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Cablegate: Brazil: One Northeast State Tries to Catch the South

VZCZCXYZ0012
RR RUEHWEB

DE RUEHBR #0102/01 0331214
ZNR UUUUU ZZH
R 021213Z FEB 10
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0399
INFO RUEHBR/AMEMBASSY BRASILIA
RUEHRG/AMCONSUL RECIFE
RUEHRI/AMCONSUL RIO DE JANEIRO
RUEHSO/AMCONSUL SAO PAULO

UNCLAS BRASILIA 000102

SENSITIVE
SIPDIS
DEPARTMENT OF COMMERCE FOR LFUSSELL AND ADRISCOLL

E.O. 12958: N/A
TAGS: EINV EFIN ETRD ELAB OPIC COM USTR EAID PREL BR
SUBJECT: BRAZIL: ONE NORTHEAST STATE TRIES TO CATCH THE SOUTH

REF: 09 RECIFE 65; 09 BRASILIA 347

1. (U) Summary: The development challenges facing the Brazilian
northeast state of Piaui are representative of the difficult issues
Brazil's poorest regions must overcome to achieve the level of
prosperity in the country's southern regions. Despite economic
growth rates over the past several years comparable to those of the
south and southeast, Piaui and the northeast's per capita incomes
remain many times lower than those of the southern states. A
recently expanded Piaui state International Relations Coordination
Office and a global-minded governor are focused on closing the gap
with the attraction of more international and domestic investment
to Piaui. Unfortunately, the state's most recent efforts in this
regard reveal significant challenges. Even the domestic investment
community in Brazil, not to mention the international investor,
remains largely unaware of the opportunities that exist in Piaui,
and significant infrastructure and human capital deficiencies
dissuade those investors that do consider projects in the state.
End Summary.

BRAZIL'S NORTH-SOUTH DIVIDE

2. (U) The per capita income in Brazil's northeast is just $7,000
Reais ($3,900 USD - less than the per capita incomes in Honduras
and Guatemala), and the population of 50 million people in the
northeast is 10 million more than that of Central America. In
contrast, the 78 million Brazilians in the prosperous southeast
earn per capita income of over $19,500 Reais ($10,800 USD). The
3.1 million people in the state of Piaui have the lowest per capita
income of Brazil's 26 states, less than $5,000 Reais ($2,800 USD).
This level of income puts the citizens of Piaui roughly on par with
the poorest nations in Latin America, and earning less than a
quarter of what a typical Brazilian from Sao Paulo state makes. In
2008, Piaui recorded total GDP of $14.9 billion Reais ($8.3 billion
USD), or just 0.5 percent of the Brazilian economy. The service
sector represents 60 percent of Piaui output, with half of that
amount derived from government. Industry represents approximately
27 percent and agriculture approximately 13 percent.

3. (U) Despite bright spots like the state of Pernambuco's
Industrial complex at the Port of Suape (Ref A), Brazilian and
international Investment has not poured into Piaui and the
northeast, but remains concentrated in the southern regions.
Brazilian Central Bank foreign direct investment (FDI) data back to
1995, for example, shows only a very gradual proportional shift
away from the traditionally-favored investment targets in the south
and southeast. In 1995, 96 percent of FDI to Brazil flowed to the
south and southeast. In 2000, the south and southeast attracted 94
percent of FDI, and by 2005, they were still grabbing 90 percent.
Between 1995 and 2005, the northeast went from two to five percent
of FDI share. The FDI data also reveal that the southern states
are successful in attracting a greater share of FDI than their
proportional share of GDP. For example, the south and southeast
states comprise approximately 73 percent of the national GDP, but
capture 90 percent of FDI. In contrast, the northeast states make
up about 13 percent of national GDP, but only attract five percent
of FDI.

PIAUI STATE GOVERNMENT ORGANIZES TO ATTRACT INTERNATIONAL
INVESTMENT

4. (U) In December 2009, the recently expanded International
Relations Coordination Office of Piaui, which now includes seven
people, hosted a conference in Piaui's capital Teresina themed to
help the local business community attract more international
investment. Second-term Piaui Governor Wellington Dias (PT -
Workers Party) , who had just returned from an official Brazilian
delegation to court investors in Germany, Greece, and England,
provided opening remarks focused on the advantages of the
internationalization of Piaui. The governor was followed by
speakers and panelists representing the Brazilian Ministry of
Tourism, the Piaui Office of Tourism, an international attorney
from Sao Paulo, and representatives from the Piaui business
community. Econoff was invited to participate and delivered a
presentation on USG partnership opportunities available through the
Foreign Commercial Service, USTDA, and Ex-Im Bank. While the
audience included Piaui state officials, business leaders, and
university international relations students, organizers had
expected a stronger showing of local private firms capable of
building international partnerships. The conference and Econoff
visit to Teresina revealed the significant development challenges
that exist in a poor Brazilian northeast state like Piaui.

OPPORTUNITIES

5. (U) According to most conference attendees, continued
infrastructure development will have the greatest impact on
attracting additional investment to Piaui. Improved
infrastructure, especially transportation lines over road and rail
connecting Piaui's cities and ports, will also facilitate organic
growth within the state. The introduction of free-trade or export
processing zones (ZPE's), currently operating in the cities of
Parnaiba and Pavussu, can also lower the cost of trade in Piaui and
increase the level of domestic and international commerce flowing
through the state. Once in place, government and business leaders
expect Piaui's infrastructure should benefit the state's most
important development opportunities, especially mineral and mining,
fishing, agriculture, and tourism. For instance, improved
infrastructure is expected to greatly benefit agriculture in the
southern part of the state where newly introduced technologies are
already supporting greater soy and cotton production.
Infrastructure development is also assisting Piaui attract interest
and investment to another promising economic opportunity: dimension
stones, opals, and primary minerals.

LACK OF INFRASTRUCTURE

6. (U) Despite some progress, Piaui suffers from the familiar
problem in Brazil of deficient infrastructure. Governor Dias rates
infrastructure development a priority, just behind his top concern
of education. Piaui has received funds from Brazil's growth
acceleration infrastructure program (PAC) (Ref B), and renovations
have been completed at the Parnaiba airport on Piaui's coast.
Governor Dias said that he envisions Parnaiba's geographically
strategic location, where flights to Miami or Lisbon take just six
hours, will make it a future air cargo hub in Brazil. Dias also
highlighted planned rail improvements and 5,800 km. of ongoing
asphalt road paving to link Piaui's major cities.

7. (SBU) The Piaui State Secretary of Tourism Silvio Leite,
however, shared with Econoff that inadequate infrastructure still
remains the largest obstacle to bringing visitors to Piaui. Roads
linking to some of the world's largest concentrations of rock
paintings dating back 50,000 years, many of them inside UNESCO
World Heritage Site Serra da Capivara National Park, require
significant improvement to support additional visitors. Piaui also
has a short but impressive coastline containing an ecologically
diverse collection of rivers, lagoons, dunes and beaches, most all
of which remain outside the reach of even the most adventurous
traveler. Finally, Leite lamented that Piaui has a long way to go
to inform international visitors and Brazilians alike of these
archeological and natural tourist attractions in the state.

8. (SBU) The private sector business community is also
dissatisfied with the condition of Piaui's infrastructure, and says
the Piaui state government is not doing enough to fulfill its
infrastructure development obligations. Manuel Arrey, a Piaui
business leader, who grows and exports nuts, produces leather, and
runs hotels in the state, explained at the conference that many
entrepreneurs pursuing investment in Piaui eventually end up
disengaging when the state government fails to comply with
infrastructure commitments tied to the project. Carlos Brasil, of
the International Relations Coordination Office, privately
confirmed the state's poor record complying with infrastructure
assurances. He told Econoff that at a recent Piaui Department of
Development and Infrastructure meeting state officials brainstormed
why many firms were backing out of projects in the state. The
overriding consensus among the group was that the state bureaucracy
and lack of progress on infrastructure projects were to blame.

LACK OF OUTSIDE KNOWLEDGE OF PIAUI

9. (SBU) International attorney and law professor from Sao Paulo,
Larissa Teixeira, echoed Leite's comments describing a lack of
knowledge about Piaui, but in connection to business and investment
opportunities. She told Econoff that most Brazilians only know
Piaui as the poorest state in the country, and international
investors familiar with Sao Paulo and Rio de Janeiro have not even
heard of the state. Teixeira said she represents a Brazilian fish
farmer who is now in the final stages of opening operations in the
neighboring states of Bahia or Pernambuco. Despite Piaui's cheaper
land costs and abundance of water resources, her clients refused to
seriously consider the state, because, according to Teixeira, they
were unable to imagine the state as anything else but a desolate
region of the country.

LACK OF COMPETENCE AND HUMAN CAPITAL

10. (SBU) Carlos Morais, who has been active in Partners of the

Americas cooperative relationship between Piaui and Nebraska,
described a series of frustrating U.S. - Brazilian business
relationships that failed to materialize due, according to Morais,
to a lack of competent Brazilian partners in Piaui. While in
Nebraska, as a member of the Midwestern International Trade
Association (MITA), Morais said American firms complained of time
management issues, scheduling delays, and missed commitments when
working with counterparts in Piaui. Teixeira also highlighted a
lack of qualified local partners for larger foreign firms
considering investment in Piaui. She told Econoff that Piaui firms
are reticent to engage with large foreign entities, and the state
needs to build a stronger track record of successful Piaui -
foreign investor partnerships to build confidence for both the
Piaui prospective local partners and foreign firms.

COMMENT

11. (SBU) If the whole of Brazil is to achieve the increasingly
impressive levels of prosperity of the country's south and
southeast, traditionally less-developed regions in the northeast
must attain higher than national levels of growth. Otherwise, the
income divide and related disparities will remain. Piaui, the
poorest state of the northeast, is not entirely reflective of the
northeast region, where some notable investment activity is taking
place, especially in the Suape port and adjacent industrial area in
Pernambuco. That said, the Piaui experience reveals a number of
challenges the northeast needs to overcome, notably: poor
infrastructure, a lack of outside knowledge of the opportunities,
and a lack of competency among government and local partners.
Mission Brazil will pursue additional positive engagement with
Piaui and will specifically look to address human capital needs
through promotion of Public Diplomacy international visitor
opportunities, and to address social and economic development needs
through Department grant initiatives. End Comment.

12. (U) This cable was cleared/coordinated with Consulate Recife.
KUBISKE

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