically important because of its intelligence activities and its participation in
agrarian reform. The constitution confirms the military's position as the guardian of law and
order. The civilian government has refrained from punishing members of the military or the
security apparatus for excesses, such as the abuse of political prisoners during anti-
subversive campaigns.

        Other influential groups are found in the Roman Catholic Church, labor, and
business. Evangelical missionaries have also made inroads, especially among the poor.
While they preach an extreme right-wing message, their effect is unclear. The Catholic
Church exerts considerable political influence despite the Vatican's efforts to curb its
activism. Local church members are working with political activists on the left, and have
been involved in land conflicts. The traditionally weak labor unions are gaining influence
and constitute an effective force opposed to austerity policies. Business interests,
especially from the São Paulo state business community, are well-represented in the
government, although business has been increasingly critical of national economic policies.


       Cardoso has built on the reforms initiated by Collor in 1990. During 1995, both
houses of Congress agreed to amend the constitution to allow private investment in the oil
industry, breaking the monopoly held by Petrobras since 1953. Rigid controls on the oil
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industry have been relaxed for the first time in the nation’s history, allowing foreign
companies to acquire stakes in oil exploration and production operations. Congress also
voted to end the state telephone monopoly, erase discrimination against foreign
companies, and allow private companies to sell piped natural gas. The ban on computer
imports was lifted in October 1992; the stock market is open to foreign investors; regulatory
discrimination against foreign companies is being stripped away; import tariffs are lower;
and the privatization program is booming. Cardoso has aggressively accelerated
privatization despite substantial political opposition, extending it to the energy, transport,
telecommunications, banking, and mining sectors. Individual initiatives include the
government’s decision to refinance the state of São Paulo’s $47.2 billion debt by privatizing
Banespa, the state bank; Votorantim, Brazil’s largest private business group, paid
$2.73 billion for a controlling stake in CPFL, the state-owned electricity distributor in São
Paulo; Cataguazes Lepoldina, a private company, purchased Energipe, a Brazilian state-
owned electricity distributor, for $524.6 million, giving it an 86% stake in the company. In
all, the states of São Paulo and Mato Grosso sold three electricity distributorships. In
addition, Brazil’s states and municipalities compete actively for investments, offering
attractive incentives.

         Brazil's opening to foreign competition in the 1990s has stimulated major changes
in previously protected industries. Companies have been forced to restructure and cut
costs. The impact of the huge privatization program has been a massive infusion of
foreign capital and technology, prompting important infrastructure renovations. As a result,
productivity in São Paulo state rose by more than 30% during 1990–1997. On the other
hand, the economic recovery and the government's commitment to reform are fragile, as
the traumatic events of 1997 underlined. In 1995, the government mismanaged the
devaluation in March, it flirted with protectionism in mid-year, and it announced a massive
bank bailout which it later abandoned. In addition, the government became embroiled in a
bitter dispute with Raytheon, whose $1.4 billion contract for a radar system in the Amazon
was tarnished by influence-peddling charges. Furthermore, doing business in Brazil is
expensive as a result of high wages, taxes, interest rates, social security costs, inefficient
ports, and a poor educational system that requires many companies to educate their own

        Reflecting these concerns as well as the realization that large budget and current
account deficits are unsustainable, Brazil has experienced considerable market volatility
since mid-1997. Brazil was one of the worst affected emerging countries with respect to
international bond markets and stock markets. However, markets were temporarily
reassured by the government’s impressive austerity package in late 1997, as well as by its
clear determination to press ahead with privatization. In 1997, the government pushed
through the sale of CVRD, one of the world’s largest mining companies, despite numerous
obstacles including demonstrations, lawsuits, and political attacks. CPFL was sold in
November 1997 at an unexpectedly high price, in a crucial sign of investor confidence at
the height of the financial crisis.

        Foreign investors have been attracted by privatization and by growing confidence in
Cardoso’s policies. Direct foreign investment during 1995 was $4.9 billion, and climbed to
$9.4 billion in 1996. During 1996–1997, a long list of companies announced substantial
new investments. Foreign direct investment in 1997 was estimated at $17 billion, putting
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Brazil second in the emerging markets league after China. Despite the slowing of growth
and the new uncertainty arising from the events of 1997, major corporations are not

       Foreign direct investment is dominated by auto manufacturers; the automotive
sector accounted for 40% of foreign direct investment in 1995–1996. In 1997, several
major automobile manufacturers made commitments to construct plants totaling
$4.95 billion. The smaller mining sector has seen impressive growth. During 1996, more
than 20 foreign mining companies announced investments totaling $2.5 billion, compared
to an annual average of $40 million in mining investments during the previous five years.
The mining industry will be boosted even more by the sale of CVRD, which should bring a
new wave of capital and expertise to the industry.

        Environmental concerns pose growing problems for business, both foreign and
domestic. Increased public awareness of environmental issues and the rise of the Green
movement have affected some business interests. In São Paulo state, for example, strict
zoning regulations restrict the location of industrial plants. Environmental concerns
sometimes prevail over private interests, and the government is increasingly trying to
attract companies that contribute little pollution.

       Labor conditions are mixed. Workers are in surplus and move freely in search of
jobs. While skilled labor is in short supply, training programs can be effective. On the
other hand, industrial relations have deteriorated. Frequent strikes and industrial violence
threaten business. While most turmoil occurs in the public sector, aggressive strikes
against foreign multinationals can occur, as in a violent 50-day strike against Ford in 1990.

        Also troubling is the cumbersome and corrupt bureaucracy. Businesses must
sometimes bypass normal channels and seek help from top-level government officials.
Businesses also must use the highly specialized despachante system. For a fee, a broker
will see that the proper papers are signed and moved more rapidly through the
bureaucracy. Nepotism, conflict of interest, and excessive benefits exist throughout the

        The fast-growing textile and tourism industries in the northeast offer examples of
the attraction of overseas investors. The northeast is growing rapidly, backed by federal
incentives for investment, proximity to the US and European markets, cheap and abundant
labor, and a growing internal market. Since 1990, when tariff and import barriers began to
decline, textile manufacturers have been scrambling to become internationally competitive.
An influx of foreign investors has transformed northeastern Fortaleza into a bustling
clothing and textile center. Tourism in the depressed northeast has also surged, prompting
predictions that tourism will be the largest industry in that region by 2000.

        Serious barriers to investment remain, especially in the northeast. The reputation of
northeastern states for corruption and conservative politics dissuades some investors.
Poor education standards make it difficult to assemble a skilled work force. In addition, the
region's infrastructure is poor, and tourism has been hampered by a lack of adequate
transportation links. To improve the country’s system of highways and roads the

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government franchised more than 1,000 kilometers of roads to private initiatives in 1997;
the government plans to grant five times that amount by 2000.

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                                      SECTION B
                                   POLITICAL ACTORS

The numbers below summarize the data for this report’s risk forecasts. A +100 indicates maximum
support and a -100 indicates maximum opposition. Numbers in parentheses indicate the
importance of neutral actors. Asterisks indicate actors described in this section.

                                  MOST                                            RESTRICTIONS ON:
  ACTOR                        Cardoso                     TURMOIL             INVESTMENT     TRADE

  Fernando Henrique                 +75                          -75              -100         -36
      Cardoso (President)*
  Fernando Collor de                -16                           -9               -9           -9
  Luis Inacio da Silva*             -75                           -                +8          +18
  Democratic Labor Party             -9                          -12               -8           -8
  Democratic Movement               +16                          -48              -18          -18
      Party (PMDB)*
  Domestic Business*                +60                          -75              -64          -32
  Itamar Franco*                    -50                          -16              +4            -4
  Labor*                            +9                           +27              +36          +36
  Landless Peasants*                -48                          +64               -             -
  Liberal Front Party               +40                          -48              -36          -36
  Paulo Maluf*                      +16                          -12               -8           -8
  Military*                         +64                          -64                -            -
  Social Democratic Party           +75                          -60              -48          -36
  Workers Party (PT)*               -75                          -18              +18          +18

  Probability Range              50%-60%                   12%-22%              14%-24%      23%-33%

                                                                               1-Apr-1998 BRAZIL B-1
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 co-founder, PSDB; former member, PMDB... EDUCATION: sociology, University of São
Paulo; University of Paris... PREVIOUS EXPERIENCE: professor, University of California at
Berkeley and Cambridge; senator (1983–1994); foreign minister; minister of economy and
finance (1993–1994).

        Cardoso was born into a military family, trained as a sociologist, and later taught at the
University of California and at the University of Cambridge. His work focused on the claims
that Latin America's underdevelopment resulted from its dependence on capital and
technology from the US and Europe. His links with the left disturbed the military rulers in the

        As finance minister for nearly a year under President Franco, Cardoso was credited
with patiently negotiating an anti-inflation package that won broad support in Congress. He
and his party also benefit from a reputation for honesty. Their moderately leftist policy goals
include social welfare reform and income redistribution. Cardoso's advantages come from his
experience and his contacts in Congress. As finance minister, he persuaded Congress to
back his economic policies despite the extreme weakness of President Franco. The success
of the policies allowed him to win the October 1994 presidential election bolstered by his
reputation as a conciliator and coalition-builder.

        Cardoso's record in office has been mixed. Part of the problem is his personality; he
appears more passive and deliberate than activist. He is a reluctant free market reformer,
having only partially abandoned his earlier left-wing ideology. During his first year in office, he
mismanaged a devaluation, nearly blundered into a regional trade showdown, and at one
time seemed ready to waste billions of dollars on bailing out a bank. Despite his talk of
reform, he has been slow to address the fundamental cause of inflation: government
spending to support state industries. His second year in office was largely focused on
amending the constitution so that he could run again in 1998, while the second half of 1997
was taken up by the threat of financial crisis. Recognizing that his political popularity is based
on his success in taming inflation, Cardoso has made avoiding a devaluation-inflation spiral
his top priority. He quickly raised interest rates and devoted billions of dollars in foreign
exchange reserves to propping up the real. His recent austerity measures have produced
some decline in his popularity ratings, although most voters still remain convinced that he is
the most reliable guarantor of low inflation. However, financial traders are disappointed with
his performance, particularly his failure to follow through on reforms that would place the
government's finances on a more stable basis.


BIRTH DATE AND PLACE: August 12, 1949; Rio de Janeiro... SIGNIFICANT
AFFILIATIONS: founder, National Reconstruction Party (PRN) (1989)... EDUCATION:
economics, University of Brasilia... PREVIOUS EXPERIENCE: mayor, Maceio (1979);
member, Chamber of Deputies (1982); governor, Alagoas (1986); president (1990–1992)...
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OTHER INFORMATION: member of five political parties since 1980; removed from
presidency by Senate for official misconduct (1992).

        Collor's political future is uncertain. His performance during his two years as president
was mixed. Initially, he was criticized for poor management and a confrontational style, but
during 1991 he appeared to be learning from his mistakes and he adopted a more conciliatory
approach. He is credited with introducing important economic reforms aimed at deregulating
the economy and making it more internationally competitive.

         Collor was suspended from office on corruption charges in September 1992. He was
impeached in December 1992 and subsequently resigned. His hopes of a quick political
rehabilitation were dashed when the Senate voted to ban him from politics until 2001.

       Collor's fortunes improved when the Supreme Court acquitted him of corruption
charges at the end of 1994. Collor is still banned from holding public office, but allies may
campaign for congressional amnesty from the ban. Even if this ban is not lifted, Collor is
young enough to compete in presidential and gubernatorial elections after 2001. He is living
in Miami and apparently planning a comeback for 2002, possibly by running for governor of
Alagoas again, where he remains popular.


CURRENT POSITION: member, Chamber of Deputies... BIRTH DATE: 1946...
worker; president, metallurgical workers union; president, PT (1980–1987); unsuccessful
presidential candidate (1989 and 1994)... OTHER INFORMATION: popularly known as

         Lula, a former assembly worker in a Volkswagen plant and now a federal deputy,
solidified his political status by a second-place finish in the 1989 presidential election. As
founder of the PT in 1979 and as the most prominent spokesman of the São Paulo state
labor movement, he was primarily responsible for labor's push for higher wages during 1980
and 1981, suffering repression and jail for his efforts.

        Lula led the impeachment campaign against Collor during 1992 and became a
primary beneficiary of Collor's removal. As the only leading political figure untainted by
corruption scandal or ties to Collor, he became the early front-runner in the 1994 presidential
election. However, his popularity declined sharply during the election campaign and he
wound up a distant second to Cardoso, winning barely 25% of the vote. His precipitous loss
of support reflected early overconfidence, apathy among PT members, and his failure to
understand the overwhelming public yearning for an end to inflation.

       Despite his background of left-wing activism, Lula's record as a congressional deputy
suggests a willingness to support moderate and pragmatic policies. He concedes that Brazil
must encourage genuine free market enterprise by ending subsidies and establishing tougher

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antitrust laws before attempting more radical socialist policies. He has proposed an alliance
with a more centrist party and has even praised the military.

        Lula formally declared his presidential candidacy in December 1997, although his
enthusiasm for another active campaign is suspect. He has been cleared of some corruption
charges, which threatened to sideline him, and is now free to make a run against Cardoso as
the candidate of the PT. Lula is one of the most widely recognized politicians in the country,
and is one of the few politicians who has a reasonable chance of defeating Cardoso. He
consistently ranks second in opinion polls behind Cardoso, attracting support of about 25%.


FULL NAME IN NATIVE LANGUAGE: Partido Democrático Trabalhista... CONSTITUENCY:
 urban poor; strong support in Rio Grande do Sul and Rio de Janeiro... WHEN FORMED:
June 26, 1980... SHARE OF LEGISLATIVE SEATS: 4% in the Senate; 4% in the Chamber
of Deputies.

        While the PDT, along with the PT, was a big winner of the November 1988 local
elections, its support has subsequently declined sharply. The PDT depends on the charisma
and popularity of its leader, Leonel Brizola. Unlike the PT, the PDT is more an instrument for
Brizola's ambitions than an ideological party with a distinct identity and grass-roots support. It
has been struggling as a result of Brizola's disappointing performance in the 1989 elections.
The party was briefly re-energized by Brizola's easy win in Rio de Janeiro's state elections in
late 1990, but it has been weakened anew by Brizola's subsequent loss of popularity. It
turned in a disappointing performance in the 1994 and 1996 elections. The PDT has limited
appeal to an increasingly youthful electorate.


FULL NAME IN NATIVE LANGUAGE: Partido do Movimento Democrático Brasilieiro...
CONSTITUENCY: middle-class center-left... WHEN FORMED: December 1979–March
1980... SHARE OF LEGISLATIVE SEATS: 27% in the Senate; 17% in the Chamber of

        The PMDB had been seriously divided over how to approach the upcoming
presidential elections, but in early March 1998 its assembly voted to support Cardoso. Former
President Franco, who affiliated with the party in 1997, former President Sarney, and Senator
Roberto Requiao had all hoped to become the party’s candidate. However, the majority of
party delegates supported Cardoso. They will consider alternative candidates only if the
economy deteriorates badly.

        Although the PMDB’s support is enthusiastically welcomed by Cardoso, it comes at a
price. The president has been challenged under electoral law for illegally using the powers of
the government to influence the PMDB delegates to support him. The legal threat is likely to
dog Cardoso for most of the campaign.
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         Although the PMDB remains one of the country’s largest parties, it is badly split
among several factions and lacks coherent leadership. It swept the November 1986 elections
for state governorships and the national Congress, benefiting from the popular price freeze
and the economic policies promoting growth instituted in early 1986. However, the PMDB has
been in decline since then. The party suffered defeat in the November 1988 local elections,
signaling an end to its period of dominance. Its subsequent performance in the 1989
presidential election was dismal; party leader Ulysses Guimarães won barely 3% approval
ratings in polls, and the party was badly divided after its poor showing and the subsequent
battle over whom to support in the second round of the election. The PMDB has paid heavily
for the 1986 collapse of former President Sarney's economic policies that included a price
freeze and the abolition of wage indexation. It lost every state capital in its southern
heartland. Its presidential candidate, Orestes Quercia, polled less than 5% of the votes in

          Since the 1994 elections, the party has further divided over its position with regard to
Cardoso's government. Its president pledged the PMDB's support in early 1995, giving
Cardoso ostensible control over the party's valuable 128-seat bloc in Congress. Cardoso was
a member of the PMDB until 1988, when he left to co-found the PSDB; this link and shared
views on social policy had always made Cardoso hopeful of obtaining PMDB support. In
return for its support, the PMDB is given a voice on economic matters and has been allowed
to fill some high government posts. However, the party is divided into four wings along
regional and personal lines; in any event, its loyalty to Cardoso is fragile. One powerful
faction of the party remains firmly opposed to cooperation with the president and has
opposed Cardoso in Congress over key issues. Some factions regularly vote against the
government if their interests are threatened.


         The Brazilian business community, the leading section of which is the Federation of
Industries of São Paulo State (Fiesp), is a major force in policy-making. Business suffered
under Collor's economic program. The president of Fiesp claimed that many bankruptcies
and dismissals resulted from Collor's austerity program. Franco's inauguration did not
appease business concerns about weak political leadership, ineffective economic policies,
government debt, taxes, and the restrictions the 1988 constitution imposed on business.
Franco's attacks on profit-hungry business leaders and his inconsistent public statements
infuriated members of the business community, who launched a massive protest in early
1993, forcing him to reduce new tax proposals.

         Business leaders have generally supported Cardoso's government. Many actually
helped elect him by refraining from price increases during the campaign period. However,
Cardoso's reliance on tight credit policies to combat inflation and support the real has given
rise to harsh criticism from the business community. In 1996, a group of business leaders
called on the government to relax its tight monetary policies and speed up approval of
reforms, in an implicit criticism of Cardoso. Fiesp has attempted to establish cooperative
relationships with international firms.
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CURRENT POSITION: ambassador to OAS... BIRTH DATE AND PLACE: June 28, 1931;
Juiz de Fora, Minas Gerais... SIGNIFICANT AFFILIATIONS: member, PMDB (1974–1985);
member, PL (1986–1988); member, PRN (1989)... EDUCATION: civil and electronic
engineering, School of Engineering of Juiz de Fora, Minas Gerais... PREVIOUS
EXPERIENCE: civil engineer; mayor, Juiz de Fora (1967–1971 and 1973–1974); senator
(1974 and 1982); vice president (1989–1992); president (1992–1994).

        Formerly Collor's vice president, Franco became president when Collor resigned
during the second half of 1992. Franco is known less for his knowledge of economic issues
than as a crusader for humanitarian causes and a supporter of nationalist, populist initiatives
and state intervention.

         Franco was always a reluctant president. He even offered to resign and call early
elections in late 1993. By the time he left office he had increased his popularity, partly
because of the success of Cardoso's policies in reducing inflation and partly because of his
reputation for honesty. He has announced that he will enter the 1998 presidential race, but
his erratic behavior rules against his chances of victory. During 1996–1997, he emerged as
one of the leaders of the fight against privatization of the CVRD along with another former
president, Sarney. His campaign may enhance his public image and bolster his plans to run
for the presidency.


           Rampant inflation during 1987–1994 aroused widespread disillusionment within labor
as wages fell behind the rise in the cost of living, generating labor militancy. Labor has
aggressively criticized IMF-backed austerity policies as too harsh on workers and has backed
its criticism with strikes. Lula's impressive showing in the 1989 presidential election further
energized workers, many of whom feel victimized by economic policies.

        Backed by the Roman Catholic Church and guided by effective leaders, the skilled
workers of São Paulo state have become better organized and more militant. Their efforts
have been aided by the organizational strength of both the General Confederation of Workers
(CGT), which is politically close to the PMDB, and the United Confederation of Workers
(CUT), which is controlled by the PT. Lula's nomination as a presidential candidate in 1994
and his early popularity showed the labor movement's enormous progress in gaining political
power. Ultimately, however, many voters supported Cardoso because of his success in
reducing inflation. The collapse of the oil-workers strike during 1995 was a bitter blow to labor

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         The plight of landless peasants has won increasing support in Brazil, partly due to the
efforts of the charismatic and shrewd Joao Pedro Stedile, head of the National Movement of
Landless Rural Workers (MST). The group, which charges the government with delay in land
redistribution efforts, led a two-month protest march on Brasilia in spring 1997 that galvanized
popular support. The marchers were joined by thousands of trade union members, civil
servants, teachers, and unemployed workers who oppose Cardoso’s economic polices; the
Catholic Church also joined in the criticism of Cardoso. Brazil’s skewed distribution of land is
the major reason for chronic rural violence. Members of the MST have been squatting on
ranches throughout the country, protesting unequal land distribution and violence against the
landless peasants by ranchers.


middle and upper classes; owners of small businesses... WHEN FORMED: June 1984...
SHARE OF LEGISLATIVE SEATS: 30% in the Senate; 21% in the Chamber of Deputies...
OTHER SIGNIFICANT INFORMATION: center-right orientation.

          The PFL was the junior partner in the formal government alliance that ended in 1987
when a bitter power struggle erupted between the PMDB and the PFL. The struggle was
mirrored by deep divisions within the PFL over its stance toward Sarney’s government. Some
leaders insisted on backing Sarney, while grass-roots supporters urged a complete break with
the unpopular government in order to improve the party's electoral chances. The PFL, which
initially supported Collor, suffered because of his impeachment and resignation in the face of
corruption charges.

         Despite its position as the second-largest group in Congress and its status as the
main right-wing alternative to the PMDB, the PFL fared poorly in November 1989. Even
though the party was deeply divided between supporters and opponents of Sarney, many
associated the PFL with his government. The party attracted many new voters in the 1990
local elections, however, and is positioning itself as a primary contender for the allegiance of
center-right voters. In 1994, party leaders formed an electoral alliance with the PSDB and the
smaller Brazilian Labor Party (PTB) to support the PSDB's presidential candidate, Cardoso.
The PFL remains a key congressional supporter of Cardoso. While the party was successful
in only a single state in the 1994 gubernatorial elections, it has emerged as the most coherent
force in Congress and as a key political victor of the 1994 elections. Its powerful leader,
Magalhaes, was elected president of the Senate in early 1997.


BIRTH DATE: 1932... SIGNIFICANT AFFILIATIONS: leader of the Progressive Party
(PPB)... PREVIOUS EXPERIENCE: mayor of São Paulo (1993–1997); appointed
governor of the state of São Paulo by the military regime in the late 1970s.
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         A highly influential populist, Paulo Maluf is leader of the PPB. He is an important, if
erratic, supporter of Cardoso. He is a former mayor of São Paulo, and a perennial
presidential hopeful. Although formally a member of the ruling coalition, he did not fail to
launch a bitter attack on the government’s austerity policies in 1997. He recommended
protectionism and aggressive export promotion as an alternative path. Maluf was widely
expected to run for governor of São Paulo state in 1998, but his sharp attacks on Cardoso
gave rise to speculation that he might consider a run for the presidency if the economy does
not recover. His subsequent reversal and declaration of support for Cardoso’s reforms has
not entirely quelled such speculation. Although he appeared to rule himself out as a
presidential candidate in 1998, it is still possible that he is positioning himself for a run if an
economic crisis weakens Cardoso’s candidacy.


         Constitutional provisions guarantee the military's authority and power. Furthermore,
the corruption scandals in the government and Congress, combined with growing
disillusionment with the political system, contribute to a nostalgia for the years of military rule.
The armed forces have maintained their influence partly because they have not suffered a
military defeat and because the leaders of the military government were not taken to court for
their mistreatment of civilians. An agreement not to initiate such a campaign was crucial in
gaining the military's acceptance of the transition to democracy. Even the most radical left-
wing politicians have refrained from confronting the generals over past human rights abuses
or suggesting that the military should shun politics.

         Since the 1960s, the military has developed a large and sophisticated intelligence
service, which is charged with maintaining internal security. Political surveillance is no longer
part of the service's mandate, but it continues to monitor rural unrest and some strikes.

        Military leaders are publicly committed to democracy, preferring to wield influence
behind the scenes. However, several corruption scandals and the weakness of Franco’s
government provoked military leaders to warn Congress to purge itself. Officers reminded the
nation that the military is a source of reliable leadership in times of turbulence. The military
also retains considerable influence in economic policy-making. In response to military
pressure, Franco hastily abandoned plans in late 1993 to cut the military budget. The
president also exempted the military from budget cuts in 1994.


FULL NAME IN NATIVE LANGUAGE: Partido Social Democrático Brasiliero...
CONSTITUENCY: a range of voters from socialists to progressives in business... WHEN
FORMED: 1988, as a splinter group from the PMDB... SHARE OF LEGISLATIVE SEATS:
17% in the Senate; 19% in the Chamber of Deputies.

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        Longtime rifts within the PMDB led Senator Mario Covas and Cardoso to found a
breakaway group, the PSDB, in mid-1988. The group includes former prominent members of
the PMDB, mostly leaders from the prosperous southern states. The popularity of its leader,
Cardoso, plus its position as the third-largest party in Congress ensures the stature of the
PSDB as a powerful party. However, since the 1994 elections the party has been
increasingly divided between its left wing, which is committed to social reform, and a more
cautious center group.

         In 1994, the PSDB found an attractive and viable presidential candidate in Cardoso.
The PSDB attracts wide popularity because of its reputation for clean government and its
moderate left-wing policies, which include social welfare reform and income redistribution.
The PSDB’s leaders forged a key alliance with the small PTB and the larger center-right PFL,
giving Cardoso a political base and some support in the northeast, where he is weak. The
PSDB also scored well in gubernatorial and congressional races in 1994, winning six of the 27
contests, including the governorships of the three most important states that contain 60% of
Brazil's GDP. São Paulo state was won by Cardoso's staunch ally, Covas. The 1996
municipal elections similarly gave the PSDB solid support, although Cardoso's favored
candidate lost the race for mayor of São Paulo.

        The economic crisis of 1997 was mirrored within the PSDB, undermining its position in
the 1998 elections. During 1997, the party suffered several resignations from its national
executive, including that of Sergio Motta, communications minister and a key party leader.
Another leading member, Ciro Gomes, left to launch his presidential candidacy at the head of
a new center-left coalition. The party was also hit by the decision of Covas not to seek re-
election in 1998; Covas is governor of São Paulo and was the PSDB’s best chance of
retaining power there. The party is losing strength partly because Cardoso is not playing
much of a role as party leader, fueling speculation that the party will lose between 10 and 20
deputies in the 1998 elections.


mass-based; strength is in the independent labor movement of São Paulo state... WHEN
FORMED: 1979... SHARE OF LEGISLATIVE SEATS: 6% in the Senate; 10% in the
Chamber of Deputies... OTHER SIGNIFICANT INFORMATION: closely associated with the
United Confederation of Workers.

        The party has undergone self-evaluation following its 1994 presidential election
defeat. Some members want to cast off the PT's radical image and appeal to a broader
cross-section of Brazilians, but most leaders are committed left-wingers. The PT has
developed an impressive record in local government. It is seriously divided, however,
between moderate and hard-line factions, and it suffers from an inability to offer an alternative
strategy to the government’s popular plans to combat inflation.

        The PT, which grew out of the metal workers' struggles during 1978–1981, became
nationally prominent through its success in the November 1988 municipal elections. Easily
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defeating the PMDB, it won several key industrial cities, including São Paulo and two other
state capitals, as well as many smaller cities. It ran a close second in several other important
centers. Its rapid emergence as a national political force shocked the government and party
leaders; it propelled Lula, the party’s leader, into prominence in the presidential race.
Although defeated in the second round, Lula's success in winning 47% of the votes initially
strengthened the position of the PT. However, the party collapsed in the 1990 local elections,
winning no governorships and suffering a decline in its congressional delegation. It continued
to weaken in 1991 and early 1992, as it was preoccupied with a search for a new role in a
world marked by the collapse of Communism. It revived later in 1992 when it emerged at the
forefront of protests against Collor, a position that paid off in increased public support. The
party won elections in four major state capitals in the November 1992 municipal elections, and
Lula seemed on the verge of a successful run for the presidency in 1994.

        Despite Lula's disappointing performance in the 1994 election, winning barely 25% of
the national vote, his party made some important gains. The PT elected its first state
governors in 1994, and continued to grow quickly overall, aided by its reputation for honesty
and by public disillusion with traditional politicians. The PT's congressional delegation of
55 members forms the solid nucleus of left-wing opposition to Cardoso. The PT also scored
notable successes in the 1996 municipal elections, as voters rewarded its effective local
government officials. The PT boasts the most coherent ideological position of any party in
Congress, including a consistent and credible stance against corruption. However, it is still
judged by many voters as too radical for national office.

B-10 BRAZIL 1-Apr-1998
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                                     SECTION C
                       18-MONTH FORECAST OF REGIME STABILITY

                                   Cardoso                          Lula                     Other Opposition
 REGIMES & PROBABILITIES:          55%                              25%                      20%

                                   Support/Opposition: Cardoso

  HIGH----                                                                  *Cardoso, PSDB
       S                                        *PFL                            *Military
       P                                                                                     *Business
       O                            *Maluf
       T                                  *Labor                                *PMDB
                         *Collor                           *Peasants
  HIGH----                                     *Franco                      *Lula, PT
                Low                      Importance of Key Actors                               High


        Cardoso's October 1994 election victory was secured by winning more than twice
as many votes as his closest competitor, Lula, giving him a strong base of credibility and
legitimacy. He remains the favorite in the national elections to be held in October 1998.
He has overcome one of his major barriers to continued rule, having succeeded in
amending the constitution to allow him to stand for a second term. He is expected to
prevail despite a loss of popularity stemming largely from deteriorating economic

       Since the key to Cardoso's strength is his success in defeating inflation, it is
essential that he keep inflation low in the months before the election. Although his
popularity ratings have declined, the electoral repercussions for Cardoso from the austerity
measures may be minimized because of the national sense of urgency regarding the
economy. Cardoso still scores well above his potential rivals in opinion surveys,
underlining the challenges facing the divided and discredited opposition. Opposition

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candidates will use the economic crisis to attack Cardoso, but their effectiveness is blunted
because they all lack an alternative economic strategy.

         Cardoso is well aware that his electoral success rests on his ability to contain
inflation and avoid devaluation. As long as the key to re-election is low inflation, Cardoso
will keep his lead. He also has a powerful electoral coalition behind him composed of his
own PSDB, the right-wing PFL, the PPB, and a majority of the PMDB. As long as Cardoso
can maintain economic stability, even at the expense of a substantial economic slowdown,
he is likely to win re-election.


        Lula formally declared his candidacy at the head of the PT in December 1997. He
is the best-positioned of all the challengers to capitalize on Cardoso’s problems. Cardoso’s
popularity ratings had dropped to 50% even before the austerity measures of late 1997
because many Brazilians feared unemployment and were angered by allegations of vote-
buying in Congress and other scandals. The corruption charges swirling around Cardoso
are damaging, as he has built his career on a reputation for personal honesty. In contrast,
the PT has built an admirable record of local government, enhancing its credentials as a
party capable of honesty in power.

        If the government devalued the currency, the political and economic environment
would become immeasurably more difficult. The downturn could benefit Lula, who has
established himself as the leading pragmatic left-wing critic of government policies. Also,
Cardoso’s best chance is in a two-way election with Lula. The emergence of rival center-
left candidates could help Lula by splitting the centrist vote.

        On the other hand, Lula’s chances of gaining the presidency are largely dependent
on a serious economic decline. The PT is internally divided, reducing its ability to mount an
effective campaign. Lula himself has shown uncertain enthusiasm for running an
aggressive campaign. Moreover, the party seems unable to break much above the 25%
support level and is widely viewed skeptically as a potential party of national government.


       The fragmentation of politics and the likelihood of an extremely volatile environment
creates the chance of a more aggressive left-wing challenger winning the 1998 elections.
The more moderate Lula was the first to declare, but many others will join in, especially if
Lula carries out his threat of abandoning the campaign. One likely alternative is Ciro
Gomes, former finance minister and governor of Ceara state. Gomes left the PSDB in
1997 to join the much smaller Social Progress Party (PPS), presumably to launch his own
presidential candidacy. A rival candidacy by Gomes would split the center-left vote,
drawing support from dissident left-wing factions within the PSDB, and undermining

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Cardoso’s coalition. Gomes has been sharply critical of Cardoso on sensitive issues such
as reducing unemployment, but his anti-inflation credentials are strong, an essential
attribute for a presidential candidate. Nevertheless, Gomes lacks a reliable political base,
and has not yet presented a clear alternative platform.

         Another possibility on the center-left is former President Franco. He also has a
good reputation as an inflation-fighter, and his opposition to the controversial privatization
of CVRD lends him a nationalist, populist appeal. Maluf is probably waiting to see if a
serious economic crisis develops, in which case he could present himself as the one
politician with the skills to resurrect the economy. If the government is forced into a
devaluation, the ensuing volatility could pave the way for an opposition challenger to come
to the forefront, possibly a new figure from outside the political establishment.

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                                          SECTION D
                               18-MONTH FORECASTS OF TURMOIL
                             UNDER THE THREE MOST LIKELY REGIMES

                                          Cardoso                            Lula                    Other Opposition
 REGIMES & PROBABILITIES                  55%                                25%                     20%
 Turmoil                  Moderate        Same                               SLIGHTLY MORE           SLIGHTLY MORE

                                     Support/Opposition: Turmoil


     S                                                                                *Peasants
     P                                      *Labor
     P                                      *PT
            Maluf, PDT*    *Franco                           *PFL, PMDB               *Military
                                                             *PSDB            *Business, Cardoso

               Low                      Importance of Key Actors                                   High

        CURRENT: MODERATE. Economic problems have provoked sharp outbreaks of
unrest, reflecting rising social tensions and the heavy personal costs of the austerity program.
The resulting outbursts usually take the form of strikes, demonstrations, rural protests, or
urban crime. Persistent violence is threatening to destroy the tourist industry in Rio de Janeiro.
Crime and violence in the impoverished sections of the city are beyond the government's
control, and kidnappings and violence between drug gangs are spreading to some of the city's
most wealthy neighborhoods. Tourism declined by more than 50% during 1988–1996, largely
because of Rio de Janeiro's spiraling crime rate. One serious related problem is widespread
police violence, which has eroded public confidence in the authorities.

        Economic policies also provoke disorder. Violent protests greeted the first privatization
in late 1991; bus strikes in São Paulo have disrupted travel; and supermarkets have been
ransacked by mobs in Rio de Janeiro. Oil workers went on strike in mid-1995 to protest
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constitutional changes and to demand pay hikes. However, the strike won little public support
and ended in failure. The year 1997 saw large, sometimes violent, protests against the
privatization of CVRD. Labor unrest in the industrial regions around São Paulo increased at
the end of 1997 following sharp slowdowns in the auto industry because of the effects of the
Asian currency crisis and ensuing austerity measures.

                                    TERRORIST INCIDENTS
TYPE OF INCIDENT     1992    1993      1994           1995           1996         1997        1998*        TOTALS
Assassinations         4       7        7              6              3             3           0             30
Kidnappings            6       3        6              6              5             2           0             28
Hijackings             0       0        1              0              1             0           0             2
Bombings               5       3        0              8              5             1           0             22
Facility Attacks       9       7        4              3              2             7           1             33
TOTALS                24      20        18             23             16           13           1            115
                                                                                                   *Provisional Reports
                                                                           Source: Pinkerton Risk Assessment Services

         Rio de Janeiro and São Paulo have been the sites of the worst incidents. Violent
outbreaks in Rio have included a revenge attack by 120 police officers that left 13 residents
dead, as well as the killing of a business executive by car thieves. These incidents led the
government to send the army into Rio de Janeiro at the end of 1994 to crack down on crime.
The army's arrival was widely approved. Soon after the army left, crime levels continued
unabated into early 1998. During 1996, the murder rate exceeded one per hour, easily placing
Rio and São Paulo among the most violent cities in the world. The killing of children who live
on the streets has attracted worldwide attention. Human rights groups charge that the
government deliberately overlooks this practice, claiming that shopkeepers in high-crime
districts pay policemen to kill children suspected of stealing.

       One feature of the crime wave has been an upsurge in kidnappings; 50 kidnappings
per month are estimated in Rio de Janeiro and São Paulo alone. Victims are usually business
leaders or socialites. Foreign executives generally spend heavily on security, reducing their

        The agrarian reform movement has led to occasional violence. Both peasants and
landowners have armed themselves in anticipation of new clashes over land redistribution. An
estimated 1,600 people were killed in land conflicts during 1964–1992. The killers of Chico
Mendes, an outspoken defender of the rain forest, were tried and sentenced, but such
effective action is unusual. Concern about rural violence has mounted since police killed more
than 10 farmers after an invasion of farm land in the northern state of Rondonia in mid-1995.
In December 1995, a local politician who had criticized police and landowners for the earlier
attack was shot and killed. Violent clashes between rural workers and armed farm employees
continued through 1996–1997. In spring 1997, a well-organized march by landless peasants
ended with a huge demonstration in Brasilia. In September, some 800 towns and cities were
the site of protests which were promoted by the Church, landless peasant leaders, and trade

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        In contrast to economically motivated kidnappings and other crimes, terrorist incidents
have occurred only sporadically. Brazil has had virtually no problem with domestic terrorism
since the mid-1970s, when the military destroyed a leftist group that operated with the
encouragement of Fidel Castro.

         Prior to the troubles caused by economic stress, Brazil had a long history of achieving
change through compromise rather than conflict. Turmoil was notably low during the period of
political transition in 1985 and 1986. Election campaigns in the 1990s have been similarly
peaceful. Even during the political crises of 1992, the constitution was strictly observed, the
military did not intervene, and no deaths occurred despite the thousands of public protests
throughout the country. The army took to the streets in Rio de Janeiro and staffed polling
stations after widespread fraud in the aborted local elections of October 1994, helping
maintain calm during the voting.


       CARDOSO: SAME. The incidence of strikes and demonstrations will continue as the
government tries to move forward with economic reforms and keep inflation low. Labor is
angry because wages have not kept pace with inflation. However, despite slow economic
growth, as long as inflation remains under control, the extent of violence will be restrained.

       No significant violence is expected to accompany the 1998 elections. The problems of
violence, corruption, and drug trafficking in major cities, especially Rio de Janeiro, will be much
more difficult to tackle. Achieving order will require attacking deep-seated social ills, reducing
the ownership of guns, and restoring confidence in the police.

         Rural violence will arise from tensions over the allocation of land and the deterioration
of living standards. The MST is becoming more organized and has called for an increase in
land occupations. Violent land conflicts will persist. The trial of the accused murderers of
Mendes may be the beginning of more vigorous government activity to police rural areas and
bring offenders to justice. The ties between some law enforcement officials and large
landowners tend to heighten violence and tensions.

         LULA: SLIGHTLY MORE. This regime would encounter more disorder, reflecting both
economic distress and tension between the new president and a fractious Congress. Lula’s
victory would result only from severe economic deterioration, including the possible traumatic
devaluation and spurt in inflation. In that case, the months leading up to Lula’s inauguration
would be tumultuous. After he took office in early 1999, the situation would calm slightly, but
difficult economic circumstances and high unemployment would be reflected in widespread
crime, conflicts with landless peasants, and other disorder. Crime and violence in Rio de
Janeiro and other cities would worsen.

        OTHER OPPOSITION: SLIGHTLY MORE. Political turmoil would increase
significantly, reflecting public dismay at the serious deterioration in the economy. This
government too might enjoy some respite after taking office, but serious economic problems
would continue to feed into persistent disturbances.
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                                SECTION E

                                               Cardoso                          Lula                    Other Opposition
 REGIMES & PROBABILITIES:                      55%                              25%                     20%
 Equity                      Moderate          SLIGHTLY LESS                    Same                    Same
 Operations                  High              SLIGHTLY LESS                    Same                    Same
 Taxation                    Low               Same                             Same                    Same
 Repatriation                High              Same                             Same                    Same
 Exchange                    Moderate          Same                             SLIGHTLY MORE           SLIGHTLY MORE

                    Support/Opposition: Restrictions on International Investment

      P                                  *PT                           *Labor
      O                  *Franco *Lula
   NEUTRAL   *Military
      P                          *Maluf, PDT          *PMDB
      S                      *Collor
                                                      *PFL             *PSDB                *Business

                     Low                          Importance of Key Actors                                 High


         The efforts to attract foreign investment must overcome formidable legal and
political barriers. The constitution explicitly discriminates against foreign capital. It gave
domestic companies privileged access to finance, exclusive operation in key strategic
areas, and preferential treatment in contracts. The constitution assures national
domination within the mining sector, allowing foreign companies to participate only in
association with a majority Brazilian partner.

                                                                                                  1-Apr-1998 BRAZIL E-1
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As president, Collor initiated                       Brazil: Foreign Direct Investment
substantial liberalization,            18.00
allowing foreign firms to enter        16.00
the equity markets, exempting          14.00
foreigners from capital gains          12.00

tax, opening the electronics           10.00
market, and allowing greater            8.00
foreign participation in the            6.00
privatization program.                  4.00
Cardoso has initiated
important additional
restructuring, some based on               1988 1989 1990    1991   1992   1993   1994 1995 1996 1997
constitutional amendments
approved by Congress.
Among the most important, the Congress has voted to end the state monopoly held by
Petrobras in the petroleum sector, allowing private investment for the first time since 1953.
Other reductions in discrimination against foreign companies include allowing the purchase
of majority stakes in mining projects, investment in the hydroelectric sector, and the ending
of the state monopoly in the telecommunications industry. The adoption of more
transparent regulations has helped streamline the establishment of a new venture, has
facilitated financing, and has reduced ownership restrictions. As a result of the reforms
achieved so far, particularly in the mining sector, the country’s economic potential has
attracted rapidly accelerating foreign investment, especially in 1994–1997. Even the
financial turmoil of late 1997 did not deter investors, who poured in a record $17 billion
during the year.

        Nevertheless, uncertainty about foreign investment remains, especially in the
telecommunications and energy sectors. Additional constitutional changes will be
necessary to allow conditions more favorable to foreign investors. Laws to regulate
competition are not in place and the pricing system needs major reform. Cardoso does not
intend full-scale privatization of either sector; he has pledged to keep the state's shares in
Petrobras above 50%.

        Until 1995, the state-controlled Telebras enjoyed a monopoly on telecommunication
services. The government’s ambitious program to modernize and privatize its huge
telecommunications system will eventually result in the creation of as many as six smaller
companies. As a first step, the government has introduced legislation to permit private
involvement in cellular telephones and satellite services. However, the proposed
concessions will be available only to companies in which at least 51% of the equity is


        CURRENT: MODERATE. Foreign ownership is still prohibited in some sectors,
including small computers, data processing, newspapers, television stations, and the

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generation of electricity. However, foreign ownership is now permitted in oil exploration
and mining ventures.

        CARDOSO: SLIGHTLY LESS. Cardoso is committed to reducing barriers to
foreign investors, within the limits Congress allows. The government has already moved to
open the computer sector, encouraging joint ventures with foreign investors. Foreign
partners may own 49% of voting shares and 100% of nonvoting shares and may still
qualify as Brazilian companies when bidding for government contracts and credits. In
response to these initiatives, large companies, including DEC, NEC, and IBM, have
announced partnerships with local companies to manufacture or distribute products.
Reduced restrictions in the oil and mining industries will also result in substantial new
foreign investment.

        Cardoso's government will interpret existing legislation as liberally as possible in
order to attract foreign investors. Certain sectors, such as information technology and
telecommunications, will be opened further. The extent of progress depends on the
constitutional revision process, and on the regulations and regulatory institutions that
emerge after the reforms are in place. In the absence of constitutional and institutional
change, the government can make only limited adjustments in its liberal interpretation of
existing laws.

        LULA: SAME. Lula moderated his hostility toward foreign investment during the
1994 election campaign. Despite his past rhetoric, once in office he can be expected to
avoid antagonizing foreign investors and driving away badly-needed foreign capital. While
the liberalization process might come to a halt, at least temporarily, it would not be

         OTHER OPPOSITION: SAME. This regime would be more interested in restoring
stability than in economic reform, at least initially. It would also be receptive to pressure
from domestic business to retain its privileges and protection. Any new liberalization would
be minimal, at best.


        CURRENT: HIGH. The government requires that at least two-thirds of
management be Brazilian. Firms may freely import personnel for managerial posts.
Among all employees, the proportion of Brazilians must be the same as among managers.
The government places no restrictions on hiring foreign laborers already in the country but
discourages importing low-skilled or technical workers. A stringent immigration law is
directed primarily at preventing the entry of political activists and has not been used to curb
the inflow of labor.

       CARDOSO: SLIGHTLY LESS. The government will encourage more foreign
competition in a bid to modernize and streamline the economy. Late in 1990, Collor
introduced a policy that reduced the domestic content requirement for foreign firms from
90% to 70%. Cardoso will continue changes along the same lines.

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         LULA: SAME. The 1988 constitutional assembly voted to limit government
purchases to Brazilian-owned suppliers, underscoring the desire of vested interests to
require businesses to buy from domestic sources. This government would be unlikely to
either tighten or ease restrictions.

        OTHER OPPOSITION: SAME. This regime would liberalize operations restrictions
slowly, if at all.


        CURRENT: LOW. The top corporate rate is 30%. Under equal conditions, foreign
and domestic capital receive equal treatment. Foreign firms are usually eligible for
financial incentives to invest in certain regions and economic sectors. Generous
government incentives have been offered to persuade companies to move to the north of
the country.

        CARDOSO: SAME. Collor encountered fierce opposition to his radical plans that
would have reduced federal taxes and returned substantial taxing and spending authority
to the state and local governments. Cardoso has nevertheless pursued similar goals,
pressing Congress to adopt constitutional changes that will devolve fiscal power to the
states. Any tax reforms will not discriminate against foreign business.

        On the other hand, Cardoso is determined to halt tax avoidance by foreign
companies and to increase revenue from corporate income tax. A corporate tax bill
introduced during 1996 attacks the system of transfer pricing, under which multinational
firms can manipulate the prices of goods transferred between operations in Brazil and
overseas in order to minimize their tax liability. The vigorous attack on transfer pricing is
motivated in equal measure by considerations of fairness and the need for revenue.

       LULA: SAME. This government would be unlikely to achieve tax reform. On the
other hand, it would not discriminate against foreign companies in any significant way.



         CURRENT: HIGH. Significant changes in repatriation restrictions occurred in 1989
and 1990. In 1989, the government initially tightened these restrictions, based on the
reported need to protect currency reserves. In mid-1989, the government moved to halt
profit transfers. Two months later, the Central Bank relaxed its rules by allowing dividends
to be transferred after a 60-day delay. Profits greater than average dividends were
retained, causing considerable distress among foreign companies that had previously
enjoyed stable rules allowing remittances of 12% of the company's registered capital
without a tax penalty. These regulations were further tightened in January 1990 in order to
prevent a run on the currency before Collor's inauguration and to counter the flow of

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dividends from subsidiaries to parent companies on 1989 profits. Profits, dividends, and
other remittances were delayed for four months rather than two months, and repatriation of
capital was delayed six months instead of four months. In May 1990, the government lifted
these restrictions but announced that the new ruling applied only to future operations. The
freeze on remittances was extended for 16 months.

         Reflecting the desire to attract new productive investment from abroad, repatriation
restrictions have been gradually liberalized. Foreign investors in equities, entering under
recently liberalized rules, face no withholding tax on capital gains and no minimum
repatriation period. Dividends are taxed at a 15% rate. Even during the serious bout of
speculation against the currency in 1997, the government did not resort to repatriation

        CARDOSO: SAME. Cardoso would prefer to ease remaining restrictions.
However, even though foreign exchange reserves remain abundant, because of the
currency’s vulnerability easing is not likely until structural reforms are in place. If the
government succeeds with its economic restructuring package and maintains the
confidence of international creditors, steady reserves will permit reductions in restrictions
on international capital flows over the longer term.

      LULA: SAME. This government would maintain current restraints and might
temporarily add new regulations in order to curb capital flight.

      OTHER OPPOSITION: SAME. This government would have little inclination or
leeway to reduce restrictions.


       CURRENT: MODERATE. The government has traditionally maintained strict
controls designed to protect the currency against speculation and to maintain hard
currency reserves. However, the increasing emphasis on allowing the operation of market
forces has brought about significant liberalization in this area as well.

        During March 1995, the government altered its floating rate system, as the real
came under increasing pressure after the devaluation of the Mexican peso. The most
important change involved switching to a formal system of floating bands, in which the real
is allowed to trade. The government has announced several changes to the exchange rate
bands since the real was introduced in July 1994. In early 1996, the Central Bank paved
the way for a possibly greater depreciation of the real, announcing a 7% adjustment in the
currency bands. The new band put the rate between $0.97 and $1.06 to the US dollar.
Currency traders accepted the latest alteration calmly, unlike the disruptions that
accompanied the devaluation of March 1995. During the rest of 1996 and into early 1997,
the real was devalued at around 0.5% per month despite growing pressure from exporters
to increase the pace of devaluation. However, the currency came under intense
speculative pressure in the second half of 1997 as the effects of Asian currency turmoil
spread to Brazil. The government was forced to spend around $10 billion of its foreign

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exchange reserves defending the currency in October-November, bringing them down to
about $50 billion. Reserves started to increase again in early 1998.

        Foreign capital inflows since 1994 have tended to buoy the real against the US
dollar, producing increasing problems for exporters. In 1995, Brazil ran its first trade deficit
since 1980, which was caused in part by the strong currency. The trade deficit widened in
1996 to a record $5.53 billion, and doubled in 1997 to $11.1 billion. As a result, exporters
are clamoring for devaluation, but the government has adamantly insisted that companies
must become more competitive. The real may be overvalued by as much as 30% against
the dollar.

        CARDOSO: SAME. Backed by about $50 billion in reserves at the beginning of
1998, the real appears stable, and the Central Bank is determined to resist calls for a
devaluation because of their fears of inflationary pressure in a climate of fiscal laxity.
Cardoso is well aware that his re-election hopes would almost certainly be dashed by a
devaluation, and will do all he can to avoid devaluation before the elections. However,
some mechanism for increasing the pace of devaluation will have to be found after the
elections in order to relieve the pressure on the currency and on exporters.

        A freer exchange rate would encourage foreign investment and economic reform.
Reserves are likely to stabilize because of steadier economic conditions and good relations
with the IMF and other international creditors. As a result, over the long term exchange
controls will gradually be eased, although it is unlikely that a full-floating exchange rate will
be instituted.

       LULA: SLIGHTLY MORE. In order to reduce capital flight, this administration might
impose tighter exchange controls in response to eroding confidence by foreign investors.
However, continued inflows of direct foreign investment should allow the government to
avoid permanently tightening exchange controls.

      OTHER OPPOSITION: SLIGHTLY MORE. Economic uncertainty would inhibit any
moves toward lower exchange controls.

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                                        SECTION F
                           UNDER THE THREE MOST LIKELY REGIMES

                                              Cardoso                          Lula                    Other Opposition
 REGIMES & PROBABILITIES:                     55%                              25%                     20%
 Tariffs                   Moderate           Same                             SLIGHTLY MORE           SLIGHTLY MORE
 Other Barriers            Moderate           SLIGHTLY LESS                    SLIGHTLY MORE           Same
 Payment Delays            High               Same                             SLIGHTLY MORE           SLIGHTLY MORE

                                Support/Opposition: Restrictions on Trade

     P                                 *Lula, PT                        *Labor
  NEUTRAL   *Military
     P                  *Franco *Maluf, PDT            *PMDB                               *Business
     S                     *Collor
                                                       *Cardoso, PFL, PSDB

                   Low                           Importance of Key Actors                                 High


        Collor initiated trade liberalization measures in 1990 aimed at making domestic
businesses more competitive. His program signaled the end to import substitution,
eliminating the numerous exceptions, incentives, and bureaucratic barriers that had
hampered both importers and exporters. Collor's policy reflected the growing conviction
that Brazil must import more to spur competitiveness, supply machinery for capital
investment, and satisfy consumer demand. He reduced or eliminated many tariffs and
licensing procedures, cut back on domestic content regulation, and allowed imports to rise
to a level that would help modernize industry and increase exports.

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The substantial tariff                                  Brazil: Imports
reductions since 1990 have          70.00

continued on schedule after         60.00
Collor’s resignation. The US
has dropped its trade case
against Brazil's patent,


trademark, and copyright laws,
praising progress in improving
protection of intellectual          20.00

property rights. At the end of      10.00
1992, the WTO commended
Brazil for its trade liberalization  0.00
                                        1988 1989 1990 1991   1992   1993 1994 1995 1996 1997
program but warned that
further opening was
necessary. While exports steadily increased during 1990–1997, total trade remains low at
about 14% of GDP.

        The large and growing trade deficits of 1995–1997 have inflamed protectionist
demands on the government. Cardoso’s responses included the reimposition of high tariffs
on the import of automobiles and other consumer durables in March 1995. In June 1995,
he instituted severe quotas on auto imports, nearly provoking a trade war with other Latin
American countries before he backed down. During 1996, he took some minor actions to
protect the trade balance, including an export incentive package and increased tariffs on
vehicle parts. In late 1996, the WTO warned that moves since 1995 to restrict imports and
to subsidize exports have made the country’s trade regime more complex and less
transparent. The WTO report was especially critical of the complex tariff structure and the
frequent tariff adjustments. It noted that protection for the domestic automobile industry,
estimated to be equivalent to tariffs of 250%, has been increased despite Brazil's position
as a large net vehicle exporter.

        Investors were alarmed by the retreat from free market economics, but most
regional trade agreements, completed before Cardoso took office, guarantee some
element of trade liberalization. The most important regional trade pact is Mercosur, which
will have wide-ranging consequences for its member countries. Brazil, Argentina,
Paraguay, and Uruguay have adopted a common tariff, initially averaging 12% on goods
from outside the area, while ending tariffs on 95% of goods traded within the common
market. By the end of 1996, free trade treaties were in place or under negotiation between
Mercosur and Chile, Bolivia, Peru, Ecuador, Colombia, and Venezuela. Nevertheless,
Brazil continues to show a marked tendency to go its own way despite regional pacts. In
March 1997, the government announced that imports must be paid for with cash, a move
that provoked protests from its Mercosur partners whose primary objection was that Brazil
had taken the step unilaterally. Mercosur increased its external tariff at the end of 1997 in
response to the economic crisis threatening Brazil, fanning concerns that the Mercosur
governments, especially Brazil, were taking a more protectionist stance to deal with their
current account deficits. Brazil has been a leader in Mercosur’s plans to expand to other
countries, including members of the Andean pact, and to make sure it survives even as the
Free Trade of the Americas is being negotiated among the countries of North, Central, and
South America.
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        CURRENT: MODERATE. Although it is a signatory of the WTO, Brazil has
traditionally charged a wide variety of import duties. Hesitant steps toward harmonization
of the WTO’s rules have been made since 1990, marked by serious lapses in 1995–1996.
At the beginning of 1997, the average tariff, which has been falling since the country
started opening its economy to competition in 1990, was 14%, compared with about 20% in
1992 and 41% in 1989. The maximum tariff has fallen to 20%.

         Protectionist sentiment has been fueled by an import boom during 1994–1997,
reflecting both trade liberalization and the substantially overvalued currency. The current
account plunged from a surplus of more than $6 billion in 1992 to an estimated deficit of
$33.3 billion in 1997. Although the effect of rising imports has been cushioned by the
boom in the domestic economy, manufacturers are clamoring for protection. The
reimposition of some quotas and increased tariffs on automobiles has been a setback for
reform, but the government insisted that the auto industry is a special case. Officials have
promised that they are determined to increase foreign competition in other sectors of the
economy. However, in response to the looming economic crisis at the end of 1997, the
Mercosur countries increased their common external tariff by three percentage points to
15%. This tariff covers most imports into the Mercosur region, but a few products, such as
autos, are subject to separate tariff agreements.

         CARDOSO: SAME. In response to protectionist pressures, the government will
halt, but not reverse, the drive to liberalization. The tariff on auto imports will fall by two
percentage points each year to reach 20% in 2001. On the other hand, tariffs on vehicle
parts will rise from 7.2% to 9.6% in 1998, and eventually 16% after 2000. The fragility of
Brazil’s external payments situation during 1998 virtually rules out any significant tariff cuts
until the real is no longer vulnerable to speculative pressure.

       The Mercosur pact and other free trade treaties with South American countries will
accelerate liberalization in regional trade, but will produce uneven effects on trade with
non-members. An agreement is being negotiated between Mercosur and the Andean
Community, which will bring in the rest of Spanish-speaking South America.

         LULA: SLIGHTLY MORE. His government would be subject to intense pressure to
slow, if not reverse, trade liberalization. Lula could be even more responsive to demands
of local industries and workers for a halt in tariff liberalization. Dollar shortages might also
derail liberalization. Tariffs in some areas would remain high. In the information
technology sector, for instance, a combination of tariffs and high taxes would keep
computer prices high, despite the new laws.

         OTHER OPPOSITION: SLIGHTLY MORE. This government would halt tariff
liberalization, and might even carry out some reversals, responding to both nationalist
sentiment and economic problems.

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        CURRENT: MODERATE. Imports remain hampered by the bureaucracy and the
requirement of cash payments. Many products, although no longer banned, face heavy
import duties and excise taxes. Before Collor's liberalization drive began, the government
relied on broad and effective nontariff barriers in its efforts to protect domestic industries.
The most telling were import licenses that could slow or stop imports quickly, stringent
import financing requirements, import quotas, and exchange controls for allocating the
scarce supply of hard currency. The country’s inefficient, expensive ports also act as a
constraint on foreign trade.

        CARDOSO: SLIGHTLY LESS. The government may seek further reductions in
selected nontariff barriers that have shielded the economy from foreign competition. It will
aim to eliminate all formal import controls, leaving tariffs as the only trade policy instrument.
Rigid computer limits, a source of considerable controversy among trading partners, will be
lifted. However, bureaucratic and business interests oppose an end to nontariff barriers,
and Cardoso has already demonstrated that he is responsive to such demands.

        Membership in Mercosur will dominate policy regarding nontariff barriers. For
example, an agreement with Argentina seeks to expand the locally based motor industry by
limiting imports from outside the region, and by promoting a free flow of vehicles and parts
between Argentina and Brazil. Companies will be allowed duty-free imports of vehicles
and parts from the partner country if they match imports with exports. The agreement runs
through 2000, by which time free trade should prevail.

        LULA: SLIGHTLY MORE. Divided and under intense pressure, Lula’s government
would avoid substantial new restrictions while halting further liberalization. Nevertheless,
Lula favors quotas on imports of such goods as autos. He would fight vehemently for
import quotas on textiles and automobiles, and he might call for more anti-dumping
regulations in some industries.

        OTHER OPPOSITION: SAME. This regime would worry about conserving scarce
foreign exchange and would not encourage higher levels of imports.


        CURRENT: HIGH. Delays caused by chronic shortages in foreign exchange
reserves have averaged in excess of 40 days, and more than 50% of exporters still use
letters of credit.

         CARDOSO: SAME. The government will enjoy improved relations with foreign
creditors and investors, easing pressure on reserves. However, the situation will remain
potentially unstable until Cardoso succeeds in passing fundamental structural reforms to
rein in the budget deficit. While foreign exchange reserves were a healthy $52.9 billion at
the beginning of 1998, intense speculative pressure against the real can quickly deplete
reserves, as demonstrated by the traumatic events of October-November 1997.

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       LULA: SLIGHTLY MORE. For a time, high levels of foreign reserves would cushion
the payments process. Eventually, though, uncertainty over the policies of a weak and
divided administration would increase capital flight and pressure on foreign reserves.

        OTHER OPPOSITION: SLIGHTLY MORE. Capital flight would occur throughout
the transition to this regime, producing a deterioration in payment conditions.

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                                  SECTION G

                                 Cardoso                                Lula            Other Opposition
 REGIMES & PROBABILITIES:        55%                                    25%             20%
 Expansion          Moderate     LESS                                   SLIGHTLY LESS   SLIGHTLY LESS
 Labor Costs        Moderate     SLIGHTLY LESS                          SLIGHTLY MORE   SLIGHTLY MORE
 Foreign Debt       High         SLIGHTLY MORE                          SLIGHTLY MORE   Same


CURRENT: MODERATE.                                   Brazil: Budget Balance/GDP
The policies begun by                   0.0
Cardoso in 1994 as finance             -2.0
minister have done a                   -4.0
remarkable job of reducing             -6.0
inflation, but have not                -8.0

removed its root causes. The          -10.0

launch of the real in July 1994       -12.0

helped bring down inflation           -14.0
from 50% per month in June
1994 to less than 1% per
month by the end of 1996. At               1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
the same time, growth
increased sharply in 1994–
1995, while consumers experienced a substantial increase in their spending power. In
1996, growth slowed to 3.2% as the Central Bank had tightened monetary policy during
1995 in response to concerns about an overheating economy. Interest rates were then cut
gradually during 1996, contributing to a burgeoning recovery. But hopes of recovery were
dashed when the government tightened fiscal and monetary policy sharply toward the end
of 1997 in response to intense speculative pressure on the currency.

         Speculators attacked the real largely because of the government’s failure to
achieve fiscal austerity. Although the government had made some improvements in 1994,
the deficit was cut largely through delays of spending rather than structural reductions, and
through temporary revenue measures. The budget deficit averaged 6% of GDP in the
period 1995–1997. Some adjustments were carried out in late 1996, including spending
cuts of $6.47 billion and improved tax collection. However, the deficits in the current
account and the budget still plague the government. A serious effort to reduce the budget
deficit is necessary to secure the success in controlling inflation, but the government's key
social security and civil service reforms have faced immense barriers in Congress.

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        As a result, total government debt has ballooned to a massive $252 billion; the high
interest rates that the Central Bank imposed in order to defend the real are also increasing
the government’s debt servicing costs. In November 1997, the government announced a
radical austerity package to cut the budget and trade deficits, at the cost of much weaker
economic growth. The package’s 50 measures include tax hikes, public sector layoffs, and
investment and spending cuts aimed at state companies, totaling some $18 billion. If
approved by Congress and fully implemented the package would significantly trim the
deficits in the budget and the current account, producing budgetary savings equivalent to
around 3% of GDP. The government also won an important battle when Congress
approved a long-delayed bill streamlining the vast civil service sector, allowing dismissal of
workers and capping pensions and salaries.

        The key to stability lies in reform of the constitution, which currently allows the
federal government little leeway; as much as 95% of the budget consists of compulsory
transfers to states and municipalities. The constitution also mandates a generous social
security system, which allows some people to retire at age 40 and others to claim multiple
pensions. The social security system is close to collapse; in 1995, benefits outweighed
contributions by more than $3 billion. The government cannot rely on spending cuts to rein
in the budget deficit because much spending is required by the constitution, leaving tax
increases as its only recourse. However, tax evasion is rampant; taxes are paid by only
about 10% of the economically active population.

        In the face of these structural problems, Cardoso is pressing for three major
reforms: the devolution of central government responsibilities and spending obligations to
local governments and the private sector, the enhancement of government revenues
through an overhaul of the tax system, and the restructuring of the social security system.
While he has made some progress, powerful congressional leaders oppose reforms, and
the process has been stalled since late 1995. The 1997 crisis has lent new impetus to his
plans, but the beginning of the maneuvering for the 1998 elections will keep Cardoso from
making much progress.

         CARDOSO: LESS. The austerity package announced at the end of 1997 ensures
that fiscal policy will be tightened over the forecast period, contributing to flat growth or
even recession in 1998. High interest rates will choke off recovery in the construction
sector and lead to sharp cutbacks in the key automotive sector. High borrowing costs will
foster some improvement in the trade account because of lower demand for consumer
goods imports, but may also cause the budget deficit to increase.

        How hard the economy will be hurt by the policies will depend largely on whether
the package generates enough credibility to allow the Central Bank to lower interest rates.
The authorities began to cut rates cautiously at the end of 1997, but have avoided
substantial change. Consumer-related sectors of the economy will probably suffer the
most, but the privatization program will keep capital goods sectors active; the government
plans to expand privatization to include additional railroads, highways, and sanitation

G-2 BRAZIL 1-Apr-1998
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        The government plans a new push on its reforms in the first half of 1998, aimed at
accelerating reforms in the social security system, labor market, and tax system. Passage
of such reforms would pave the way for faster interest rate cuts. Prospects are poor for the
social security reform bill; it has already been diluted substantially and will face intense
opposition in an election year. In addition, government finances will be weakened by tax
evasion and lower tax revenues from struggling businesses.

       LULA: SLIGHTLY LESS. Lula’s inauguration might well be preceded by a sharp
downturn in the economy, a devaluation, and an upsurge in inflation. Cardoso’s efforts at
reform would be largely stymied. Upon taking office, the new government would halt the
reform process and endorse increases in social spending. However, weakened
government finances and the struggling economy would be serious constraints. Fiscal and
monetary policy would remain restrictive. Interest rates would remain painfully high,
seeking to maintain economic stability in the absence of structural reforms.

       OTHER OPPOSITION: SLIGHTLY LESS. Budgetary constraints and the desire to
remain in the good graces of international financial institutions would leave little room to
maneuver. This government would attempt to institute a more restrictive policy but would
face extreme political obstacles.


CURRENT: MODERATE.                                   Brazil: Change in Real Wages
Despite indexation, real wages        20.0
fell sharply during the high-         10.0
inflation years. Since the             0.0
launch of the real in mid-1994,      -10.0
wages have risen in real terms       -20.0

and are adding to the demand         -30.0
for consumer goods imports           -40.0
while reducing the
competitiveness of exports,
contributing to the massive
trade deficit. Over the same             1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
period, unit labor costs have
soared by 38%, hurting export
performance. The government faces a wave of damaging public sector wage claims.
Labor is becoming increasingly militant, reflecting the workers' belief that they have been
treated unfairly and were especially squeezed by the recession and by privatization

         Wage policy is a key challenge facing any government in the fight against inflation
and high public spending. Wage increases, especially in the public sector, are a primary
source of inflation. Despite evidence pointing to wage indexation as a major cause of
inflation, efforts to end it have been repeatedly defeated in Congress and the Supreme
Court. In May 1995, Cardoso raised the minimum wage by 43% to 100 reals per month.

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By law, minimum wages must be increased to reflect past inflation, but Cardoso awarded
an even bigger raise than was necessary. It is almost impossible to dismiss workers in the
federal and state governments and public companies. The constitution guaranteed job
tenure for civil servants who have accumulated more than five years of service. Important
amendments were finally passed in late 1997, which may eventually make it possible to
rein in the public sector wage bill.

        CARDOSO: SLIGHTLY LESS. The current economic crisis and threat of higher
unemployment over the forecast period may make labor more amenable to wage
moderation. Unemployment will increase sharply in 1998 as austerity measures and
industrial cutbacks take effect. For the first time, the Union Force, which represents some
130,000 auto parts workers, accepted temporary cuts in salary and hours to protect 8,000
jobs in early 1998. Many other unions will be asked to make similar sacrifices in coming
months because of sagging demand, overstocking, or restructuring. High interest rates will
also put smaller and medium sized companies under great strain. The result will be some
moderation in the pace of wage increases.

       Over the longer term, the government will try to dismantle the pervasive system of
wage indexation and replace it with a price and income policy to be negotiated with unions
and employers. To succeed, the government needs either to persuade employees to take
a pay reduction or to allow past inflation to creep into the new index. Any moves will
provoke great controversy. One proposal is to allow companies to negotiate wages directly
with workers, instead of relying on industry-wide standards.

        Congress will oppose the removal of indexation, fearing that workers lack adequate
bargaining power with employers. Unions intend to lobby intensively for a policy of
protection for wages and employment. Labor leaders are threatening strike action if
companies attempt to lay off workers or cut wages.

       LULA: SLIGHTLY MORE. Lula’s government would be more receptive to labor
demands, but would be restrained by economic problems. In addition, the creation of the
Forca Sindica, a moderate union that focuses on job security, may weaken the link
between the PT and labor.

         OTHER OPPOSITION: SLIGHTLY MORE. Despite the sympathies of government
officials, deteriorating economic conditions would prevent most workers from gaining much
higher real earnings.


         CURRENT: HIGH. After long and often contentious negotiations, the country
completed an agreement with commercial bankers on the restructuring of its $52 billion
commercial bank debt in early 1994, even though no accord with the IMF had been
reached. The Central Bank estimates that the agreement reduced external debt by
$4 billion and led to further savings of another $4 billion in reduced debt-servicing costs.
Chronic difficulties in servicing the foreign debt have established a pattern of alternating
confrontation and reconciliation with foreign creditors. Despite the 1994 restructuring
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agreement, numerous
                                                       Brazil: Debt Service Ratio
questions remain about future
relations with the international       50.0

financial community. At the
end of 1997, foreign debt              40.0
stood at approximately

$186 billion, 24% of GDP.              30.0
Although the growing current
account deficit is another
cause of concern, Brazil has
demonstrated a consistent
ability to tap international
                                          1988 1989 1990 1991 1992 1993 1994 1995 1996     1997
financial markets. In mid-
1997, the government floated
a $3 billion bond, the largest global bond ever issued by an emerging country; it was
heavily oversubscribed, demonstrating investors’ confidence and willingness to lend to

CARDOSO: SLIGHTLY MORE. Capital inflows will be attracted by successful efforts to
amend the constitution and create a more welcoming environment for foreign investment,
as well as the completion of the bank debt restructuring accord. The country's erratic and
worrisome relationship with foreign creditors and investors will slowly be replaced with
confidence as the government proves its ability to proceed with economic reform.
Government officials are confident that the trade and current account deficits will be easily
financed, largely because of the abundant foreign exchange reserves and growing foreign
investment. Slower economic growth in 1998 will whittle down the trade and current
account deficits, bringing the current account shortfall down. The deficit should be
financed almost completely from privatization proceeds rather than speculative capital
inflows into stock and money markets. Moreover, Brazilian borrowers are receiving
improving terms on international capital markets. Total external borrowing requirements for
1998 are expected to decline to $36 billion, which should be available if confidence in the
government’s policies is maintained.

         LULA: SLIGHTLY MORE. Lula’s government would face much more difficulty than
Cardoso’s regime in winning the approval of international donors and investors. The
opposition in Congress, led by Lula, is committed to seeking better terms from foreign
banks. Within the PT, Lula leads the moderate wing regarding foreign debt. He is more
likely to seek a renegotiation of the foreign debt than a debt moratorium, as party radicals
demand. Agreements with the IMF and commercial bank creditors would be more difficult,
but another moratorium would probably be avoided. Nevertheless, conditions would make
it increasingly difficult to finance the current account shortfall. Although federal exchange
reserves are substantial, debt servicing costs are rising. The costs of servicing the debt
could produce a crisis if the ability to attract foreign capital is compromised by a decline in
confidence throughout the external financial markets. An IMF accord is possible if the
market unrest worsens.

      OTHER OPPOSITION: SAME. This regime would be unable to establish
harmonious relations with the international financial community. Foreign capital inflows
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would fall precipitously, and Brazil could find it extremely difficult to finance its current
account deficit.

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                                     SECTION H

                                 Cardoso                            Lula            Other Opposition
 REGIMES & PROBABILITIES:        55%                                25%             20%
 Turmoil            Moderate     SLIGHTLY MORE                      SLIGHTLY MORE   SLIGHTLY MORE
  Investment        Moderate     LESS                               SLIGHTLY LESS   Same
  Trade             High         SLIGHTLY LESS                      Same            Same
 Economic Problems:
  Domestic          High         LESS                               SLIGHTLY LESS   SLIGHTLY MORE
  International     Very High    SLIGHTLY LESS                      SLIGHTLY MORE   SLIGHTLY MORE


        Cardoso’s popularity has undoubtedly slipped from its high point in 1994. Even so,
as the incumbent leader of the center-right, Cardoso is the favorite to win and embark on a
second term. Despite the criticisms of established politicians, the center-right attracts
substantial electoral support. Cardoso commands a generally effective, if inconsistent,
congressional majority. If he meets his goal of pushing through critical constitutional
amendments on structural reforms by the middle of 1998 and if he manages to avoid a
devaluation and keep inflation low, support for the center-right will solidify.

        Several challengers are readying themselves to compete for the office in case
Cardoso falters. One of the biggest beneficiaries of the 1996 municipal elections was
Maluf, leader of the conservative PP, whose candidate won the mayoralty of São Paulo
over Cardoso's hand-picked candidate. Maluf was one of the primary opponents of
Cardoso's re-election amendment, harboring presidential aspirations himself. However,
Maluf seems to have taken himself out of the presidential competition, and will only enter if
a severe economic crisis undermines Cardoso’s position.

       None of the other numerous candidates appears to constitute a serious challenge
to Cardoso. Two former presidents, Sarney and Franco, may decide to run again in 1998.
However, neither appears a threat to Cardoso unless the economy dips.

         Cardoso views the institutional weakness of the political system as one of the key
obstacles to economic progress. Accordingly, he plans to devote his second term to
political reforms aimed at rationalizing government institutions. He favors rules to
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encourage greater discipline within political parties and to prevent deputies from casually
changing parties. He also hopes to amend the constitution so that future changes can be
achieved by a simple majority rather than a three-fifths vote.


        Substantial constitutional reform may prove impossible before the 1998 elections. If
so, the financial traders could become disillusioned with Cardoso's leadership, tainting the
economic climate leading up to the elections. A government devaluation prior to the
elections would prove disastrous for Cardoso. As a result, the left wing could capitalize on
the gains it made during Collor's impeachment campaign. Lula and his left-wing supporters
regained prominence in the wake of Collor's downfall; as a result, they may be well placed
to challenge Cardoso. Lula is one of the country’s best-known politicians and consistently
scores an impressive second to Cardoso in popularity polls.

       Admittedly, the left is scarcely ready to mount an effective presidential or legislative
campaign. It has suffered major defeats and was badly divided by election campaigns in
1990 and 1991. While it was encouraged by an impressive performance in the 1992 and
1996 municipal elections, the left has yet to demonstrate its capacity for sustained unity,
and the leftists in local office have compiled a mixed record. However, if Cardoso falters,
growing demands for change and for a new group of politicians might be powerful enough
to propel Lula to a win in 1998.


        While the two leading candidates appear to be Cardoso and Lula, a large number
of other candidates are waiting to enter, including Maluf, former presidents Sarney and
Franco, and Gomes. If economic deterioration were accompanied by chaotic political
conditions, such as massive labor strife or demonstrations, Cardoso would be badly
discredited and the way would be open for an alternative center-left candidate, especially if
Lula decides not to run.


        CARDOSO: SLIGHTLY MORE. Since living standards are unlikely to keep pace
with expectations, turmoil is likely in the early part of the forecast period. By the end of the
period though, turmoil will decline as the economy improves and inflation remains under
control. Lula and his supporters in Congress may spearhead intense opposition to
government measures, particularly public sector layoffs and privatization. The extent of
unrest will depend partly on the government's success in striking deals with the PT and

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other labor leaders. If the government succeeds in carrying out significant economic
reform, turmoil will subside as the economic recovery accelerates.

        LULA: SLIGHTLY MORE. Before the 1998 elections, the weakness of Cardoso’s
government and accelerating economic deterioration would lead to substantial turmoil.
After the elections, despite its closer ties with labor, Lula’s government would face public
protests over poor living standards and austerity measures. The appearance of disarray
and paralysis at the highest levels of government would provoke disorder throughout the
forecast period.

         OTHER OPPOSITION: SLIGHTLY MORE. Economic deterioration and political
instability would prompt a sharp initial increase in turmoil at the beginning, but rational
economic policies and a return to stability by the end of the period should foster a return to
calmer conditions.


       CARDOSO: LESS. The government will obtain important constitutional reforms
aimed at abolishing the disadvantages currently suffered by foreign companies. The
government will open additional sectors of the economy to private and foreign investment.
The attempt to maintain coalitions within Congress will produce a less comprehensive
reform package than that sought by Cardoso, but progress will be steady.

      LULA: SLIGHTLY LESS. Although Lula’s government would not enact many of
Cardoso's constitutional reform initiatives, the importance of foreign investors to the
economy, as well as the key role of Mercosur, would ensure some continuing liberalization.

       OTHER OPPOSITION: SAME. This regime might respond reluctantly to pressure
from the IMF to reduce restrictions, but populist inclinations might limit any action.


        CARDOSO: SLIGHTLY LESS. Trade liberalization is a key element in any plan for
economic reform. At the same time, the government must deal cautiously with powerful
protectionist pressures, moving slowly to cut tariffs and nontariff barriers. It is constrained
even further by unreliable congressional coalitions. The legislature and the government
bureaucracy will vehemently obstruct change, and will almost certainly bring about some
weakening of Cardoso’s plans.

         LULA: SAME. Increasing problems with regard to export competitiveness and
financing the current account deficit suggest that this regime would halt the drive toward
liberalization. This government would fail to carry out substantial trade liberalization
because of its political constraints, but the presence of Mercosur would also prevent it from
reinstating important barriers.
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       OTHER OPPOSITION: SAME. Economic deterioration would diminish foreign
exchange reserves and lengthen payment delays. Trade liberalization would largely come
to an end.


                                                                      Brazil: Cardoso
GDP growth will be flat in 1998                                      Real GDP Growth
but will average 4.5% per year
through 2003. The inflation
rate will be 8% in 1998 and will        6

average 5% annually through             5

the forecast period. Austerity

measures will take a steep toll         3
on growth, but declining                2
interest rates during the
second half of the year will
spark some revival by year-              1993    1994   1995   1996    1997e       1998f   1999-
end. Despite intense                                                                       2003f

resistance, Cardoso will
persist in his restructuring
program. After 1999,                                                 Brazil: Cardoso
privatization receipts will             2500
decline, making it even more
imperative that the                     2000
government enact reforms to
reduce the huge trade and               1500

budget deficits before then.
Cardoso has an agenda of
structural reforms for his
second term, including public
sector restructuring and                   0
measures to enhance labor                   1993   1994   1995   1996     1997e     1998f  1999-
market flexibility. Labor
leaders and left-wing members
of Congress will initially resist austerity measures and reject the economic demands of the
international financial community. Domestic business interests will fight efforts to liberalize
trade and investment and reduce the price-fixing power of cartels in the domestic market.

       However, business leaders and the center-right bloc in Congress will join with
Cardoso in supporting a rational austerity package. Constitutional changes may enable the
government to reform the tax and welfare systems, and to take more control over its
spending, measures essential to the fight against inflation. Cardoso expects, perhaps too
optimistically, that proposed reforms to the social security system and the government
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bureaucracy will be achieved during 1998. Fiscal reforms aimed at reallocating
responsibilities between the states and the federal government regarding revenue,
spending, and tax collection will certainly take longer, but are likely to be in place by 2000.
These reforms are essential to put government finances in a more stable position and to
lay the foundation for longer-term growth and investment.

        LULA: SLIGHTLY LESS. Although Lula’s government would achieve much less
progress on reform than a center-right regime with a working majority in Congress, it would
not allow the economy to deteriorate to the depths reached before Cardoso’s time. Real
GDP would decline in 1998 but growth would return thereafter, to average about 3.8%
annually through 2003. The inflation rate would be 15% in 1998 and would gradually drop
to an average of 8% per year over the forecast period. The economy would eventually
embark upon a moderate recovery from its 1997–1998 state of crisis, but this government
would achieve very little structural reform and few actions to ensure significant
improvement. The government would cautiously apply austerity measures, attempting to
cut spending at both the national and state levels of government. Progress would be
slowed by the forces that have faced all previous reformers. Lula’s administration would
have much less success than a united, center-right government in carrying out an austerity
program, because of its need to maintain congressional support. Economic growth would
be hampered by high interest rates and the slowdown in government spending. Stability
also depends on factors beyond the control of any government, such as US interest rates
and world growth.

       OTHER OPPOSITION: SLIGHTLY MORE. This regime would suffer from weak
economic conditions, including an economic deterioration and a rise in inflation during
1998. It would be inclined toward more social spending; reform would be halted, if not
slowed, leading to lower growth and higher inflation.


CARDOSO: SLIGHTLY                                            Brazil: Cardoso
LESS. The current account                                    Current Account

deficit will be $25 billion in        5
1998 and average $18 billion          0
over the five-year period,           -5
requiring continued access to      -10

foreign finance. While foreign
debt problems will gradually
diminish, external accounts
may become more of a
problem. The government will
achieve an improved, if               1993  1994 1995   1996   1997e     1998f            1999-
uneven, relationship with its                                                             2003f

foreign creditors. A gradual
removal of protectionist measures will win the tentative support of the international financial
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community. Lenders will be eager to demonstrate their approval of the government's
program of economic reform. Although steady progress will be difficult to achieve, the debt
agreement with commercial banks will reduce Brazil's debt burden as long as economic
reforms remain in effect.

        LULA: SLIGHTLY MORE. The current account deficit would average $25 billion
per year over the five-year period. Relations with the international financial community
would deteriorate. While Lula appears to favor a relatively moderate course, other
congressional members might push for a more nationalistic approach, antagonizing foreign
bankers. Congressional leaders might threaten to refuse to honor current debt agreements
and to initiate another moratorium. Brazil and its creditors would enter a difficult period, but
this government would eventually seek agreement because of its need for foreign
currency. While negotiations would be extremely difficult, their outcome would lead to
some austerity measures.

       OTHER OPPOSITION: SLIGHTLY MORE. The current account deficit would
remain extremely high at first, reflecting severe economic difficulties. The populism,
nationalism, and high spending of this government would frustrate attempts to reach
agreement with international creditors. Policies would gradually ease as officials attempted
to regain access to international finance.

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