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Cablegate: Brazil's State of Goias: Riding the Agricultural

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 BRASILIA 000790

SIPDIS

SENSITIVE

NSC FOR DEMPSEY, CRUZ
USDA FOR FAS/ITP/BFREEMAN AND FAS/COTS/PPACKNETT
USDA FOR FAS/OA/BIG/PJOSEPH
TREASURY FOR OASIA/SEGAL
FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4322/ITA/IEP/WH/OLAC-SC
SOUTHCOM FOR POLAD

E.O. 12958: N/A
TAGS: ECON EAGR SOCI EFIN EINV ETRD TBIO PGOV BR
SUBJECT: BRAZIL'S STATE OF GOIAS: RIDING THE AGRICULTURAL
BOOM


This cable is Sensitive but Unclassified, please protect
accordingly.

1. (U) Summary. The central Brazilian state of Goias, from
which the Federal District of Brasilia was carved 47 years
ago, has grown above the average for Brazil over the last
several years. The state's economy, fueled primarily by
agriculture and an emerging agribusiness, has a growing
awareness of the importance of exports. Business reps
welcomed the market opening that FTAA would represent, but
were wary of U.S. competition and of perceived U.S.
protectionism, particularly of agricultural products.
Beyond agriculture, the state is searching for a new
strategy to attract out-of-state businesses, since tax
exemptions are supposed to be phased out shortly under
national level tax reform. While the state is heavily in
debt to the federal government, above-average revenue growth
has cushioned the burden of debt service. In conversations
with Econoff, even working-class Lula voters lauded second-
term governor Marconi Perillo, from the centrist PSDB party.
Perillo's youth and popularity give him potential for a
future political role on the national level. Lula's
trademark Zero Hunger ("Fome Zero") program has no resonance
here, as effective state-level programs seem to be
adequately addressing such social needs. Despite
discomfiture by some over squatter land invasions by
landless activists (MST), the most commonly cited social
issue was the need to deal with immigrants from other parts
of Brazil to this island of relative prosperity. End
Summary.

2. (U) Econoff traveled March 16-17 to Goiania (population
1.2 million), the seventy-year-old capital of the Brazilian
state of Goias, an agricultural state in central Brazil.
Goias, while one of the larger Brazilian states in land
area, has a population of only 5.3 million, much of it
rural. Its booming agriculture and agribusiness based
economy, however, is exemplary of one of the fastest growing
sectors of Brazil's economy, and one that is beginning to
affect world markets. Goias' efforts to deal with its state
debt while finding creative ways to finance infrastructure
investment and deal with social issues also reflect debates
and trends at the national level. Goias is also (in)famous
as the source of a significant proportion of Brazilian
illegal immigrants to the U.S.

Economy
-------

3. (U) Goias is riding the wave of Brazil's agricultural
boom. In about twenty years, according to state Planning
Secretary Humberto Tannus, Goias has become an agricultural

SIPDIS
powerhouse, introducing a multitude of new cash crops into
what had been a sleepy rural economy dominated by family
farms. The state is now Brazil's leading producer of
sorghum and tomatoes and among the leaders in soy,
pineapples, corn, beans, chicken, beef, dairy and grains
production. Tannus put the state's growth rate last year at
about 3%, according to preliminary data. This compares very
favorably with national GDP growth of minus 0.2%. In fact,
state data show growth rates consistently above the national
average, with a recent peak of 5% in 2000.

4. (U) According to the President of the Agriculture and
Animal Husbandry Association (FAEG), Macel Caixeta, there is
a growing diversification of agricultural production into
other tropical fruits as well. Tannus said exports,
primarily of agricultural products, reached USD 1.1 bn last
year, up from a few hundred million dollars just two years
before. The state's biggest export market is now China,
which just overtook the Netherlands as the primary
destination for the state's soybeans and other exports.
Goias' overall economy as a whole is becoming more
diversified, with industry (much of it agribusiness, but
including mining and manufacturing) making up about 34% of
the economy, agriculture accounting for about 18% and
services accounting for the remainder. The state is now the
third leading producer of clothing in Brazil, primarily for
the domestic market.

5. (U) Investment Department head Sergio Castro explained
that Goias has been an aggressive user of tax incentives to
lure business to the state and claimed that the program has
had particular success in attracting agribusiness and
distribution operations, as well as some heavy industry:
Mitsubishi has an assembly plant in the state, and Daewoo
reportedly is considering establishing a plant as well.
Commerce Secretary Ridoval Chiareloto explained that the
Secretariat was busy negotiating 500 11th-hour tax incentive

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agreements before the deadline for their elimination imposed
by last year's tax reform.

6. (U) Chiareloto and Castro claimed success in attracting
players in the pharmaceutical industry to a pharmaceutical
"development pole" in the city of Anapolis, not far from
Brasilia. They said U.S. multinational Johnson's was moving
its distribution center for all of Brazil to centrally
located Anapolis, attracted in part by the creation of a
"dry" port, complete with airport, railroad and truck
terminals and bonded warehousing facilities. Brazilian
pharmaceutical companies are already producing generics in
Anapolis, they said, and European firms are also considering
operating there. Planning Secretary Tannus hopes that the
Brazil's to-be-announced federal-level industrial policy,
which lists pharmaceuticals as one of four priority areas,
will also benefit Anapolis.

FTAA
----

7. (U) State Commerce Secretary Chiareloto told Econoff that
farmers and businesses in the state welcome the opening of
new markets that an FTAA would represent, but said Goianians
are wary of U.S. protectionism in agriculture, the state's
principal exports. FAEG's Caixeta was more positive, saying
that his association sees the U.S. as a "partner" in the
FTAA process; he predicted that the FTAA would become a
reality soon. "O Popular" editor Cordeiro, perhaps a more
detached observer, said his paper's polling indicates that
there is not yet a fixed opinion on the FTAA among the
broader public, because most Goianians are just awakening to
the importance of exports.

Public-Private Partnerships
---------------------------

8. (U) Most interlocutors are looking at the federal level
public-private partnerships (PPP) effort as a useful tool to
attract private investment in infrastructure. Planning
Secretary Humberto Tannus noted that PPP-type arrangements

SIPDIS
have existed in Goias for some time on a piecemeal basis,
primarily in the form of concessions. The new federal bill
on PPPs would provide an organizing framework and useful
guarantees. Goias has its own bill ready to be presented to
the state legislature, which would combine into one
framework these existing concessions, the state
privatization committee (Conselho de Desestatizacao) and the
new federal PPP effort. Tannus acknowledged that, under
the Fiscal Responsibility Law, Goias' high debt level
prevented it from giving budgetary guarantees to PPP
projects, but claimed there are several potential
workarounds. These include pledging to the PPP effort
existing state assets (he mentioned two different stadiums),
contributions in kind such as real estate, and commitments
to construct complementary infrastructure (roads, power
lines, etc). Tannus claimed some interest from companies
that work infrastructure projects. FAEG's Caixeta welcomed
any effort that improved rural infrastructure, citing
railroad development in particular as a key way to bring
down transportation costs.

9. (U) Transportation Agency chief of staff Valdir Marques
told Econoff that the lack of investment by the federal
government in maintaining federal highways was causing
dramatic increases in traffic on state roads. State roads,
however, were designed primarily as feeder roads and were
bearing up poorly under the increased loads, particularly of
heavy trucks laden with the state's agricultural produce.
The state began in 2002 a seven-year, USD 240 million-road
repair program with an Inter American Development Bank
(IADB) loan. The program will rehabilitate 3000 kilometers
of paved roads and pave an additional 1000 km of currently
unpaved roads. Using private contractors to build and
maintain the road network, a relatively recent innovation,
has reduced costs by 50%, according to Marques. Marques
claimed only several hundred kilometers of state roads are
in bad condition (with several thousand more in fair
condition). Anecdotally, taxi drivers complained to Econoff
of a plethora of "awful" stretches of highway, both federal
and state, and noted that unusually heavy rains this summer
had washed out a key bridge, requiring a one hundred
kilometer detour in one case.

GMOs and Free Range Cattle
--------------------------

10. (U) State Commerce Secretary Chiareloto and Investment
Department Head Castro said the state is following closely
the national debate on GMOs. Since much of the state's
soybean and grain crops are sold to European markets, there
is a fear of losing market share to other countries or
regions that can claim to be GMO-free. They suggested that
Brazil, given its continental size, could solve the problem
using a regional approach. Some regions could adopt GMOs
while others do not, thus maintaining market share in both
segments. Extensive pasture in Goias means that ranchers
have long raised free-range cattle, which are not given
animal feed, according to both Chiareloto and FAEG's
Caixeta. They saw demand for the state's free-range cattle
(boi verde) jump since the BSE scares in the UK and the U.S.
They expect continued strong demand in this market niche.

Debt and Budget
---------------

11. (U) Although Goias is the fourth most heavily indebted
Brazilian state, with an income to debt ratio of 240%, to a
surprising extent this was a non-issue during conversations
with the state finance secretariat. As was the case with
many other Brazilian states, the Federal Government took
over responsibility for most Goianian debt (and receives
monthly payments from the state.) The state's revenue
stream has been growing overall, reducing the sting of
required debt repayments to the Federal Government. Indeed,
the state has elected to repay 50 million Reals a month (15%
of revenue), two percentage points above the minimum debt
repayment level of 13% of revenue. The finance secretariat
claimed that Goias was current on its debt payments and did
not see any obstacle to continuing to pay down debt levels.
Finance Secretariat Chief of Staff Guilherme Souza claimed
further that much of Goias' indebtedness was not due to
state fiscal mismanagement, but because it chose, as part of
the negotiation with the federal government, to take on debt
owed by state-owned parastatals (sewage and power companies
were cited). This decision has left the parastatals free to
take on new debt and thereby continue making critical
infrastructure investments.

Social Issues
-------------

12. (U) Almost to a person, Econoff's interlocutors cited
immigration from other parts of Brazil as one of the state's
most pressing problems. Dealing with this immigration has
stressed social programs and budgets. The state
nevertheless needs immigrants with skills to fill some of
the jobs being created in agri-business. The editor of "O
Popular", Isanulfo Cordeiro, cited the case of busloads of
job-seekers that arrived after a story (in a competing
newspaper) on vacant agribusiness jobs in Rio Verde, which
hosts a large food-processing business, led by Brazilian
company Perdigao. Cordeiro labeled the report
'irresponsible' for having omitted to state that the
vacancies were for skilled workers. He said penniless local
authorities in Rio Verde had to seek donations to
"repatriate" the desperate unskilled jobseekers, many of
whom had borrowed money to get to Rio Verde and had none to
return home. Cordeiro assessed the quality of the state's
educational system as reasonable, but noted it was of
insufficient size to meet demand for skilled workers. Some
private vocational training programs, funded by business
associations such as FAEG, help address the problem, but are
targeted at specific sectors. (Note: Rio Verde also hosts
an Amcit Mennonite community.)

13. (U) FAEG's Caixeta said association members were
alarmed at squatter invasions by the landless movement (MST)
in some parts of Goias. He alleged that the "leftist" Lula
government was openly supporting the MST. By contrast, he
lauded Gov. Perillo's policy of not tolerating MST squatter
invasions while trying to help the legitimately needy find
housing. Perillo has an eye for social issues without being
a socialist, said Caixeta. Planning Secretary Tannus
enumerated a series of state-level social programs that
combat hunger (a food-targeted stipend for families, and a
people's restaurant, which provides balanced meals for one
Real), help families keep their children in school (a
targeted stipend), fight diseases with sanitation
improvements at the household level, retrain unemployed
workers, and provide micro-credit. One other program aims
ultimately to reduce squatter invasions by helping the rural
poor to build or improve their own housing, so long as they
can prove their ties to the given region. "O Popular"
editor Cordeiro lauded these programs to Econoff, noting
that his newspaper's culinary column had published a
favorable review of the one-Real restaurant.

14. (U) Lula's trademark "Fome Zero" program, Cordeiro
added, has no resonance in Goias, because the existing state
level program has been much more effective. Separately,
Planning Secretary Cannus, implying some reluctance, said
the state is still negotiating with the federal government
how to marry up "Fome Zero" with the state's "Renda Cidada"
(Citizen's Income) program, which provides food stipends as
well as exemptions from water and power bills for the most
needy.

15. (U) In a meeting with an association of small and micro
entrepreneurs, several small business owners told Econoff
that they struggle daily to deal with bureaucracy and
inability to obtain credit. Expressing frustration, the
owner of a small business involved in telecommunications
said he often feels the time spent trying to obtain credit
would be better spent simply on better managing his
business. The president of the association complained that
the government's micro-credit program for loans of 2000 -
3000 Reals, while available at excellent interest rates (6%
annual), still required guarantees equal to 50% of the
borrowed amount. A government-sponsored consultant to the
association, Rodolfo Monteiro, said a study of small and
medium enterprises (SMEs) showed that 40% of SMEs that could
obtain credit never bother applying. Other obstacles to SME
development cited by the group include the Byzantine
requirements of the labor law and bureaucratic hassles. The
association is thinking creatively about joint purchasing
arrangements among members (e.g. for office equipment) to
reduce costs through large volume purchases, as larger
companies do.

Comment
-------

16. (SBU) Goias's economy, thanks to agriculture and
agribusiness, is doing better than much of Brazil. It is
clear, however, that the state is already coming up against
infrastructure constraints that require substantial
investment to de-bottleneck. The state's debt levels make
that an impossible task for its public sector. And so,
while it was clear that there is no love lost between PSDB
Governor Perillo and Lula's PT-led federal government (which
the PSDB on the national level opposes), Goias needs federal
initiatives such as future PPPs and incentives for
pharmaceuticals under the new industrial policy to attract
new private investment in these areas.

HRINAK

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