BRAZIL: PROSPECTS FOR THE REGIME

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87T00495R001201380001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 25
• Document Creation Date: December 22, 2016
• Document Release Date: May 20, 2010
• Sequence Number: 1
• Publication Date: April 3, 1985
• Content Type: NIE

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Director o
Central - 01
Brazil:. Prospects for
the Regime
National Intelligence Estimate
Memorandum to Holders
0
Secret
Secret
NIE 93-84
5 April 1985
491
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S
MEMORANDUM TO HOLDERS
NIE 93-84
BRAZIL: PROSPECTS FOR
THE REGIME
Information available as of 5 April 1985 was used in
the preparation of this Estimate, which was approved
by the National Foreign Intelligence Board on 3 April
1985.
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THIS ESTIMATE IS ISSUED BY THE DIRECTOR OF CENTRAL
INTELLIGENCE.
THE NATIONAL FOREIGN INTELLIGENCE BOARD CONCURS.
The following intelligence organizations participated in the preparation of the
Estimate:
The Central Intelligence Agency, the Defense Intelligence Agency, the National Security
Agency, and the intelligence organizations of the. Departments of State and
the Treasury.
Also Participating:
The Assistant Chief of Staff for Intelligence, Department of the Army
The Director of Naval Intelligence, Department of the Navy
The Assistant Chief of Staff, Intelligence, Department of the Air. Force
The Director of Intelligence, Headquarters, Marine. Corps
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CONTENTS
Page
SCOPE NOTE ...................................................................................... 1
KEY JUDGMENTS .............................................................................. 3
DISCUSSION ........................................................................................ 7
What Neves Brings to Office ................................................................ 8
Experience and Popular Support ................................................. 8
Liabilities ....................................................................................... 8
Meeting the Economic Challenge ....................................................... 8
Neves's Priorities ........................................................................... 8
Coping With Interest Group Pressures ....................................... 9
Influence of Economic Advisers .................................................. 10
Charting Brazil's Political Course ........................................................ 11
Political Party Restructuring ........................................................ 11
Constitutional Reform .................................................................. 12
Assuaging the Military .......................................................................... 12
Neves's Foreign Policy .......................................................................... 13
Relations With Communist Countries ........................................ 14
Relations With the Middle East .................................................. 14
Outlook for the Next 12 Months .......................................................... 14
Staying the Economic Course ...................................................... 14
Stable Civil-Military Relations ..................................................... 15
Potential Vulnerabilities ............................................................... 15
Implications for the United States ....................................................... 17
Annex: Key Policymakers .................................................................... 19
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SCOPE NOTE
The dynamics of the transition to civilian rule in Brazil were
initially examined in April 1984 in NIE 93-84, Brazil: Prospects for the
Regime. This Memorandum to Holders updates that Estimate and
assesses the political and economic outlook for the new government.
The election of Tancredo Neves in January 1985 was a major
milestone in Brazil's progress toward full restoration of democratic
government. Neves was chosen to become Brazil's first civilian presi-.
dent since 1964.
This Memorandum was prepared prior to Neves's illness and is
based upon the assumption that he will take office. This key assumption
rests on Neves's broad popular support, his personal honesty, and his
unique ability to hold together a fragile political coalition. Should Neves
die, Acting President Jose Sarney will be installed as president and
Chamber of Deputies leader Ulysses Guimaraes as vice president,
according to the provisions of the 1967 Constitution. Sarney, however,
does not have the broad base of support enjoyed by Neves, and popular
pressure for an early direct election for a new president will build
quickly. While there is likely to be a period of political uncertainty
following Neves's death, there are strong indications that most political
and military leaders will give Sarney the support he needs to gain
control over the government and to address critical issues, at least in the
short term.
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not necessarily authoritative.
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KEY JUDGMENTS
President-elect Tancredo Neves and Vice President Jose Sarney
inherit pent-up pressures for political change and a still-troubled
Brazilian economy burdened with greater than 200-percent inflation
and high unemployment, recurring difficulties with the International
Monetary Fund (IMF), and a $100 billion foreign debt. To his
advantage, Neves, 75, is a broadly popular, skilled politician, well
known for his honesty and ideological moderation as well as his ability
to build a consensus among disparate interest groups. We expect the
President-elect-once he recovers from surgery and takes over for
Acting President Sarney-to exploit his skills and popularity to maintain
a temperate, predictable course for Brazil
On the economy, Neves's principal early challenge will be Brazil's
unresolved financial negotiations. We believe both Neves and the IMF
probably will be sufficiently accommodating, in view of the high stakes
involved, to reach agreement in the coming months on a new stabiliza-
tion program that will allow for continued economic expansion. Neves
would refuse IMF prescriptions that he regards as too harsh, however, in
order to preserve his political support. An IMF accord probably will
pave the way for a rescheduling of foreign bank debt on terms similar to
those tentatively negotiated by the outgoing government. Neves, never-
theless, may press for some form of protection against the effects of a
substantial rise in international interest rate
Neves is publicly committed to strong economic growth. We
believe the continuing momentum of Brazil's incipient recovery will
permit him to honor his growth pledge and, at the same time, to tackle
what he concedes to be an acute inflation problem in 1985. We expect
the civilian government to stress fiscal discipline, financial reform to
strengthen the government's control over monetary policy, and an
informal "social pact" among labor, business, and _ government to
contain wage and price increases. As a result, we believe that Neves
stands a better-than-even chance of slowing the rate of inflation by the
end of the year.
Still, we believe there is a one-in-three chance that domestic
political pressures may force Neves to adopt expansionary. economic
policies that result in excessive government spending, abandonment by
Brasilia of its IMF program, and escalation of inflation to the 300- to
500-percent range. Or, a several percentage point resurgence of foreign
interest rates and a sharp drop in Western economic activity may
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impair Brazil's ability to meet its debt obligations. In either event, the
effects would diminish Brazil's prospects for a sustained recovery,
heighten chances of a confrontation with foreign creditors, and weaken
the civilian government's political base.
Assessing Neves's prospects for managing the economy is compli-
cated by Brazil's changing political landscape. Neves is committed to
the consolidation of democratic government. He intends to overhaul the
military-imposed political party system and revise Brazil's Constitution
to permit direct presidential elections by 1988 or 1989. In this
increasingly open political environment. Neves's consensus-building
efforts will be especially vulnerable to the competition for influence
among labor, the political left, and the Congress. We expect militant la-
bor leaders in Sao Paulo and leftist politicians to come out strongly
against Neves early in his administration, and there are already signs
that his electoral coalition is fraying at the edges.
We expect the armed forces to monitor the Neves government
closely, but we see little likelihood of military intervention in the
political process for at least the first year or so of civilian rule:
- Most officers appear to recognize that their prolonged rule
tarnished their public image and diminished Brazil's military
capabilities, and they seem anxious to return to the barracks.
- Neves has overcome the military leadership's doubts about his
ability to protect the armed forces' interests and to keep the
economic recovery on track, according to generally reliable
sources. He has accomplished this by assuring commanders that
he will pursue moderate and pragmatic policies, keep leftists out
of key positions, block inquiries into past human rights abuses
and corruption, and support current military spending levels
and the lucrative arms export industry.
If Neves's economic policies result in rising social unrest or he submits to
a leftist clamor for civilian trials of former military rulers-which we
do not believe is likely-armed forces leaders probably would openly
oppose the President. In our judgment, however, conditions would have
to deteriorate gravely before the military would risk popular unrest by
forcing Neves from office.
We believe Neves will continue the pragmatic, low-profile foreign
policy that was favored by the former military government. We expect
him to strengthen ties to other Latin American countries, although he
may be more critical of Chile than his predecessors; to support the
Contadora peace initiative in Central America, while avoiding any
direct participation; and to avoid involvement in East-West disputes.
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Relations with Communist countries will probably be unchanged, with
Brasilia looking for commercial opportunities but remaining suspicious
of Soviet and Cuban political intentions. Neves has publicly stated that
he will not renew diplomatic relations with Havana any time soon. He
will probably continue to strengthen ties to China, looking for markets
for Brazilian goods and expanding scientific and technical cooperation.
Relations with the Middle Eastern countries-especially Iraq-proba-
bly will remain close as Brazil continues to push arms sales to the region.
We expect Neves, who has assured US officials of his good will to-
ward Washington, to continue the military regime's efforts to strength-
en bilateral relations. We believe his administration will share US
concerns-although probably less actively-about Soviet and Cuban
adventurism and Latin American drug trafficking. Nevertheless, we
also see potential bilateral irritants, especially on such issues as debt
servicing costs, trade or investment restrictions, technology transfer, and
nuclear proliferation:
- The new government is concerned with high US interest rates
and their detrimental effects on Brazil's ability to meet its
foreign debt obligations.
- Neves supports Brazilian import and investment restrictions but
also wants greater access to US markets.
- Neves seeks expanded access to US technology, including
assistance for Brazil's space-launch-vehicle program and per-
haps conventional weapon design, while resisting US reexport
restrictions.
- He will resist signing the Nuclear Non-Proliferation Treaty or
accepting international safeguards on Brazil's nuclear programs.
If Neves dies before he is inaugurated or is permanently incapaci-
tated, Vice President Sarney is likely to be formally installed as
president, and broad popular and military support for the democratic
transition is likely to ensure that he is allowed to remain in.office at least
over the short term. Sarney lacks wide appeal, however, and he is likely
to bow to pressure for an early direct election for a new president, per-
haps in 1986. We believe that Sarney will attempt to follow Neves's eco-
nomic policies over the near term, including the implementation of
austerity measures and negotiations with foreign creditors. Over the
longer term, prolonged political uncertainty probably would inhibit
successful economic stabilization, and Brazil would probably fall out of
compliance with IMF lending criteria. While political and economic
tensions may tempt the military to intervene, we believe it would act
only in the event of prolonged uncertainty and social disorder.
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DISCUSSION
1. Tancredo Neves, whose administration has ended
21 years of military rule, must contend with a range of
sensitive political and economic issues. His major
political challenge is to consolidate civilian control by
forging an effective government and establishing a
mechanism for constitutional, orderly transfer of pow-
er to his successor via direct elections.' He will also
have to deal with the conflicting agendas of newly
' Neves was elected indirectly by an electoral college composed of
686 delegates-the 548 members of the Brazilian Congress plus six
electors chosen by the state legislatures in each of the 23 states. (u)
assertive groups-labor, civilian politicians, and small
business. In the economic sphere, most economic
interest groups and politicians desire an immediate
return to rapid economic growth and more equitable
distribution of income. Efforts to advance these objec-
tives, however, could result in excessive government
spending, lead to confrontation with international
lenders, and jeopardize long-term economic growth.
While coping with these challenges, Neves will contin-
ually have to reassure military officers who, although
anxious to return to the barracks, will be monitoring
the government closely
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What Neves Brings to Office
2. Neves brings to the presidency extensive experi-
ence and broad popular support that should ease the
transition from a military to a civilian government.
His ties to traditional political groups, however, may
eventually alienate those Brazilians expecting a broad-
based administration.
Experience and Popular Support
3. In our view, Neves comes to power with impor-
tant strengths. A public figure for over 50 years, he has
the political acumen necessary to prosper in the
shifting currents of Brazilian politics. A recent US
Embassy assessment portrays Neves as conservative,
but not doctrinaire, and generally without strong
ideological commitments. Moreover, according to the
Embassy, Neves's moderation, personal honesty, and
understanding of the Brazilian "rules of the political
game''-which prize compromise and consensus
building over confrontation-have been keys to his
success. He has achieved accommodations with a cross
section of the Brazilian political elite, ranging from
leftists to his military predecessors, without appearing
to identify himself with any group. US Embassy and
other reports portray him as methodical and cautious,
making political decisions himself but only after exten-
sive consultations. Neves, for example, made certain
he would win the electoral college vote before saying
publicly that he would run, according to the Embassy.
4. The present political atmosphere should further
bolster Neves's position. Opinion surveys have consis-
tently indicated that he enjoys wide popular support.
The military broadly accepts Neves and supports the
transition, according to reliable sources and US Em-
bassy reporting. These sources also report that most
members of the armed forces believe the military's
credibility has suffered from its prolonged tenure in
power and its inability to sustain economic growth in
the 1980s, as well as from widespread reports of
corruption. The officer corps is looking forward to the
changeover so that it can focus on repairing its
tarnished image and improving military capabilities.
5. While Neves brings experience and popular
backing to the presidency, he also brings some short-
comings. According to US Embassy and other report-
ing, his age-he turned 75 in early March-may work
against him because he is not a part of the generation
of politicians that matured under the military and now
longs for power. He is viewed by many of these
people, especially those on the left, as too closely tied
to "establishment" politics, despite his role as opposi-
6. Neves is also reluctant to delegate authority,
according to various sources. Further, although he
consults widely,
While this approach
has worked well for him thus far as a politician, some
Brazilian observers believe it may cause him problems
as an administrator charged with running the country.
Meeting the Economic Challenge
7. Even with his political, experience and popular
support, Neves faces a formidable challenge on the
economic front. He inherits an economy that-despite
some recent improvements-remains seriously trou-
bled. Brazil's most notable gains in 1984 were a $13
billion trade surplus and a'4-percent growth in GDP
after three years of recession. Because this recent
economic growth has been narrowly based on exports,
however, many knowledgeable Brazilians have public-
ly stated that they believe the government must take
action to broaden the recovery and reduce unemploy-
ment. Inflation has stubbornly remained above 200
percent for a second straight year, and Brazil is out of
compliance with its International Monetary Fund
(IMF) stabilization program. In addition, Brazil's $100
billion foreign debt and higher-than-normal interest
rates have produced an annual debt service burden
that will absorb some 75 percent of export earnings
unless a new debt restructuring arrangement is
reached with foreign creditors.
8. Given the magnitude and visibility of Brazil's
economic challenge, we believe Neves wants to launch
his presidency with some major economic policy ini-
tiatives in order to distinguish his administration pub-
licly from that of the military. According to various
sources, Neves's economic priorities for 1985 are to
strengthen growth and employment opportunities, re-
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duce inflation, obtain what he considers a fair multi-
year rescheduling of foreign debt, and promote a more
equitable distribution of income
9. Neves has touted growth as the centerpiece of
the new administration's economic program. The task
recently has been made easier by last year's export-led
recovery, which should pick up speed in 1985, result-
ing in a GDP growth on the order of 5 percent for the
year. Neves has indicated publicly that he hopes to
facilitate growth through a combination of eased
monetary restraints for private industry, increased
subsidies to agriculture, and new government invest-
ments in small-scale, labor-intensive public works pro-
jects. In addition, according to various sources, he
wants to create more industrial jobs, stabilize real
wages, and increase social spending to bolster domestic
demand as well as promote more even income distri-
bution.
10. Re ucing inflation has been described publicly
by Neves as essential to Brazil's sustained recovery,
and it probably will be the most difficult challenge
facing him. In our judgment, inflationary pressures are
likely to be especially intense during the early months
of his administration because of excessive monetary
expansion as the military prepared to leave office. To
fight inflation in the near term until more fundamen-
tal measures can take effect, Neves has proposed an
emergency "social pact" among business, labor, and
government to limit wage and price increases. Accord-
ing to the US Embassy, he believes such an agreement
would change Brazilians' psychological expectations of
continued ballooning prices-expectations that are
widely thought to be an important component of
inflation.
11. For the longer term, according to US Embassy
and press sources, Neves believes that the government
must curb public-sector deficits to control inflation. To
this end, he is reported to favor budget and tax
reforms, divestitures of some nonessential state enter-
prises, and cutbacks in large-scale public projects.
According to press reports, Neves's advisers will also
seek to reduce production costs in the industrial sector
as a way of depressing inflation. In view of Neves's
commitment to real wage stability, however, we be-
lieve his most likely target will be the reduction of
high domestic interest rates. In addition, Neves report-
edly thinks he can gradually dismantle Brazil's infla-
tionary indexation system, although not quickly be-
cause of potentially disruptive effects on the economy
and living standards.
12. On the issue of Brazil's large debt repayment
burden, Neves has consistently stated that he wants a
restructuring of the foreign debt that would include
lower interest rates and longer maturities. Neves sup-
ported the terms of a tentative multiyear debt re-
scheduling negotiated by the outgoing military govern-
ment as the best that Brazil could hope for under the
reasonably favorable foreign interest rate conditions
and strong demand for Brazilian exports expected
throughout 1985. Neves was disappointed that he had
to inherit the uncompleted talks because of his con-
cern that the issue could generate substantial discord
among his supporters. His advisers are hopeful, howev-
er, that the new government will be able to complete
the agreement without major changes.
13. To accommodate foreign creditors, Neves has
underscored his intention to continue IMF-prescribed
stabilization measures in 1985, so long as they do not
appear to be causing another recession. Difficulties
will arise, nonetheless, in reconciling IMF stabilization
with the administration's commitment to growth. In
February 1985, the IMF suspended its financial sup-
port for Brasilia because of the military government's
failure to comply with monetary and public-sector
deficit targets. Before resuming its support, the Fund
wants the Neves government to provide assurances in
a new letter of intent that it will take vigorous steps to
control accelerating inflation
Coping With Interest Group Pressures
14. We believe Neves's economic policy course will
be strongly challenged by various interest groups.
Several groups-including labor, civilian politicians,
and small business-have had little impact on policy-
making under the military and see new opportunities
for enhancing their positions under a civilian presi-
dent. Others who have wielded significant influence
over the past 20.years will attempt to protect their
interests; these include the technocrats directing pub-
lic-sector economic activity, the amorphous middle
class, and influential industrialists.
15. Neves, whose constituency spans all these
groups, will probably look for ways to accommodate
their competing agendas without undermining his
economic plans. According to the US Embassy, he is
especially concerned that the demands of labor for
higher wages, together with business calls for im-
proved profits, may add to inflationary pressures early
in his administration. Hoping his proposed "social
pact" will mitigate tensions, Neves has met separately
with business and labor leaders a number of times,
some of whom have indicated receptivity to the idea
of an informal pact.F_~
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Organized labor in Brazil-which embraced about 20
percent of the country's 44 million workers as of 1980-
hopes to exploit the more open political environment
under Neves to bolster its flagging fortune
Sharp ideological and personal rivalries, as well as the
effects of the recent economic recession, prevented
labor from exploiting new opportunities in the late
1970s during the first phases of the military's political
liberalization. Moreover, ineffective leadership, declin-
ing union membership, and poor showings of prolabor
candidates in the 1982 elections have left the unions on
the fringes of the political proces
Moderate labor leaders have formulated modest
agendas for the new government in an attempt to
influence policy and-avoid confrontations, at least in the
near term, according to US Embassy reporting. More
militant unionists, led by the Workers' Party (PT) under
the leadership of Lula da Silva in Sao Paulo state, have
pledged to oppose Neves, whom they view as little more
than a continuation of military rule. They plan to press
for wage hikes and increased autonomy from govern-
ment controls over internal union affairs. The militants
are likely to challenge Neves early in his administration
on wage and other issues, but reporting from a variety
of sources suggests that the labor movement as a whole
will exercise little leverage on the new governmentF
Neves, for his part, has done little to court the unions.
Nonetheless, we believe he recognizes the need for
labor peace if he is to deal effectively with triple-digit
inflation. We expect him to consult with labor leaders
on economic and social welfare issues and to make
limited concessions. He probably will stop short of
easing government controls on the unions that have
helped prevent the militants from gaining control of the
labor movementF___1
16. Despite Neves's efforts at conciliation, we be-
lieve that some contentious differences among interest
groups will surface, especially on the issues of econom-
ic austerity and debt. Brazilian press reporting indi-
cates that most civilian politicians (including many of
those in Neves's coalition), organized labor, and the
bulk of the middle class are far less willing than
technocrats and powerful industrialists-the main
beneficiaries of foreign loans-to accept additional
sacrifices for the sake of fulfilling foreign debt com-
mitments. Neves's own Brazilian Democratic Move-
ment Party (PMDB) called for a debt moratorium and
a break with the IMF during a period of particularly
strained relations with foreign creditors in the summer
of 1983. If forced to choose on such issues, Neves
Much of the private business community is looking
ahead to the Neves administration with considerable
optimism, judging from a variety of sources. Business-
men view Neves as a moderate, consensus-style, and
highly popular politician who is likely to strengthen
political and social stability in Brazil. Also, a number of
Brazilian businessmen anticipate a more open policy-
making climate and a much more active role for
business in shaping government policy than was permit-
ted during the past 21 years of military rule. Neves, for
his part, has encouraged these expectations by suggest-
ing publicly that he will assign some important ministe-
rial posts to people with business and banking back-
grounds who have proved their ability to manage major
enterprises.F___1
Business for the most part has strongly endorsed
several major elements of Neves's economic policy
platform, but has reservations about others. In particu-
lar, the President-elect's pledges to sustain an economic
recovery and to shift greater productive responsibility
from the public sector to the private sector have gained
widespread business support. Business confidence that
the new government will deal effectively with soaring
inflation, however, has been slow to materialize. Al-
though private-sector leaders were somewhat reassured
by a major economic policy speech by Neves in Decem-
ber underscoring the need for fiscal and monetary
discipline, they continue to forecast high inflation rates
for this year.F__~
would inevitably antagonize some important interest
groups, possibly weakening his political base
Influence of Economic Advisers
17. As part of his effort to devise politically palat-
able economic policies, Neves intends to revamp the
policymaking machinery. Various sources indicate
that he plans to abolish the "superministerial" eco-
nomic policy. making function of the government's
Planning Secretariat. Unlike the military regime, he
intends to consult a wide spectrum of economic
advisers ranging from leftists to conservatives. We
believe his decisions will be influenced substantially by
these people, partly because he lacks expertise in
economic affairs and partly because, according to a
range of US Embassy and open reporting, he does not
have strong ideological predilections that shape his
economic policy views.
18. Although Neves granted government positions
to representatives of all his constituent groups in order
to hold together the broad coalition that elected him,
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he reserved key policymaking posts for moderate
economic advisers. He selected Francisco Dornelles,
who was a conservative Finance Ministry official
under the military government, as his Finance Minis-
ter and economic team leader. Moreover, Joao Sayad
and Antonio Lemgruber, Neves's selections to head the
Planning Secretariat and the Central Bank, are report-
ed to be advocates of austerity to quell inflation. To
placate leftist supporters, we believe Neves will find
places for some of Brazil's leading leftwing economists,
but in less influential posts
Charting Brazil's Political Course
19. Also among Neves's major challenges will be the
consolidation of democratic government and the es-
tablishment of mechanisms for the direct election of
his successor. Careful management in this area, which
includes reform of both the military-imposed political
party structure and the Constitution is critical for
ensuring long-term political stability
Political Party Restructuring
20. The emergence last summer of Neves's electoral
coalition, the Democratic Alliance, and the turmoil
generated within the military government's Social
Democratic Party (PDS) by its controversial candidate,
Paulo Maluf, hastened the breakup of the party system
created under military rule. While major realignments
are under way, the ultimate shape of the party
structure remains unclear and will depend far more on
fickle personal alliances and regional politics than on
ideological considerations, according to sources of the
US Embassy.
21. For the time being, we expect Neves to try to
preserve his Democratic Alliance as an umbrella orga-
nization to support his policies in the Congress and
prepare for the 1986 congressional and gubernatorial
elections. His task will be difficult, however, as the
different parties and groups within the Alliance begin
to pursue their own political interests. His PMDB, for
example, which holds about 40 percent of the seats in
the Congress, has long been divided into moderate and
left-of-center factions. The leftists have complained
publicly about Neves's centrist orientation, and Neves
has held extensive meetings with them to discourage
defections, according to US Embassy reporting.
22. The old PDS splintered into two parties under
the weight of its unpopular presidential candidate, and
we judge further divisions may occur. The pro-Neves
dissidents who broke with the PDS to form the Liberal
Front in mid-1984 formally converted their group into
the Liberal Front Party (PFL) in December, but they
remain within the Democratic Alliance. The centrist
PFL is more coherent ideologically than the PMDB
and has a strong regional base in the northeast. It
controls about 25 percent of the seats in the Congress.
Neves has met extensively with leaders of the party,
promising,them a strong voice in his administration in
exchange for their support. Key PFL members have
told the US Embassy that the party will chart a
moderate course and, at least in the near term, back
Neves's legislative program. The remnants of the PDS
will probably survive as a right-of-center opposition
force. We believe there is likely to be considerable
infighting in the PDS, however, as various forces battle
for control of the party.
23. The left, also divided, is seeking to rebuild and
may present Neves with his earliest and stiffest chal-
lenge. Leonel Brizola, the governor of Rio de Janeiro
state, is likely to emerge as a key spokesman for leftist
opponents of Neves's policies. Brizola now heads the
small, divided Democratic Workers Party (PDT), but
he plans to try to form a more broadly based Socialist
Party. Neves is sensitive to Brizola's ambitions, and a
variety of reporting indicates he is trying to undercut
the PDT chief, primarily by enticing leaders of small-
er parties to spurn Brizola's efforts to form alliances.
24. Other leftist organizations that could pose prob-
lems for the new civilian government include:
- The Workers Party (PT). This party was formed
in 1980 with the backing of unions in the
industrial city of Sao Paulo. The PT is a militant
group that has called numerous strikes. Headed
by a charismatic labor leader, Lula da Silva, the
PT thus far has had little success in expanding
beyond Sao Paulo, where it controls dozens of
local unions. The party, badly split during the
presidential election, plans a major rebuilding
effort in coming months.
- The Brazilian Communist Party (PCB). Al-
though banned, the PCB reportedly controls
some members of Congress who formally belong
to legal parties. The Communists see new oppor-
tunities under a Neves administration and will
press for legalization of their party and a voice in
the administration in exchange for legislative
support. The party's far-left rival, the small
Communist Party of Brazil, intends to continue
agitating against the central government, accord-
ing to various sources.
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The Revolutionary Movement of 8 October
(MR-8). This proscribed leftist party stepped up
political activity in mid-1984 in anticipation of
the election. MR-8 leaders reportedly believe
they have sufficient influence within the union
movement to press Neves for wage hikes and
investigations into corruption under the military
regime.
25. Against this backdrop of political restructuring,
Neves has stated that he intends to institutionalize
civilian government by revising the military-imposed
1967 Constitution. According to various sources, there
is broad popular support in Brazil for convening an
elected constituent assembly that would establish a
system of direct presidential elections. Such elections
were advocated during 1984 by groups opposed to the
military government-with massive public support-
and a constitutional amendment providing for direct
elections was almost enacted by the Congress in June.
26. We believe other critical issues that are likely to
be addressed by a constituent assembly include:
- Opening the political system to accommodate the
emergence of new political party groupings.
- Shifting some political and economic power
away from Brasilia to the states.
- Increasing congressional prerogatives in policy-
making
27. Neves supports a constituent assembly but, giv-
en the complexity and sensitivity of the issues, has
indicated that he will move cautiously. He has decided
not to convoke the assembly before 1986, and he does
not envisage direct election of his successor before
1988. To hold the assembly sooner, Neves has argued
publicly, would require dissolving the Congress at a
time when the new administration will be trying to
consolidate its position and win passage of key legisla-
tion. Moreover, he opposes any efforts to amend the
Constitution through congressional action and circum-
vent the need for a constituent assembly. Neves's
advisers have also told US Embassy officials that he
supports proposals for shifting some political and
economic power from the central government to the
states. He probably calculates that backing this con-
cept will reinforce his political support-especially
among Liberal Front Party leaders, who strongly
endorse the idea.
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Assuaging the Military
28. In addition to serious economic challenges and
the need to establish a foundation for lasting civilian
government, Neves will have to convince a nervous
military establishment and intelligence officials that
his course is correct. Although the military is ending its
direct control of the government, we expect it to
monitor the new civilian administration closely. While
broadly supportive of the return to civilian rule and
anxious to focus more directly on strictly military
matters, the high command retained some doubts
about relinquishing power to Neves right up to the
time of the election, according to a variety of reliable
reporting. Armed forces leaders were fearful of possi-
ble investigations into human rights abuses and cor-
ruption under the military regime. They were also
worried that leftists would wield significant influence
in Neves's government. In addition, they were uncer-
The Brazilian military-at 250,000 men, the largest
in South America-is charged with protecting a land-
mass that encompasses almost half the South American
continent and shares borders with 10 other countries.
Without a compelling threat on Brazil's borders, the
military leadership has heretofore focused on such
internal responsibilities as the maintenance of public
order, garrison of remote areas, counterterrorism, and
civic action.
In addition to their mandate to preserve external and
internal security, the armed forces have served-under
the Constitution-as the final arbiter of Brazilian poli-
tics since the founding of the republic in 1889. The
Brazilian military is conservative and hostile to Com-
munists and other leftists. In 1964 the military, respond-
ing to what it viewed as a serious threat from the left,
broke with its tradition of limited temporary interven-
tion and assumed direct rule for a prolonged period.
The last two administrations, however, have moved
gradually to restore civilian government.
Both in and out of government, the military has
aspired to transform Brazil into a world power, accord-
ing to a variety of sources. Even before the armed
forces assumed control in 1964, the priorities associated
with the military's great-power ambitions-rapid eco-
nomic development and national discipline-had
clashed repeatedly with the tendency of civilian politi-
cians to seek support among urban workers by promis-
ing immediate improvements in living standards. In our
view, this inherent conflict remains a potential source of
friction between military and civilian leaders as the
armed forces relinquish direct control of the govern-
ment at a time of economic uncertainty
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tain about his ability to implement anti-inflationary
economic policies while maintaining social order, and
concerned that he would reduce military spending.
29. Neves has reached accommodations with the
armed forces on these issues. He has reassured the
armed forces that his government will steer a moder-
ate course and respect their interests. Neves has agreed
to block inquiries into past human rights abuses and
corruption; name cabinet-level military ministers ac-
ceptable to the high command; bar leftists from key
posts in his government; and try to delay legalizing
outlawed leftwing parties. Moreover, there are indica-
tions that he intends to avoid sharp cuts in military
spending, and that he will continue government sup-
port for the important and lucrative arms export
industry)
Neves's Foreign Policy
30. A range of reporting indicates that Neves plans
no significant departures from the military govern-
ment's pragmatic foreign policy, which was driven
more by economic than ideological considerations.
The selection of the moderate banker, Olavo Setubal,
as Foreign Minister underscores, in our view, Neves's
intentions to adopt a steady, predictable foreign poli-
cy
31. We expect Neves-who US Embassy officials
report has a solid grasp of foreign policy issues-will:
- Maintain Brazil's identification with the Third
World but resist pressure to upgrade the coun-
try's observer status in the Nonaligned Move-
ment.
- Build ties to democratic American countries. He
reportedly anticipates close relations with Presi-
dents Alfonsin of Argentina and Sanguinetti of
Uruguay. In a departure from Brazil's traditional
posture, however, Neves has been publicly criti-
cal of the military regime in Chile, although he
has withheld comment on neighboring Paraguay,
where Brazil has substantial economic interests.
His policy toward Suriname is not clear, but the
Brazilian military sees that country as a potential
focal point for Cuban activity, and Neves proba-
bly will continue the military government's poli-
cy of serving as a non-Communist source of
political and economic support.
- Support the Contadora peace initiative in Cen-
tral America. Neves has been critical of super-
power involvement in the dispute, but he is
unlikely to try to assume a direct role in the
peace process. The US Embassy in Managua
reported in late January that Neves sent only a
tepid response to Nicaraguan President Ortega's
message calling for closer bilateral ties. (c NF)
32. On foreign economic policy, Neves may feel
compelled to emphasize the political nature of the
foreign debt problem and to criticize high interest
rates. He is publicly and privately opposed, however,
to formation of a cartel of Latin American debtor
countries.
33. Neves has also been critical of trade barriers in
the West while at the same time defending protection-
ist measures at home. In a recent assessment of Neves's
likely trade policies, the US Embassy in Brasilia states
that Neves, given the long-term need for foreign
exchange to service the foreign debt, is unlikely to
lower import restrictions. The US Embassy also be-
lieves Neves is unlikely to make a serious effort to curb
problems prompted by Brazil's export drive, including
Neves has said publicly over the last several months
that he intended to review the military government's
1975 nuclear agreement with West Germany, which
called for the construction of nine nuclear power
reactors and Brazilian acquisition of a safeguarded
nuclear fuel cycle. On the power reactor program, for
example, US consular officials in Rio de Janeiro report
that a ranking Brazilian nuclear official familiar with
Neves's views believes that the President's review of the
accord was cursory and that he plans no major changes
beyond stretching out construction of the reactors. Some
US Embassy officials,-however, believe that Neves will
make sharp cuts in the reactor program.
Neves has stated that he favors "nuclear indepen-
dence," and we see little likelihood that he will cut back
on Brazil's unsafeguarded, sensitive nuclear research
projects. Neves has, in fact, placed the military govern-
ment's last Vice President, Aureliano Chaves, in charge
of all civilian nuclear agencies-a move that signals
continuity in the indigenous nuclear program.
Neves has stated that he shares the view of many
Third World leaders that international safeguards are
discriminatory. We do not believe that he will bow to
pressure to sign the Nuclear Non-Proliferation Treaty.
Nor do we believe that he would accept the application
of comprehensive safeguards to the Brazilian nuclear
program that would be required to bring into force the
Treaty of Tlatelolco, which calls for a nuclear-weapons-
free zone in Latin America. Nonetheless, Neves is
sympathetic to concerns within Brazil's scientific com-
munity about potential weapons applications of nuclear
research.
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numerous complaints by international competitors of
heavy export subsidies and dumping on foreign mar-
kets. A variety of reporting indicates that Neves shares
his fellow Brazilians' economic nationalism and he is
likely to continue protecting a number of nascent
domestic industries-such as companies designing and
manufacturing minicomputers-against foreign own-
ership.
Relations With Communist Countries
34. Neves, like most Brazilians, is distrustful of
Communism. We expect no dramatic improvement in
bilateral relations with the Soviet Union and its al-
lies-including Cuba, which has had no diplomatic or
commercial relations with Brasilia since the military
assumed power in 1964. Neves has stated publicly that
Cuba's aggressive export of revolution poses a threat to
hemispheric stability, and that he will not restore
relations with Havana any time soon. At the same
time, however, Brazil has long pursued trading oppor-
tunities in Communist countries, and Neves has given
no sign that he intends to reverse this approach. He
will probably seek to expand commercial and other
relations with the Soviet Bloc when such moves are
compatible with Brazilian interests. Even if trade
relations with Moscow grow, however, Neves will be
on guard against efforts by the Soviets to expand their
political influence
35. Reliable reporting indicates that both the Sovi-
ets and Cubans, for their part, see the return to civilian
rule as an opportunity to improve bilateral ties. Mos-
cow sees Brazil as an important regional actor and is
anxious to redress the bilateral trade imbalance which
favors Brazil. Havana has also tried to achieve a thaw
with Brasilia in anticipation of Neves's inauguration.
Several unofficial Cuban delegations, for example,
have visited Brazil to meet with local groups that
advocate a restoration of bilateral ties, and delegations
of Brazilians to Cuba have received special treatment
from the Castro regime.
36. In contrast to his cautious approach in dealing
with Cuba and the Soviet Union, we believe Neves
will build on the military government's efforts to
strengthen ties with China. During 1984 at least six
Brazilian delegations visited China in search of mar-
kets for commercial and military goods. The two
countries agreed to exchange military attaches, and a
nuclear cooperation agreement was also signed. Ac-
cording to the US Embassy, Neves's support for Bra-
zil's foreign policy direction under the military, to-
gether with the need to bolster exports, will work in
favor of continued expansion of Sino-Brazilian rela-
tions.
Relations With the Middle East
37. Relations with the Middle East, which grew
dramatically under the military, will probably contin-
ue to expand under Neves. The Middle East is the
major source of oil imported by Brazil and the major
market for Brazilian weapons exports, with Iraq cur-
rently the largest customer. The arms relationship with
the Arab world is especially important as a source of
foreign exchange. Several Arab governments-partic-
ularly Saudi Arabia-are financing Brazilian military
research projects which, in turn, provide a stimulus to
the development of indigenous technological expertise.
Neves has shown no inclination to limit arms exports.
He is likely to echo the military regime's argument
that conventional weapons such as those produced by
Brazil are readily available from other sources and
that the country must retain its reputation as a reliable
supplier. Despite the importance of the Middle East,
Neves will probably maintain the military govern-
ment's evenhanded posture toward Arab-Israeli issues.
Outlook for the Next 12 Months
38. We expect Neves to steer a moderate political
and economic course for-Brazil for at least the next
year, and we judge that he is likely to have the
political clout to maintain such a course. Despite the
indirect nature of his election, Neves enters office in a
position of strength because of his broad popularity,
his acceptability to Brazil's military and political elites,
and his demonstrated ability to negotiate and compro-
mise with key political actors. Moreover, the public
euphoria surrounding the return to civilian rule should
help keep opponents in check and provide Neves with
an initial honeymoon period to consolidate his control
over the government.
Staying the Economic Course
39. In our judgment, the civilian government is
unlikely to make any radical changes in economic
policy this year. We believe the new administration
will maintain a stabilization program designed to
combat Brazil's dangerously high inflation rate and to
maintain cooperation with foreign lenders. The con-
tinuing momentum of Brazil's incipient recovery
probably will permit Neves to honor his growth pledge
to his supporters without recourse to major stimulative
government policies. Moreover, his recent perfor-
mance as governor of Minas Gerais state testifies to his
willingness to support austere budgetary policies. In
addition, we believe Neves will want to maintain
restraints this year to pave the way for a stronger
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recovery in 1986, when he would hope to reap
considerable political gain in that year's scheduled
congressional and gubernatorial elections
40. We believe that Neves and the IMF will try
strenuously to reconcile their differences and probably
will reach a settlement in the coming months. Various
intelligence sources report the new administration's
intentions to maintain IMF support by vigorously
pursuing an anti-inflation program. Accordingly,
Neves's economic team probably will initiate negotia-
tions with the IMF for a new letter of intent soon after
the inauguration. Still, insistence by the IMF on
measures tough enough to achieve a sharp drop in
inflation might backfire and cause him to abrogate
relations. Given the widespread antagonism among
Brazilians toward the IMF, Neves would not want to
be perceived as acquiescing in excessive austerity
measures by the Fund.
41. Whether or not an agreement is reached with
the IMF, we believe Neves's moderate economic
policy team will seek greater fiscal discipline. The
incoming government has affirmed its intention to
implement the budget reforms prepared by the mili-
tary regime to enhance government control over
spending. It probably will also take steps to reduce the
pay and fringe benefit excesses that pervade the
government bureaucracies, cut back nonessential
large-scale public works projects, and curtail spending
by state corporations.
42. As a result, incur view, the odds are slightly
better than even that the new government will suc-
ceed in slowing Brazil's inflation rate by the end of
this year, although overall 1985 inflation may top 250
percent because of the effects of monetary expansion
on prices in the first half of the year. We judge,
moreover, that Neves will resist labor demands to raise
real wages until he can bring inflation under control.
If Neves fully carries out the military regime's
planned budgetary and financial reforms, he will be in
a better position to limit Brazil's monetary expansion,
which should further lower the inflation rate. Such a
reduction would be likely to have positive effects on
Brazil's investment, economic growth, and foreign
payments position.
43. Brazil's payments position this year should re-
main strong, in our judgment. Neves's economic team
has publicly asserted its intention to maintain the
current sizable foreign reserves. Accordingly, we be-
lieve the new administration will continue to offer
major tax and credit incentives to exporters, especially
those in industry. Neves probably will prefer to de-
value the cruzeiro only gradually to soften the infla-
tionary impact but, if forced to choose, he is not likely
to permit the currency to become significantly over-
valued, which would make Brazil's exports less com-
petitive. We expect that continued recovery in the
West and some revival of demand in developing
countries will combine, with favorable government
policies to lead to an increase of 5 to 8 percent in
export revenues. We expect the export performance
will enable this year's trade surplus to remain above
$12 billion, despite substantial increases in nonoil
imports. Consequently, we believe Brazil's current
account deficit probably will again be small
44. An accord with the IMF should pave the way
for a rescheduling of foreign bank debt on terms
similar to those tentatively negotiated by the outgoing
government. Neves may press for some form of pro-
tection against a major rise in interest rates. In the
event that the IMF program is aborted, the new
administration might feel that it is in a strong enough
foreign exchange position to press foreign bank credi-
tors for a multiyear debt rescheduling without Fund
support. Venezuela has provisionally reached such an
agreement with international banks.
Stable Civil-Military Relations
45. The armed forces will remain the most impor-
tant political group in Brazil, but unless Neves dramat-
ically shifts his conciliatory posture toward the mili-
tary or strays too far from the moderate course we
expect him to steer-changes we regard as highly
improbable-we see little likelihood of any military
intervention in the political process during the next
year. Hardline elements opposed to the turnover of
power are being eased out, and we expect the Army
high command to use routine promotion and rotation
cycles to replace other potential troublemakers. As the
Neves government takes hold, we expect both sides to
continue their dialogue to diminish tensions and un-
certainties.
Potential Vulnerabilities
46. While we have forecast a moderate, relatively
successful first year for Neves, his ability to hold to a
centrist course will depend on his own political skills,
economic conditions, and the continued willingness of
key actors to compromise on contentious issues. Al-
though he has demonstrated his ability to juggle
competing demands and build a consensus, we believe
there is considerable room for miscalculation that may
complicate policymaking, erode his political base, and
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intensify opposition to his administration sooner than
we, or Neves, expect. On the political side, key
variables to watch include:
- Popular expectations and Neves's leadership
style. The transition itself has generated high
expectations that could be difficult to fulfill,
leading to popular disenchantment if Neves fails
to differentiate the policies of his administration
from those of the former regime. Further, his
reluctance to delegate authority could prevent
him from examining policy alternatives and dis-
tract him from key issues.
- Managing Congress. Legislators, newly freed
from the constrictions of military rule, are almost
certain to demand a larger role in policymaking,
especially on economic issues. There are indica-
tions that Neves is already facing difficulties
holding together a working majority in the Con-
gress, and he probably will have to make substan-
tial concessions on key legislation. The political
party realignment could also result in a splint-
ered system that paralyzes the legislative pro-
cess-infighting in state legislatures is already
intense. Moreover, members of Congress and
party chiefs, anticipating the 1986 elections,
might be unwilling to identify too closely with
the new government.
- Coping with the left. Leftists are unlikely to
give Neves much breathing room. We believe
Brizola will press relentlessly for limiting Neves's
term to two years, arguing that he is a transition
president without a direct popular mandate.
Brizola, as well as other leftists, are also likely to
attack the President's economic policy and may
demand investigations into past military corrup-
tion and human rights abuses. Neves's leftist
supporters could be especially susceptible to such
appeals. Other leftist groups, including the Com-
munist Party and MR-8, are also likely to intensi-
fy their political activity as they seek to exploit
the more open environment.
- Containing labor. Weak, divided, and lacking a
clear agenda, organized labor nonetheless has the
ability to carry out disruptive strikes in both
urban and rural areas. Several moderate labor
leaders have told the US Embassy that they have
been disillusioned by Neves's resistance to their
calls for more union autonomy. Moreover, the
Embassy has indicated that moderate labor
chiefs may be unable to control their rank-and-
file members, who appear increasingly influ-
enced by leftists. According to US Embassy and
press reporting, leaders of the Workers Party in
Sao Paulo intend to oppose a "social pact" with
business and the government. Rural labor unrest
in the northeast and the interior of Sao Paulo
state has also increased in recent months, accord-
ing to press reports.
- Military concerns. The armed forces will watch
for policy shifts that threaten their interests.
They may, for example, be willing to tolerate
some investigations into flagrant military corrup-
tion, but they would resist any broad formal
inquiries into their activities while in power.
They will also be sensitive to any indication of
growing leftist influence in the government,
shifts in foreign policy-especially any move-
ment toward a rapprochement with Havana-or
signs that Neves is unwilling to act firmly against
leftist subversive activity or illegal strikes. In our
view, there is some possibility of military or
rightwing violence, such as bombings, against the
government, although the high command should
be able to contain such outbreaks.
47. Whether Neves can limit the 'impact on his
administration of these variables is closely linked, in
our view, to his overall economic performance. His
success in managing the economy over the next year,
in turn, will depend heavily on his ability to maintain
foreign banker cooperation and to regain control over
Brazil's accelerating rate of inflation. We remain
concerned that efforts by Neves to accommodate
many or all interest groups and advisers, including
those espousing leftwing views, may result in the
adoption of inconsistent or misguided policies, such as
advocacy of a foreign interest rate capping scheme
and expansionary measures to spur rapid, domestically
driven growth.
48. Should bank rescheduling discussions become
protracted because of greater Brazilian demands or
inflexible bank positions, the new administration prob-
ably would increasingly politicize the issue by appeal-
ing to governments of creditor banks to facilitate
easier repayment terms. Such a situation would most
likely occur under circumstances of resurging foreign
interest rates or an unexpected drop in Western
economic activity that would cause a major swelling of
Brazil's current account deficit. Neves already has
indicated that the Foreign Ministry will be given a
greater role in foreign debt policy and has selected
Olavq Setubal. a highly respected banker, to be its
head.
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49. If Neves does not succeed in holding the line on
public spending, his plans to stabilize prices would be
undone. Polls indicate that many Brazilians already
are skeptical about the new administration's determi-
nation to fight inflation and will be alert to its first
signs of wavering. A decision by Neves to shift to
expansionary fiscal and monetary policies would be
likely to lead to a rapid escalation of price increases to
the 300- to 500-percent range. A sharp rise in inflation
would seriously weaken the civilian government's
prospects for sustaining the recovery, disrupt Brazil's
relations with the IMF, and damage its political base.
Implications for the United States
50. Both publicly and in private, Neves has under-
scored his intention to continue the military govern-
ment's efforts to strengthen ties to Washington. He
visited Washington shortly after his election victory in
January, and has assured high-level US officials of his
friendly intentions.
51. We believe that, on balance, Washington's
hemispheric interests will be enhanced by the demo-
cratic process and Neves's presidency. A moderate
who is strongly committed to elected government, he
will be a stabilizing force in the largest and most
economically powerful country in South America. His
emergence is also likely to foster cooperation between
Brazil and democratic elements elsewhere in South
America. At the same time, we believe Neves is
unlikely to allow Brazil to be used as a base for
operations by dissidents from neighboring countries,
such as Chile, Bolivia, or Paraguay.
52. The regional interests of Brasilia and Washing-
ton are likely to coincide in several key areas. Neves,
for example, has already voiced public support for US
efforts to curb illicit drug production and trafficking
in Brazil and the region. Barring any dramatic changes
in Brazil's external account situation, he is also unlike-
ly to take a confrontational stance toward Western
lenders on the foreign debt issue or support any efforts
to create a cartel of Latin American debtors. We
believe he will remain committed to supporting the
Contadora initiative in Central America, although he
is unlikely to seek a direct role for Brazil in that
region
53. On security issues, Neves is likely to share US
concerns about Soviet and Cuban activities in the
hemisphere and guard against efforts by those nations
to expand their activities in Brazil or in vulnerable
neighboring countries. We believe, for example, that,
given the military's intense interest in Suriname, he
will maintain the military government's economic and
military aid programs in that country to forestall
Cuban expansionism there. We judge that he might be
persuaded to play a similar role in neighboring Guy-
ana if Cuban activities there expand significantly.
Neves probably would also welcome increased US-
Brazilian cooperation in such areas as military training
and doctrine, hoping that such programs would help
distract Brazilian officers from internal politics as well
as enhance their military capabilities.
54. Neves, however, will be operating in a much
more open political environment than the military
government faced, and domestic political pressures
will probably lead him periodically to voice anti-US
positions. For example, he may feel compelled to
criticize US policy in Central America to accommo-
date his leftist supporters. For the same reason, he may
occasionally speak out against foreign banks and busi-
ness interests, accusing them of insensitivity to Brazil-
ian concern
55. In our view, however, bilateral relations will be
most vulnerable to tensions stemming from Brazil's
economic difficulties. While Neves has indicated his
intention to maintain good relations with creditors,
signs of lender inflexibility or large increases in the US
prime lending rate would be likely to prompt a sharp
response. Similarly, if Neves's orthodox economic pro-
gram fails to control inflation, we expect he would
concede a larger policymaking role to his more leftist-
oriented economic advisers, who clearly are inclined
to be more nationalistic and unfriendly toward Wash-
ington. If these advisers begin to dominate economic
policy, Neves might well move to increase Brazil's role
in the Cartagena debtors' group and become more
supportive of collective resistance to the banks.
56. Foreign investment and trade issues may also
become irritants. Neves has said he will continue to
welcome foreign capital, but there are indications-
including his support of pending legislation protecting
Brazil's infant computer industry-that he may re-
quire foreign investments to be more consistent with
Brazil's national development strategy. He may con-
tinue Brazilian insistence that projects include technol-
ogy transfer and not compete with indigenous opera-
tions. On trade issues, we believe Neves will continue
to defend Brazilian import restrictions but press for
expanded access to US markets. He also wants the
United States to be more forthcoming in sharing
weapons and space technology, while resisting US re-
export restrictions. Further, he will be sensitive to any
US pressures to limit Brazil's lucrative arms exports or
to place the Brazilian nuclear program under interna-
tional safeguards
17
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