Oct 16, 1992

NO CHANGES IN BASIC OBJECTIVES AND POLICIES, SAYS BRAZIL.

GENEVA, 15 OCTOBER (CHAKRAVARTHI RAGHAVAN) -- The basic objectives and policy orientations of Brazil are based on a growing consensus in the country and remain unchanged, despite the important political changes and transition of power, the Brazilian delegate to GATT, Amb. Celso Amorim assured the GATT Council Wednesday.

Amorim's assurances, in the context of the suspension from office of President Collor de Mello and assumption of the Presidency by the Vice-President, Itamar Franco, following the Congressional vote to impeach Collor, came during the Council's Trade Policy Review of Brazil.

Amorim noted that the universal praise his country had received for the political transition - in strict observance of constitutional rules and following a fully transparent and democratic process - had been accompanied by signs of apprehension over the economic set up.

Collor de Mello has been associated with the sweeping liberalisation measures and the opening up of Brazil's inward looking economy. The coalition of forces behind his ouster on charges of serious corruption and abuse of office has given rise to questions as to whether the "reforms process" would endure or would be reversed.

Amorim's remarks, the first on Brazil's behalf in a multilateral forum, were aimed at putting to rest such apprehensions and ensure continued external support.

The changes in Brazil, directed towards trade liberalisation, privatisation and deregulation, Amorim said, in simplistic analyses directed to changes taking place in many developing countries, were often described in as recognition by governments of past errors and new policies "to do the right thing".

These "manichean" approaches tended to overlook specificities of individual countries and sought to present complex transformations taking place as a mere change of direction in government's policy.

What were taking place in Brazil were not only a change of trade or economic policy, but a change of development model, with the very center of gravity of the economic system moving. As a late entrant to industrialisation, Brazil, had played a major role in economic development and had adopted policies based on three pillars of state intervention (though coordination, financing and building of infrastructure, and sometimes of state entrepreneur-ship), import-substitution and a rather favourable international economic environment for both risk capital and credits. This model had shown signs of exhaustion, while the international economy itself showed changes including in terms of globalisation of industries and production.

But contrary to what may have occurred in other countries, the import substitution model in Brazil had not failed nor was it at the root of the problems faced by Brazil. The size of the Brazilian market and scales of economy, as well as its abundant natural resources, had enabled the country to achieve over the last 40 years an average growth rate of seven percent until 1980.

The economic transition was taking place in a fully democratic environment, and did not stem from any authoritarian decisions based on wisdom of well-trained bureaucrats. The whole process had to be negotiated, through a fully independent National Congress and an autonomous judicial system (to which appeals lay in some economic matters) and an increasingly organised civil society with different economic and political interests.

"Nevertheless, consensus around the reforms is growing and to a great degree, the press academic world, as well as many businessmen and important sections of the workers movement favour the economic reforms being undertaken", the Brazilian delegate assured the GATT Council.

Underscoring the importance of an external environment supportive of the process, Amorim stressed that the competitive integration into the world economy, sought by Brazil and its MERCOSUR partners, would make sense only in an open world economy governed by a solid multilateral trading system. A successful Uruguay Round, that would reverse some of the "nasty practices" to which Brazil had been subject, was hence one of the high priorities of Brazil. Brazil had suffered most from the anti-dumping and countervailing actions, faced many restrictive grey area measures and was the only developing countries that had suffered illegal retaliation (at the hands of the U.S.) through GATT illegal unilateral legislation.

"This underlines the reasons behind our firm support to the reinforcement of the multilateral trading rules and to a strong Multilateral Trade Organisation (MTO)", Amorim added.

The GATT secretariat's report, in praising Brazil's reform policies and trade liberalisation, however warns that "in the prevailing environment of persistent macroeconomic imbalances, the sustainability of these liberalisation efforts should not be taken for granted".

"Failure to control inflation, to revive economic activity, and to tackle rising unemployment, would increase the political odds against the success of the liberalisation agreement, by encouraging existing pressures to retard the tariff reduction programmes or to revert to a more protectionist industrial policy", the secretariat said.

In effect, the secretariat (in line with the Fund/Bank/OECD current orthodoxy) underplayed the external environment and uncertainties and stressed more the domestic reforms and adjustments.

Amorim told newsmen however, at a briefing on Wednesday, that while he did not deny the absolute need for fiscal reforms, the external environment including the issues of an open market could not be ignored. All the elements of the process, internal and external, went together. His country had embarked on some fiscal reforms of an immediate nature, while structural reforms would come next year along with the constitutional review.

The GATT secretariat report also questioned the usefulness of the MERCOSUR regional integration (under the agreement between Argentina, Brazil, Chile and Paraguay), arguing that multilateral trade liberalisation rather than regional preferences and integration, held out more promise.

It was not very clear from the report, whether it is merely the secretariat's penchant for theoretical approach even though such an approach has not been much visible in denouncing the regional integration approaches of NAFTA or the European Economic Zone - or whether it is based on detailed study of the countries involved. While it argues that regional integration and trade would be fruitful only on basis of complimentarily of the production structures of the countries, it appears also to ignore the historic experience that such complimentarily, whether in Europe or elsewhere, also grew out of a process of integration, and not vice versa.

The report welcomed Brazil's termination of non-tariff restrictions on imports and changeover to tariffs, as well as its Uruguay Round offer to bind the tariffs at a maximum of 35 percent for industrial products.

But despite the tariffication of non-tariff barriers, and reductions in the tariffs, there were in place heavy fiscal charges on imports - due to additional taxes such as port tax, the merchant marine renewal tax, and the internal tax system. Also seen as negative, are the local content requirements for government procurement and official financing, and preferences for local suppliers when offers are similar to those of foreign suppliers.

In the discussions in the Council, a number of participants emphasised that the international trading community had a responsibility to support Brazil's reforms and help it realise the benefits of its restructuring. The opening up of Brazil's markets thus need to be supported by an open international environment. Brazil's efforts in this regard had not been matched by its developed trading partners. Protection in sectors of export interest to Brazil and on subsidisation of exports, particularly in agriculture, created unfavourable trading conditions for Brazil's exports and gave wrong signals to the domestic economy.

A number of delegations, mostly from the industrial countries, indicated their interest in the future examination in a working party of the MERCOSUR agreement and hoped it would be an outward-oriented arrangement that would compliment Brazil's own liberalisation.

In summing up the discussions, the GATT Council Chairman, Balkrishan Zutshi, noted that the Council members had welcomed the affirmation that the new government would continue the policies of liberalisation, deregulation and privatisation. Brazil had been strongly commended for the considerable progress made in the transformation of its trade regime, in the face of considerable economic difficulties.

The Council, Zutshi added, noted the importance attached by Brazil to an open multilateral trading system and its strong commitment to the Uruguay Round process. "Brazilís ability to continue its liberalisation and reform", he added, "would be greatly facilitated by a supportive external economic environment, including a successful conclusion to the Uruguay Round".