Ladies and gentlemen

I have discovered that most Americans know that Brazil is located somewhere in Latin America where they have Carnaval in Rio, play soccer and watch the girls from Ipanema.

But Brazil is a lot more. In order to understand Brazil, it is important to understand its Constitutional history. I have structured my comments today to give you a Constitutional overview using my administration as an example of how Brazil's system works. Finally I will review my concerns for Brazil and present my vision for the future.

One day somebody asked me what I would do to reduce Brazil's cost, which he considered very high. Businesspersons around the world, as you know, are always preoccupied with what is known as a "country's cost", or the cost that investors have to incur to invest in a specific country: taxes, regulations, interests, tariffs, etc. I answered that among many other measures the main one to reduce cost would be to change our Constitution. Brazil's cost is its 1988 Constitution.

This is an unusual document. First, it was written by a Constituency Assembly not exclusively elected by the people for this task. It was written by regular politicians. Second, the Constitution is a hybrid. The first draft was a parliamentarian form of government. The second draft switched to a presidential one. Because Congress changed the head but forgot to change the body, parliamentary instruments were grafted on to a presidential system. Third, every member of the Assembly and Congress wanted to add something to the Constitution. It became like decorating a Christmas tree when everyone adds an ornament at will until the tree is decorated but has no unifying theme.

The Constitution was written in 1988 anticipating the end of the military's political influence and to prepare Brazil for democracy with the elections of 1989. The Congressmen were in a hurry to finish their job and didn't have time to accomplish their goals. The result is that the new Constitution has several articles that are not yet effective and must be promulgated by further acts of Congress.

After all this the Constitution was sold as a panacea to solve all the Brazilian problems. Instead, it supported an even more closed economy, reinforced government monopolies, supported strategic state companies, and set levels of government spending in many areas of the administration, and last but not least, regulated the interest rates at a maximum of 12% a year. As if it is possible to regulate the law of supply and demand.

Brazil does not have a long-term democratic tradition because the democratic process was interrupted many times and some times for long periods -the last one for 29 years. We also don't have a Constitutional tradition because Constitutions were imposed by governments in power rather than from the legitimate aspirations of the people.

The Constitution of 1891 was the first of the Republican period of our history. It established "due process of law", the presidential system and was based upon the free market doctrine of the North-American and British institutions.

In 1930, the 1891 Constitution was suspended after the so-called Revolution of 1930 installed a dictatorship.

In 1934, the second Republican Constitution, inspired by the Weimar Republic and the Spanish Constitution of 1931 was promulgated. It eliminated the free-market and democratic principles of 1891 in order to reinforce the president who had seized power in November of 1930.

In 1937 the president felt threatened by a supposed popular insurrection, and in November with the support of the militarv he amended the Constitution, inspired by the clearly fascist Polish Constitution. Political parties and Parliament were abolished.

In 1945 a military coup d'etat ousted the dictatorship, a president was elected, and in 1946 a new Constitution was promulgated, which was a mixture of the previous Constitutions of 1891 and 1934, embracing the free-market concepts and a strong federal government.

In 1964 a new military coup d'etat occurred, and a new Constitution was promulgated in 1967. It was based on national security and a strong central government. Individual freedom was downgraded.

In 1969, Constitutional Amendment Number 1 to the 1967 Constitution, reinforced the authoritarian characteristic of the 1967 Constitution.

That was the constitutional setting under which I took office. The 1988 Constitution was only one year and three months old on my Inauguration Day. As I mentioned, I had to operate under that Constitution which was already outdated and which differed substantially from my political and economic beliefs. I had even criticized the Constitution in my campaign, opposing its regulation of the economy and our lives.

Remember, my Inauguration was in 1990, and the world began to change in 1989 with the fall of the Berlin Wall marking the end of closed and regulated markets around the world. Brazil, at that time, was unaware of what was happening globally.

I had to lead Brazil into the 20th century. Imagine what I faced. I had inherited a new but out of date and almost unworkable Constitution. I was the first democratically elected president in 29 years, so I faced a country that was not used to democracy. Instead it was used to protectionism, collectivism, and the all powerful managing state. Old patterns are not easy to change, but I realized changes had to be made. And I made them.

Ironically, I found myself using a Constitution I had criticized to institute my reforms. The hybrid nature of the constitution let me use a Parliamentarian instrument known as "medida provisoria" or ''fiat'' to put reforms into immediate effect pending future Congressional approval.

When I took office I realized I had to combat the hyper-inflation quickly and to have time and occasion to implement the first phase of the structural reforms. I had to deal with extremely high monetary liquidity. With 90% monthly inflation, the government had to print more money every day. With all that cash in hand, the people consumed with abandon because to save it meant to lose it to inflation. In effect they were losing 3% a day.

All this money and spending threatened any measures I might have taken. I took a drastic step and froze all private assets for a year and a half. It was a shock! I did it, and most importantly, I did it with congressional approval.

As bizarre as compulsory loans and frozen assets may sound to you as Americans, it was not so bizarre for us Brazilians. They were part of old patterns which were familiar to us. What was bizarre for us was getting the loans back -- but even more bizarre was getting them back with interest. Getting the loans back was not part of old patterns. Former governments had taken compulsory loans, but had never returned the principal -- let alone any interest.

I will never forget a meeting that occurred in my office, following the announcement of the freeze, when I received a representative from Sao Paulo and a former all powerful minister of Finance, under the military regime.

- "Congratulations!", he greeted me. "This is the most audacious program that I have ever seen! Even in my period as Minister I would not have dared to do so much! And you did it with the Congress!"

-"Yes," I said. "That's democracy! "

And he continued:

-"Of course, you will not give back all those assets That would be extraordinary! "

I realized he was still thinking in terms of the old patterns.

-"Of course I will," I said. "In 18 months I will begin to give back all the assets."

One year and six months later I returned every cent of the frozen assets, with the corresponding interests. During the last 15 days of March 1990, inflation fell from 90% to 44% in April and to 8% in May.

Also using the power of fiat this is what I did to launch Brazil's modernization:

In March 1990, I announced the end of the moratorium on our $115 billion foreign debt, and we began the arduous task of payment negotiation which we finally settled in June 1992.

I abolished restrictions on imports. Those restrictions actually listed 800 hundred specific products that could not be imported into Brazil. Cars and computers were on that list. After I abolished this list, I established a tariff reduction schedule, bringing

down the tariff ceiling from 105% to an average of 14%.

I introduced Plan#2 to scrap price and wage

indexes and to accelerate foreign trade. At that time, we had already

stopped discriminating against foreign capital, and it was flowing into

Brazil.

I introduced the Project for National

Reconstruction to reinforce my economic plan, to demonstrate our

social commitment and to provide a step by step economic program for

the future.

Even my opponents acknowledge that our Project

for National Reconstruction provided macroeconomic consistency that

paved the way for Brazil's prominence as an international economic

partner.

I am proud of some additional accomplishments

of my administration. For example:

I decreased the government payroll from 5.3% of

the GNP to 3.7% of the GNP.

-The National Treasury cash balance decreased

from a deficit of $46.6 billion to a surplus of $2 billion.

-The P.S.B.R. (Public Sector Borrowing Requirement)

decreased from 7% of the GNP to 2.2% of our GNP.

At the same time we created a month by month

budgetary surplus. We did not miss one month, and we increased our

monetary reserves from $5 billion at first to $23 billion when I left

office.

These initiatives in addition to the creation of the

Brazilian Program of Quality and Productivity and the Sectorial

Chamber that I created in 1991, generated a positive and an almost

immediate impact on the private sector. Efficiency increased, product

quality improved and industry productivity soared to an average of

7.6% per year compared to an average of 2% in industrialized

countries.

As proof in 1989 only five Brazilian companies had

an ISO 9000 certificate. Today, thirteen hundred companies have it,

and this number is increasing.

In April 1991 I signed the Assuncion Treaty with

Paraguay, Uruguay and Argentina to create Mercosur -- a common

market for South America- that would reduce all tariffs to zero and

eliminate all non-tariff restrictions. As a result, commerce between

Argentina and Brazil doubled, from 1991 to 1993. Chile is a new

member, and Bolivia will join in June. Today, Mercosur is home to 200

million consumers, while generating $800 billion in GNP and internal

trade flows that jumped from $8.3 billion before Mercosur to $28.5

billion now. In addition Brazil and its partners took the first steps

towards strengthening other economic blocs like Nafta and the

European Community. Most importantly Mercosur guaranteed peace

in the Southern Cone of our Continent.

Ladies and gentlemen

Eliminating monopolies was one of my goals from the

beginning. Monopolies were a complicated issue. The 1988 Constitution

guaranteed government monopolies for economic areas that were

considered strategic to national security. These included electricity,

communications, oil, navigation and others.

These concepts of "national security" and "strategic"

were convenient arguments for specific interest groups that profited

from a closed economy and they remind me of Margaret Thatcher. On

her visit to Brazil, a Brazilian journalist wanted to know if

Mrs.Thatcher supported the privatization of the government

companies that were considered "strategic", she responded in her usual

style:

- The rice and the beans in your meal, are they

considered "strategic" ?

- "Oh, yes", replied the news reporter.

- "And, young man, are they owned by the state"?..

He shook his head, no.

-"Of course not", she answered as only she could

and turned away.

I sent bills to Congress to change the Constitution,

and I knew that it would take time. Unfortunately monopolies still exist.

However, there was another tier of monopolies. They

were not protected by the Constitution, but in reality they were

monopolies because of extensive government involvement. These

included petrochemical, aeronautical and steel companies. I turned my

attention to these.

In October 1991 I began to privatize the first company.

It had taken over a year to prepare for this.

In the beginning I had to consider two alternatives.

I could begin the process with a small, non-controversial company in an non-important market. Supporters of this, inside the administration, thought it was a good way to test the market

and obtain reactions to privatization. I believed this was a weak

approach.

The other alternative, which I supported, was to begin with a big company from an important sector of the economy. In this case, steel. This would send a strong signal of our commitment.

It was an uphill battle, but one year later the company earned a profit for the first time in 15 years.

The whole privatization process was very difficult. The reactions against it were tremendous because I had broken another old pattern. Every reform I made in two years was a jolt to someone. But they had to be made. Brazil was in transition, and it was difficult for many to adjust to democracy, a new Constitution, an open and free-market, and a President committed to modernization. It was painful for Brazil to stand on its own two feet.

From the beginning, I faced a furor of opposition, all in the name of "national security," from the establishment, supporters of an autarchic economy and "strategic" state companies. My reforms required Brazil to think globally for the first time. We had to think in terms of an open mind as well as an open economy. This demanded a new way of thinking as well as a new way of doing business.

What Brazil needs to do now is to reinforce the reforms that I initiated seven years ago. Economic stability will be permanent only if the Brazilian government adopts further measures. Those are: fiscal reform, tax reform and social welfare reform, besides encouraging privatization. These cannot be half reforms. They must be complete and they require Constitutional amendments.

Even though I successfully initiated a privatization program, the governments that followed mine have adopted a stop and go attitude.

That attitude is based on the fact that Brazil lacks laws that define how constitutionally established government monopolies can be dismantled. You will remember I mentioned that a lot got left out of the 1988 Constitution in the rush to finish writing it.

Articles were quickly written, but a subsequent paragraph said that for the article to be effective, it will need a complimentary law to define how the article will work. Many articles still remain ineffective because no complimentary laws have been even proposed.

What got left out of the Constitution was bad enough, but subsequent amendments to eliminate monopolies compounded the mistakes. For example, an amendment states, "the oil monopoly is hereby eliminated", but a subsequent paragraph said to be effective, this amendment will need a complimentary law to establish the rules for how this industry will be de-monopolized. It goes without saying that this complimentary law has not even been proposed. Complimentary law require 2/3 vote of Congress and until it passes, nothing, absolutely nothing, can be done.

It is incredible that after almost 10 years, the Constitution is still in shambles.

As I mentioned, fiscal reform, for example, is urgent. The current structure of public spending must be revised, because a Constitutional requirement puts public spending in a strait jacket that forces the government to spend 90% of the federal budget in a pre-established way.

This mandated public spending does not leave much money for discretionary spending like investments or current expenditures.

Tax reform is needed to reduce the excessive burden of taxes on production, to facilitate tax payments, to integrate portions of the informal sector of the economy, and to increase the contribution base and to cut tax evasion and fraud. If everyone pays, everyone pays less.

Tax reform is vital. For each one hundred dollars an employer pays out in salary, he has to pay one hundred thirty dollars more in taxes. This type of tax structure certainly does nothing to promote employment.

The third reform needed is to the welfare system, which needs to find new non-inflationary sources to finance it. This could be done through either a complementary private welfare system and/or restructuring the rules for retirement, because welfare today is bankrupt. There are two active workers for each recipient and 40% who receive it have never paid into it. But reform will not be easy.

Instead of facing Brazil's urgent problems, Congress and the current administration chose to focus their energy on a smoke screen. They put all their efforts into passing an amendment to the Constitution that will allow the current president's reelection with the stroke of a magic wand.

This is reform all right, but it is not the reform Brazil urgently needs.

The reelection amendment took a 3/5 vote of Congress to pass, and it passed amazingly quickly in a Congress that should be acting with the same speed to approve the structural reforms I have listed.

I have some additional concerns:

I am deeply concerned about the size and cost of domestic securities debt. This represent 30% of the GNP and the interest on the debt costs 1/3 of total federal revenues. This is a record. Never before has it been this high. The worst thing is this is all short-term debt, and I am not certain how Brazil can service this uncontrolled debt that is accelerating dangerously.

I am deeply concerned with the current trade balance deficit, and this is another record. This deficit and an overvalued currency have already begun shackling economic growth.

I am deeply concerned with the administration's help to the banks, both private and state owned, that has already consumed $40 billion and does not seem to stop.

I am deeply concerned because so little is being done for land reform.

I am deeply concerned about the pain that is affecting mainly the middle class, through extremely high interest rates that restrict consumption, restrain production and undermine investments. Business failures, bankruptcies and unemployment are the result. All that is further irritated by a social environment that bears the face of homelessness, poverty, and disease and can only lead to increased violence. This social debt is currently way too high and totally unacceptable.

Brazil cannot afford to make a mistake.

Brazil has to blaze its own trail.

It is the largest country of Latin America and the ninth economy in the world.

Its population of 156 million is relatively young: 62% is under age 29. 74% of the population lives in urban areas. Brazil and the United States are the two largest democracies on the American continent. Brazil is the third largest trading partner for the United States in the Americas, after Canada and Mexico. It has a high level of industrialization, and 70% of exports are industrial products. It is among the world's top three food exporters. It is the largest producer of coffee in the world and the second largest producer of both sugar and Soya. After the United States, it is the hemisphere's largest producer of steel, automobiles, and similar industrial products.

Brazil imports more from United States than from any other country --in 1996, $12.7 billion. This is 23.8% of all Brazilian imports. In 1996, Brazilian exports to the United States were $8.8 billion. That represents 18.3% of Brazilian exports. The trade balance between Brazil and the United States is a $2.2 billion Brazilian deficit. Until March 1997, Brazil imported $1 billion and exported $128 million.

The total US investments in Brazil are $19 billion. The total of all countries' foreign investments in Brazil are $57 billion. These figures are astonishing because they show how quickly things have changed. They also reflect the bonds between Brazil and the United States. Ours is a long friendship dating from as far back as 1824 when we first established diplomatic relations.

In 1823, one year after our independence from Portugal, the Monroe Doctrine established the importance of Latin America to the interests of the United States. It also recognized the potential of that part of the world. If I were to describe Brazil's future in one word, that word would be "potential." In fact many have equated Brazil to the United States 70 years ago. With its vast land size and natural resources, its young population, its booming economy in a highly sophisticated financial system and above all its ability to reinvent itself, Brazil has the potential of an awakening giant.

It is the people who insure Brazil's future, and they cannot be crippled by an unworkable Constitution. They deserve more.

I am confident in the Brazilian people, and I am confident about the future. There is no doubt about it. Brazil is the New Frontier, and that frontier is unlimited.

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