Director of
Central
Intelligence
Brazil: President Collor's Prospects on the Eve of the Rio Summit (cnf)
Information available as2 was used in the preparation of this National Intelligence Estimate.
The following intelligence organizations participated
in the preparation ol this Estimate.
Tne Central intelligence Agency
Trie Defense Intelligence Agency
T.ne Ne;ional Security Agency
Tne Assistant Secretary for intelligenceesearch.
Department o? Slate
also participating.
Tne Deputy Chief o! Staff lo- Intelligence.
The Director o' Naval ir (exigence.
The Assistant Chief of Siaff. rtetligence. Department of the Ait Force The Direcior of Intelligence. HeadQuane's. Manne Corps
approved for publication by the nieMigsnce Board.
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Key Judgments
Brazil: President Collor's Prospects on the Eve of the Rio Summitr
On the eve of the Rio dc Janeiro global environmental summit. President Fernando Collor de Mello is confronting the most serious challenges yet to his presidency. Most significantly, he must win sufficient support in the fractious Congress to pass constitutional amendmentsackage of economic reform legislation to cut inflation, generate strong economic growth, and gain political
The odds are somewhat better than even that he will win passage this year of most of the key provisions he wants. These will help to cut the budget deficit and improve business confidence. Collor is also likely to continue making significant gains in privatizing public companies.!
But the economic results will be mixed over the next year or so. largely because Congress will not approve everything Collor needs. Monthly inflation will subside but probably not belowercent. Austerity, combined with continued political uncertainties, will keep economic growth atercent, well below the dramatic gains of Mexico. Chile, Argentina, Venezuela,umber of other Latin American countries.
What if He Fails To Pass His Legislative Program?
There ispercent possibility the Congress will not approve
the most critical portions of Collor's legislative package this year:
esult, his stabilization program would be derailed and the economy pushed into deep recession.
Collor would become politically impotent, and constructive compromise with Congress would be highly unlikely.
Strikes, protests, and food rioting would be likely, but the military probably would intervene only in the event of serious instability in one or more major cities and if elites openly called for them to act)
Relations With the United States
Collor believes he has met most US concerns on issues that were ncttlesome at the outset of his term. In conversations with President Bush and senior US officials, he and his associates will cite actions they have taken in areas such as nuclear safeguards, strategic trade controls, moves toward adherence to Missile Technology Control Regime guidelines, trade liberalization, and cooperation with the United Stales on GATT.
in
Collor is noi expecting to have in-depth discussions with President Bush on unresolved bilateral issues. Nonetheless, he believes that there hasack of reciprocity by the United Stales and other developed countries. While Collor may not react forcefully to this perceived inadequate response, he might smart from further admonitions that Brasilia needs to do more,
Collor is confronting what could be the most fundamental challenges to ihc success of his presidency. He must:
Win sufficient suppoil in the fractious Congress to ensure passage of constitutional amendments and complex legislation to cut the large fiscal deficit and undertake structural and other economic reforms.
Drive high rates of inflation down over the next several months to restore confidence and attract investment.
Prepare for municipal elections this October as welllebiscite next April over whether Brazil will retain its presidential system or adopt aone.
Deal with allegations of malfeasance against some senior government officials and of personaldrug usc|
Collor came to office in0 committed to stabilizing and restructuring the economy bycomprehensive free market reforms. He scored some initial successes by eliminating most trademaking cuts in the bloated public-sectorlaunching an ambitious privatization programivest the state of steel, petrochemicals, fertilizer, and transportation holdings; and nullifying moreegulations that hobbled investors^'
The central goal of defeating inflation has failed, however, despite the implementation of two shock programs that temporarily froze wages, prices, and financial assets. Monthly inflation has been running at more thanercent since lasthighest rate in Latin America. In partesult of severe austerity measures, Brazilower GDP growth rateallew of the Latin American countries.f
Why Is Brazil Lagging?
Collor's Leadership Style. Collor's youth and vigor, assured manner, vows to eradicate corruption and to remake Brazil, and his rejection of traditional politics
' The period nl tint Fiiimiit it Ihc MXot(W
A New Economic Game Plan
Collor has discarded economic "shock therapy" because it has done little to get to the root causes of Bratil's economicand hasdiscontent. He is now opting for broad structural reforms aimed at strengthening federal fiscal and monetary authority and at improving the confidence of both domestic and foreign Investors. Some successes have been achieved in enhancing tax revenues, introducing pay-as-you-go corporate taxes, and curbing slate borrowing. Important reforms awaitapproval or will soon be presented. Key proposals call for:
Increasing Brasilia's share of tax revenues, in part at the expense of slate and municipal governments.
Sirtamlining the tax system.
Giving the federal government tools to reduce widespread tax evasion.
Permitting the dismissal of some tenured public civil servants.
Eliminating the government monopoly in the telecommunications sector.
Opening the petroleum sector to foreignin refining, exporting, andbut not exploration and drilling.
Allowing majority foreign ownership in the mining sector
helped him to win office and to launch bold reforms. But, these traits also have been political liabilities that he has only recently begun to overcome. For example, even as his initial economic program faltered and inflation crept upward, Collor made little effort to reach out to Congress or other key groups. He
rJlor's New Political Approach
llor reluctantly concluded last year thai he had no hoioe but to seek consensus with Congress, key overricrv and other influential interests The more accommodating aad consultative political ppfoacaes he has pursued this year have enhanced bis political maneuvcrabihiy and support. The appointment of Mureilw Moreira as economy minuter innd of other competent and respected Cabinet members since then, has improved his government's standing al home and abroad.
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Makeup of Brazilian Congress as of2
I roCoUar WBMarious
PDS
Social Party
Frnot Party
Democratic Party
labor Party
Kecorstrucona Party
Party
Democratic Movement Party
Social Democratic Party
Worken' Parry
Party
Socialist Party
Socialist Party
ususi Party ol Brodl
allying wilh lhe wcond-largest parly and several other smaller ones, Collor regained iome initiative and can now count on aboutercent of the vote in Congress.
His courtship of key governors has strengthened his political Ranks in major states!-
Outlook for Passage of Ihe Economic Reform Program
On balance, we believe ihe odds are somewhat better than even that Collor will gain congressional approval for most of lhe key elements of his fiscal reform and. constitutional amendment packages this yearj""
Collor will have to pressure, negotiate, and wheedle for the additional support he needsin passage of his constitutional and economic reform legislation!'
important bills are scheduled to be volcd on in June, providing early tests of Cotlor's congressional support.
Success would lend to improve business confidence, lower inflation and interest rates, and reduce high domestic debt service costs, particularlyJJjJ' Potentially the most importantnew financial transactionsgenerate upillion in revenues next year, equalerceni of GDP. Wiih other revenue-raising measures likelye passed, the fiscal reform could reduce the budget deficit byercentage points. But io get these key measures passed. Collor will probably have lo significantly compromise other legislau've objectives
Relations With Commercial Banks
An agreement in principle with Brazil's Bank Advisory Committee on reducing commercial debt and debt service payments is likely by late summer. Finalization of the accord withreditors probably will not occur until early next year, however. The agreement couldillion in medium- and long-term -debtillion andnterest payments0 million. Because Brazil has been paying onlyercent of the interest due, however, payments to bankers would actually rise. Consequently, the chief benefit offinancial relations is likely to be greater confidence in the Collor government's economic mana2ementeturn of flight capital.
Progress has been made in curiailing ihc consntu-lional rights of slates lo borrow without centra) bank approval, but ihey will retain sufficient autonomy to undermine Brasilia's monetary policies.provisions ihat earmark fixed percentages of national taxes for state and municipal governments are unlikely to be rescinded. Moreover, the federal government's inability to force slates to investinstead of maintaining large bureaucracies will continue torag on the cconomyf
Inveslment is likely to increase moderately.interest rales, diminished impediments to businessomewhat lighter tax burden, brighter prospects for exports, and fewer uncertainties about economic policy would help promote private-sector
The government has had considerable success in privatizing state enterprises, and we expect further progress over the next year or so. It should be able to auction off most of theirms scheduled to be sold by the end of next year. Their disposal would trim the federal payroll by more0 employees. Hundreds of staic-owned companies remain, however.
investment. Foreign firms would be encouraged by belter protection Tor intellectual property righis and couldomewhat larger role in bidding for parastatal firms
A declining number ofeceni rise in industrial production, and higher growth in the major industrialized countries that are the leading importers of Brazilian goods suggest that modest growth is likely during the second halfof this year. Nonetheless, the continuation of fiscal and monetary austerity and political uncertainties will keep growthercent during the period of this Estimate. Inwe expect the monthly inflation rate lo remain in the tow double digits]
What if the Legislative Program Falls To Pass?
We believe therepercent chance that Congress will not approve the most critical portions of Collor's fiscal reform and constitutional package this year, thus derailing his stabilization program. Although the government would apply stopgap fiscal measures, these would do little to reduce the budget deficit. Confidence in the President and his program would plummet, triggering capital flight and spurring inflation. Compromise between the President and Congress would be highly unlikely. The likelyof Economy Minister Moreira would probably be seen by marketsarbinger of new wage and price freezes.
The economy would plunge again into negative grow;h. though probably not at deep asonetary policy would be tightened to attempt to keepn inflation,ew round of layoffs would raise the jobless rate above already high levels. Prospecu for new investments would evaporate.
There would be important international implications as wcU. Any chance for compliance wiih IMF fiscal targets would be dashed In addition, the likely loss of reserves and failure to abide by the IMF program probably would hold up the completionebt accord with comjpercial banks, further depressing confidence.
Seofet
' in the three services over lhe erosion of miliiary salaries has resulted in public complaints, open pressure on ihe President and Congress, and even minor rallies by miliiary dependents.[
In response, lhe administration moved quickly In April to obtain congressional passage ofpercent military pay raise and is likely to narrow ihe sharp disparities between pay levels for military personnel and those of legislative and judicial branch functionaries. We believe that the high command will periodicallythe government to raise salaries as long as inflation remains high, and additional isolated acts of indiscipline are possible
Finally, there is great uncertainty over what the military's future mission should be. Manyare concerned that military prestige will further erode and that key decisions concerning force structures and missions will be made by civilian leaders, without miliiary input. We believe Collor and the Congress will proceed carefully on issues of institutional concern to the armed fo.
Ihe rejnajndcr of
Political Implications. Collor would be politically impotent, the current moderate optimism about the administration's management of the economy would evaporate, and respected officials would depart. Collor would have only scant prospects for restoring the Credibility of his government and would be likely to veer from crisis to crisisis term, which ends in5
the military would intervene only in the event of widespread insiability in one or more major ciiies and if elites openly called for the miliiaryct, j
The Intelligence Community is divided over the likely outcome of the3 plebiscite in whichwill choose between presidential andforms ofhe main parties and4 presidential candidates have not yet signaled their intentions, and we doubt lhat many have yet focused on the importance of the choice. Collor. who expressed supportarliamentary system when he believed heood chanceeing elected Prime Minister, is now
Some agencies believe thatongressional defeat would not translateole in favor ofhey believe the electorate will be influenceduch broader range of factors than Collor's perceived failures; these include thehesitancy toamiliar system and Ihe likely impact of prospective presidential candidates who would favor the present system. Other agencies believe the deterioration that would follow adefeat would increase the likelihood of approvalarliamentary system to abouthey believe that support among politicians is already surprisingly high and that parliamentarism would be popularechanism to marginalize Collor. I
Relations With Ihe United Slates Collor believes that his administration has made considerable headway in improving Brazil's imageariety of fronts, bringing it back from the acute disrepute of the waning days of his predecessor's term. He is convinced that he has met the bulk or Washing-ion's concerns on issues that were nettlesome at the outset of his term. He also evidently is sanguine thai
of the government would intensify almost in direct proportion to rising monthly inflation; strike activity and scattered labor violence probably would spread. Protests and food riots would probably occur in some cities, and crime would soar. But we believe
ihe summit in Rio will be widely vieweduccess and that it will give him additional clout with his Con gress. | j
A proposed law protecting Intellectual Propertysought by the United Slates -has attracted opposition from nationalists, theindustry, and the Catholic Church. But we believe it is likely to be approved later this month.
In conversations with US officials during the summit. Collor and his representatives will offer up aof constructive actions taken by his government in areas such as nuclear safeguards, strategic trade controls, moves toward adherence to MissileControl Regime guidelines, regional CBW bans, trade liberalization, cooperation with the United StatesTT, and, in general, constructive stances in line with those of the United States in international fomr
The Brazilians arc also likely to cite numerousinitiatives they have taken during the same period. While Collor remains concerned about US trade policies that he believes put Brazil at aa top priority will be to seek USof the reasons for Brazil's noncompliance with IMFtargcisJ-
Collor was one of the first Latin American leaders to support the Enterprise for the Americas Initiative and, with Menem of Argentina, accelerated formation of the MERCOSUR regional common market.cooperation with the United States on counter-narcotics issues is likely to continue expandingbut, because of budgetary and other constraints. Collor has not assignedigh priority I
Collor is not expecting to have in-depih discussions with President Bush On unresolved bilateral issues during the summit. However, he and his aides believe their efforts to satisfy the concerns of the United States and other developed countries have not been reciprocated. While Collor may not yet be inclined lo react forcefully to this perceived inadequate response, he might smart from further admonitions thatneeds to do more, especially ifessage were conveyed during the summit.I
Brazilian Policy oa Key Regional Issues
Cuba. Brasilia has long favored dialogue wiih Havanaay to promote change in Cuba and to facilitate its reintegration into the Latin American community. Since Brazil and Cuba restored relationsrade relations have expanded moderately. In early May. Brazil's Mines end Energy Minister confirmedhe US Ambassador that the state-ownedcompany had justillion exploration contract with Havana, which includes drilling three oi! wells in Cuba's coastal waters. In response to the Ambassador's call for canceling the contract, the Minister claimed that the company would "do theunder the agreement. The Ambassador subsequently demarched the Brazilian Foreign Minister, who promised to look into the matter, but evidently has noi yet provided any further
Haiti. Shortly after the Haitian coup, Brasilia promised to enforce the Organization ofSlates (OAS) embargo, but failure to enact its own sanctions has allowed some Brazilian exporters to continue shipping goods to Haiti.Brazil has not advocated the use af force to restore President Aristide, but itultilateral peacekeeping mission if approved by the UN Security Council]
Peru. Brazilian diplomats have expressedconcern about the possible repercussions throughout Latin America of the attempted coup in Venezuela last February' and Peruvian President Fujimori's antidemocratic actions since April. Brasilia is maintaining diplomatic relations with Lima but has suspended the few cooperation projects between the two couniries. Collor supports efforts in the OAS and the Rio Group to insist that Fujimori keep his promises to restore democracyI
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