Assessing Dilma Rousseff's Brazil

Kellie Meiman Hock, managing partner at McLarty Associates, and Riordan Roett, professor and director of the Latin American Studies Program at Johns Hopkins University's Paul H. Nitze School of Advanced International Studies, join the Federal Communications Commission's Cara Grayer to discuss Brazil's political and economic future. The panelists consider a range of topics, including Brazil's shifting attitudes toward foreign affairs under President Dilma Rousseff, its role within the BRICS grouping of emerging economies, and its economic challenges. Over the course of the conversation, Hock and Roett address Rousseff's political position and possible policies the Brazilian government can pursue to stimulate its economy.

GRAYER: Good afternoon.

I would like to introduce to you two of Brazil's experts, and thank you for coming.

There's some reminders to the audience that we are now and we're aware of no cellphones.

ROETT: Good.

GRAYER: No cellphone pictures.

We are talking today about...

ROETT: A selfie?

(LAUGHTER)

GRAYER: No selfies.

ROETT: (OFF-MIKE)

GRAYER: We're talking today about the largest country in South America in the Latin American region, the world's fifth largest country by both geographical area and population.

The country's economy is the eighth largest by (inaudible) and seventh largest by GDP. A member of the BRIC group. Largest producer of coffee for nearly 150 years and blessed with a melting pot of people and an abundance of resources.

So today I would like to introduce to you Kellie Meiman Hock, and Dr. Riordan Roett. I want to start with a very easy first question for you, and that is before we dive right into the issues of today, can you give us a bit of an overview of what makes Brazil a BRIC, and one of the big four?

ROETT: I'll let Kellie start with that. She loves the BRICS.

(LAUGHTER)

HOCK: Riordan knows that one of my stock not particularly good jokes is that the—you know, the reason Brazil is a BRIC is because some Irish-American guy that worked at Goldman Sachs decided to make up the BRICS. It really was something that was just invented by Jim O'Neill in 2001, trying to define what we used to call big emerging markets were going to look like going forward.

And at the beginning it was, you know, really not a thing yet. Enter 2008 and the global financial crisis, and there were a lot of mechanisms that existed pre-2008 that were kind of grabbed off the shelf as ready-made institutions. One was the G-20, another one was the BRICS: and that is shortly thereafter in 2009, is when the BRIC countries actually started meeting regularly. And those first meetings, if you saw the photographs of the heads of state standing together. You know, I remember one particularly memorable picture where they all have their hands in, like you know, you do in a basketball game all together, and they were all kinda looking like, "what do I have in common with this guy," you know?

(LAUGHTER)

And it was one of the more, I had it as my screensaver for awhile, because it was just so awkward, and you know, but that evolved a bit. I mean, at this point, you do have, while the interests continue to be quite divergent, you do have some issues on which they have been able to you know, fruitfully discuss in dialog, and in this last meeting that they had on the margins of the cup last July in Fortaleza in Brazil, they did come up with this concept of BRICS Bank, which we'll see what that ends up entailing.

I guess I personally think as long as you have the Chinese with the ability to do what they did last week, which is get on an airplane and just write their own checks that are quite large, whether or not you have a BRICS Bank to me is a bit of an academic point.

But you know, the next meeting that they have in July in Russia, I think will kind of prove the point if this BRICS Bank is going to become something more meaningful or remain just a little bit more of a talking point.

ROETT: My summer allergies. The BRICS really did become a very important acronym for looking at the world in a very different way beginning in 2001, 2002. These were the emerging markets. Now, we can discuss whether they are emerging or submerging at the present time, but they were the emerging markets at that time, and with a tremendous commodity boom during the 2001, 2008, 2009 period, they benefit a great deal from that trade.

They also became a symbol, I think, of wanting to reform the international agenda, particularly the voting rights of the International Monetary Fund for example, which of course has never happened because our beloved Congress doesn't know what it's doing.

And more importantly, the BRICS really did encapsulate to some degree the ability to really capture the attention of the world for an agenda that really was very developmental in the old fashioned way of meaning developmental. So I think in that way it's not going to go away.

I don't think there's a common agenda that is deterrably (ph) deep, but I think there is something that brings them together and because the acronym has lasted for so long, I don't think that it's going to disappear anytime soon.

Importantly, Brazil in particular, what we're talking about, played a very important role when the G-20 was resuscitated and calling for the reform of the international institutions at the end of George W. Bush's administration, and the finance minister of Brazil had his own mini-summits trying to come up with an agenda, which was then put on the table to be discussed at the summits that follow afterward. So I think that Brazil in particular has taken the BRICS to heart, particularly under President Lula, who was the BRICS president, and enjoyed being the BRICS president very, very much.

President Dilma is not a BRICS president. She just merely sits at the table, and she has some other problems to worry about than worrying about being BRICS president.

GRAYER: I think we can all agree that something has gone terribly wrong with Brazil, and can you pinpoint its recent downfall, or if you can even categorize it as a downfall?

HOCK: I wouldn't. I—I—what I would say is that neither were things as good as everyone was saying they were back in 2009, 2010, nor are they as bad as everyone is saying today. There was a great deal of euphoria around Brazil when the 2008, 2009 global economic crisis hit. Their reserves were high. They had a lot of money to throw at the problem. They did throw a lot of money at the problem by hypercapitalizing the NDS, their development bank, by initiating a very ambitious public works program.

And you know, it really did create, along with the pre-salt oil finds, a particularly enthusiastic moment. But the challenge is that there are certain reforms that you really can only do in the days of the fat cows: tax reform, labor reform, being the ones in Brazil that are desperately needed. And the fact that those reforms were not taken at the point where Brazil, and due in great measure to the commodities boom as well, was really you know, at a very privileged moment, laid the groundwork for when that pendulum swung the other way, for Brazil to not be terribly well-prepared to handle that moment, because you know, when the stimulus spending, and we found this from the United States as well right, I mean, when the stimulus spending needs to be tapered down, that's not a particularly easy moment politically, and that was intensified, I would say, over the previous year, over 2014, with it being a presidential campaign year.

And bottom line is, when you institute those sorts of policies, eventually you've got to pay the bill.

ROETT: I'll give you the good news. The real has depreciated 21 percent against the dollar recently. There is a deepening recession in Brazil, and the commodity super cycle is over. The economy will contract by 1.2 percent in 2015. Lost jobs in April for the first time since 1992. Unemployment is up to 6.4 percent. Inflation will end this year probably at 8.2 percent. That's the good news. Now do you know what the bad news is? This is an economy out of control, driven by the P.T., particularly by the incompetent finance minister, Mr. Mantega, who thank god was finally fired, pushed out, and now, Joaquim Levy has many many pieces to pick up and put back together again.

And 2015 is going to be a terrible year for Brazil. And I am now looking at reports saying that 2016 will probably not be much better. You know, productivity is down. Brazil is not a competitive economy, and they really need to induce the reforms that Kellie mentioned before they are going to become competitive and productive. And that is the real challenge for Brazil.

GRAYER: OK, so while it's a difficult moment economically, what do you think about Dilma's economic team, and do you think that they can get the job done?

ROETT: That's two different questions.

I'll let you start.

HOCK: No, I do, actually. I think that the economic team, I do think that they can get it done.

ROETT: OK.

HOCK: I have a lot of faith in Joaquim Levy, the finance minister. He's incredibly competent, incredibly hard worker, incredibly driven, and incredibly needed right now.

And what is making me optimistic is the fact that President Rousseff realizes that what Brazil needs right now is the difficult medicine that Joaquim is doling out.

That said, he has a very delicate balance that he needs to strike, given that the president's popularity is low, the Congress is all over the map. He essentially is able to put forward and has been putting forward yes, some reforms that require congressional approval, but you know, for the most part, reforms that he is able to do you know, just out of—out of his own power and jurisdiction, and he is very careful to say, you know, I'm not increasing taxes. I'm just putting back in the taxes that were reduced before that should have never been reduced.

And so that doesn't soften the blow if your, you know, monthly paychecks don't go as far as they used to, which is a reality today in Brazil, but it is—it is what Brazil needs.

Now, in those moments though, when the reforms require the Congress, that's where Joaquim's game gets a little bit trickier, because you know he's—he's been you know, up to now, very direct and saying "look, if you all aren't going to approve these reforms that we need, that I was put in place to implement and that, you know, the only reason Wall Street is not freaking out right now, is because I am here doing this job. I'm just going to take out my jacks and go home." And he said that.

Now, you can do that once or twice, but you can't do it all the time. So that's going to be a real delicate balance for him going forward, and it's to the point that it's kind of gotten silly. And last week when Nelson Barbosa, the planning minister, rolled out their budget, which by the way included a GDP prediction of it dropping this year 23 percent in dollar terms, so significant. And budgetary cuts to match.

Joaquim did not go that day. Foreign minister, or excuse me, Finance Minister Levy did not go to the unveiling of the budget, and the immediate response the next day in the real markets is that the real weakened by one percent. Why wasn't Joaquim there? Did he not think it was enough cuts?

You know, it gets almost into, you know, Kremlinology of who's in the room and what do they support? And you know, they you know, came out and said "no, he had a cold. Don't worry."

You know, so it gets a little goofy, but I do think that—I do think that he's empowered. I do think that you know, beyond him, you've got a very good, you know, minister of commerce, industry, and development, Minister Monteiro, who comes from their industrial association, CNI, so knows the business environment. Also knows the political environment as a politician from northeastern Brazil, and I think in a very positive indication of where his priorities are, his first visit outside of Brazil was to the United States.

So I think that you know, he's very much trying to engage the private sector and you know, to my mind that's been a positive. And this moment, you know, difficult moments sometimes can lead to helpful conversations. And there are some policies that over the last number of years, have frankly restricted growth in the economy: a bit of a doubling down on state-led growth and industrial policy, that frankly in some of the highest tech sectors, has restricted investment as opposed to encouraging investment, and a lot of discussions that government officials weren't necessarily as open to having, you know, when the economy was you know, all—all roses, now they're sitting down there saying "OK, how—what can we do to make our PDPs, our you know, private-public partnerships work better? What can make Brazil (inaudible) their industrial policy work better and actually encourage investment?"

And so some more substantive discussions are happening at this point on how you can weed out some of those bottlenecks, and I do hope that that'll bear fruit.

ROETT: Joaquim Levy's a great guy, but he's one person in an extraordinarily bureaucratic, corrupt government structure. The P.T. is no better than any of the other political parties in Brazil right now. They thrive on corruption. They thrive on appointments. They thrive on kickbacks.

The Petrobras scandal is a very good example of that.

There is no coherent party policy in the Congress at present at time. Dilma has lost control of the politics and has handed over to Michel Temer, the vice president from the PMDB, who is a crook. The two heads of Congress are on the list probably of those who were taking bribes from the Petrobras scandal, the head of the Senate and the head of the lower House.

How do you really come up with a coherent set of policies when one part of the P.T., the very more radical, ideological part of the P.T. can't stand any of the policies that Levy is putting forward? The other political parties are divided on whether or not they want to support these policies.

So, while Levy is a great guy and Barbosa is a great guy and Mantega is a great guy—they're three great guys in the middle of a tremendous mess.

And how you clean that mess up is a very, very complicated question.

President Cardoso, a former president, made a statement to the F.T., about a week ago, saying that the political party system is dead in Brazil. It needs to be restructured, reorganized. And that is a major issue which we've been talking about for decades, but it really has gotten worse decade after decade after decade.

The only way you get anything done in the Brazilian Congress is to buy people off. That was the case in 2005, with the famous monthly payment. We all thought Lula was doing a great job in the first two years of his administration, because he was actually getting something passed by the Congress.

How was he getting it passed? Monthly payments, envelopes, minz sal lil (ph), caldal meaz (ph), each month. People in Congress got big bucks to vote for his program.

Do you think that stopped?

GRAYER: OK.

(LAUGHTER)

You asked the whole audience and not just me.

(LAUGHTER)

So I'll—so the follow-up question to that is...

ROETT: None of us think about (inaudible).

GRAYER: ... given the recent developments around Petrobras, do you think Brazil will finally crack down on corruption?

(LAUGHTER)

ROETT: No. President Dilma was minister of mines and energy and chairman of the board of Petrobras when all this took place. He doesn't know anything?

That's a question. I don't have an answer to that question.

Corruption is in-built in the political system. The Petrobras scandal is really one of many scandals in the public sector in Brazil, and that, of course, is linked directly to the campaign of President Dilma last year to be reelected with the money from the scandal at Petrobras went into the P.T. campaign.

So, if the president doesn't know anything, as President Lula didn't know anything about the Mensalao in 2005 either, impunity runs deep in the Brazilian political elite and corruption runs deep as well in the Brazilian political elite.

Now, what is important is that federal prosecutors are actually prosecuting. And that's something very new and very important. Some very brave younger men and women are finally coming forward and applying the law.

Imagine. There are actually plea bargains in play with many of the executives of the oil companies that were involved in the kickbacks. That's very important. People are going to jail.

How long they'll stay there is another question, but they are going to jail, and I think that's very—very positive, as well.

But in general, the broader question of corruption in Brazilian politics, it runs so deep and for so long, that I think it's very difficult for any one person to even think about opening up that bag of worms and really addressing it.

GRAYER: Kellie?

HOCK: To my mind, there's three factors that make this situation a little bit different.

One Riordan highlighted, and that is this new generation of young prosecutors who really do view themselves as defenders of the new Brazil and turning the page on the old Brazil. I think that that's very significant.

Secondly, I think that you have the public enraged, frankly, at the level of corruption that has been exhibited in this particular case. And they're speaking out about it in a more systematic way than typically has been in the past.

Now, Brazilians, famously, get very angry and then get very distracted later.

ROETT: Right.

HOCK: So we'll see how long it lasts.

ROETT: They go back to the beach.

(LAUGHTER)

HOCK: But, for now, there is a level of political engagement on this that is—that is more significant than in the past.

And then, lastly, the fact that the Petrobras situation, because they are, at the end of the day, a publicly traded company in the United States of America, is under investigation by the U.S. SEC, which leads to a different level of examination than, you know, if it were just a game that were being played only at home.

So, we'll see. I think there are some factors that are going to be a little different.

GRAYER: I want to shift gears just slightly. What do you think of the recent—what do you think the recent political and economic hiccups for Brazil will mean for its role as a regional leader?

ROETT: Well, there's always been a issue, Portuguese-American versus Spanish America. Brazil began in 1500 as a tiny part of the coastline, and by the 1750, the Treaty of Madrid, they occupied half the continent.

So there's always some suspicion of Brazil when it begins to flex its muscles.

But, having said that, the last two decades, let's say, with the funding of the Common Market of the South, Mercosur, which is a mess, it doesn't work, but beginning with Mercosur, Brazil began to play more of a regional role. They've been very strongly in favor of UNASUR, which is the collection of South American countries, the defense mechanism which was put into place a couple of years ago. Brazil has been a leader in that as well.

So they have stepped out more the last decade or two to try to find a common agenda with their Spanish-American neighbors.

But very often Brazil was caught between the crazies in Venezuela or Ecuador and more rational people in Uruguay and Chile. And Brazil has always been very reluctant to really come down on either side very strongly. They maintain relations, of course, with both, as they play the middle, which they've done somewhat successfully over the last two decades.

But Brazil has been a very reluctant member of the family of South American countries, in part because it is so large—it is the largest economy, because of the history in which they indeed did seize a good deal of other people's land, and, finally because they are different. Brazil is different than Argentina or Venezuela or Mexico.

HOCK: Now, to my mind, I think that under President Lula Brazil became more active in—globally, but also in the region, just because he likes foreign policy so much.

And what's very clear is that President Rousseff really doesn't enjoy foreign policy. This is not fun for her. She prefers domestic.

And, with that, you've seen Brazil be less active in groups like UNASUR and the like, that—you know, many of which were actually invented under President Lula's leadership.

You know, for Rousseff, I think that they'll continue to keep their—keep their bet very strong on Mercosur. You know, they've started discussions with the Pacific Alliance as well, which is the group of, you know, Pacific-facing countries, Mexico, Peru, Colombia and Chile, that kind of branded themselves as the countries that were eastern looking and more open economies. So they've got that line out.

But I think Mercosur's gonna stay where the priority—where the priority remains. But I do think the fact that Dilma went to Mexico this week, President Rousseff went to Mexico this week, is significant. Brazil and Mexico, given the size of their economies, have a just very, very low level of trade. Mexican trade with Brazil I think is just 1 percent of their total. And there's been more of a feeling of competition, frankly, between China (sic) and Mexico than a feeling of what can we do to complement each other's economy?

So I think that's a positive.

And I—and I think is indicative of President Rousseff taking a bit more of an outward looking perspective, which—her trip to the United States is part of that as well, you know, given that she has a real need to show domestically that she's doing everything she can to draw investment to Brazil of any type.

ROETT: The problem is that Brazil is a very closed economy. It's not a great trading nation. Brazil, for example, is not part of the TPP, Trans-Pacific Partnership conversations that are going on. It really is not going to ever join the Pacific Alliance. It is stuck in the South Atlantic, and this is a Pacific century. And the kind of countries along the coast understand that.

Brazil is putting its head in a hole by not becoming more involved in these international trade negotiations.

It's a closed economy. It's not a particularly productive economy. It's an economy still driven by commodities and it is not a very competitive economy, as I said before.

GRAYER: Well, security has always been an issue for the country. Are they ready for the Olympics?

ROETT: If you don't mind dead dogs floating in Guanabara Bay, I guess they're ready for the Olympics. I wouldn't want to be sailing—in a sailing event in Guanabara Bay next year, by any means.

The Olympics will be based in Rio de Janiero. A marvelous city. As we know, the Brazilians are very good at getting things done at the last hour, last minute, last half-minute, last second. And they probably will do that again.

There aren't enough hotels. Transportation infrastructure is still terrible. They haven't really prepared very well for the Olympics, although, and I'll let Kellie defend the mayor of Rio de Janiero, who is a good guy and is trying very hard, but he has what on his back? The federal government. And God help you when you have the federal government on your back in Brazil.

GRAYER: Kellie, are they ready?

HOCK: I do tend to think—I mean, not everything is gonna get done, right? They're not gonna finish the metro line that was supposed to go all the way to the village. I mean, there are—there are particular projects that will not be done.

And they are going to have to shut down the city of Rio de Janiero during the Olympics.

ROETT: Mostly.

HOCK: Totally, in order to get it done from a traffic perspective.

But—but I do believe that they will get it done. I do think that Paes is incredibly focused. This is his political ticket to the future for Eduardo Paes, the mayor of Rio. And he is being very aggressive and not very shy about pointing out where he's been frustrated with some of the shortcomings of the federal government.

And, you know, I think he's gonna be pretty darn sure that this goes well.

GRAYER: Before we open for our questions from the audience, I want to ask you if you can leave us with—tell us something that we may not know. Anything?

ROETT: President Dilma is not President Cristina Fernandez de Kirchner. If you didn't know that, now you know it.

(LAUGHTER)

HOCK: They have different lengths of hair.

ROETT: No, Cristina's certifiable. Dilma's not certifiable.

HOCK: No, I'll add to that. I mean, Brazilians—and I will say this, because sometimes in this town—I've not worked on Brazil as long as Riordan, but I've been either living there or working there since '94—and I know that people get frustrated because it sometimes—you know, in Washington, we—it looks like one of those countries we should be able to work with and we should be able to be aligned on everything, and, you know, then we'll have a spat over Iran or we'll have a spat over Snowden or, you know, whatever the case might be, you know, and emotions get high.

I mean, I will say that the one thing I'll say about Brazil is that they are, at the end of the day, an incredibly pragmatic country, which, aside from the length of their hair, might make for a bit of a difference.

But, you know, and so, at the end of the day, Brazilians do tend to take a pragmatic path. I think that that's what you see with some of the economic team nominations that Dilma has put into place.

HOCK: Good, that's great.

So we're gonna open up for questions and answers for the audience.

ROETT: Good heavens.

HOCK: If you can state your name, affiliation, and keep the questions concise...

(CROSSTALK)

HOCK: I think I saw that hand go first, so?

QUESTION: Well, thank you. Richard Downey (ph) from Delphi Strategic Consulting. And thanks for a very interesting discussion.

Within the context of the discussion on BRICs, if we could talk a little more specifically on the China-Brazil relationship.

Early on, it seemed like Brazilians were—had high expectations for the relationship with the Chinese. And then when they found out that it was—they were basically interested in extractive types of interests, they weren't going to gain employment, it didn't raise employment, it didn't increase their infrastructure, there was sort of a downtick. And now, we see most recently this new $53 billion investment in a whole variety of sectors.

Could you talk a little bit about how that relationship has gone? Thank you.

ROETT: Want me to start?

HOCK: Sure.

ROETT: Lula loved China and Lula loved the BRICs. And during the super commodity boom, for about eight or nine years, Brazil benefited dramatically from the relationship with China. China wanted to buy everything Brazil could produce.

The result, of course, was that Brazil began to drop in terms of what it—what it exported and manufactured goods. It is now back to the resource curse, and China is a very important part of that problem for Brazil. But it may well be, Dr. Downing (ph) just said, that the turning point have been the recent visit of the prime minister.

If those projects, of which I am very doubtful—if all those projects indeed are put into place, China will have changed its tune to some degree because of the slowdown, of course, in the Chinese economy, the demand for commodities isn't as great, construction companies in China would like to build things in Brazil and they really do have an investment program as opposed to a commodity export program. That may be an important turning point in the relationship between China and Brazil.

HOCK: I would agree with Riordan. I think that the actual results—I've got a list here of all the agreements that came out last week. You know, the proof will be if these become reality. If even a significant portion of them become reality, because already there's a fair amount of cynicism in Brazil as to, OK, you know, the Chinese come, sign a bunch of deals, say there's going to be investment. And, you know, Brazil is a place where you really, you need to be local to be taken seriously, and there's very few Chinese companies that have taken that path—Huawei (ph) and a couple of others have.

But it's still not felt as a local economic force in the way that other countries are.

HOCK: And one has a sense what China does, China does for China. For example, one of the projects, the great railroad over the Andes, if—is going to benefit China with lower transportation costs for the commodities which they will take out of Brazil and send across the Pacific—soy beans, iron ore and those kinds of things.

That is not going to help Brazil's industrial policy, if Brazil ever had an industrial policy.

GRAYER: (OFF-MIKE)

QUESTION: Hi, my name is Leslie Warner. I'm a consultant. I studied in Brazil a little over a decade ago during the age of, you know, post-Lula election euphoria. And through the course of studying Brazil, I came across a phrase which I'm sure you're accustomed—or you're familiar with, which is Brazil is the country of the future...and always will be. And it sounds like from your comments that that may still be the case.

So my question is are there any indications that Brazil might be moving in a positive direction in any sort of—in any sectors? Is there any positive—is there anything that we can look forward to with regard to Brazil? Thank you.

ROETT: Carnival is still a good show. There's one thing.

(LAUGHTER)

The other thing I would state is that Brazil is becoming increasingly important in terms of global food security. It is one of the most efficient producers of food in the world, primarily because of their research center in Barapa (ph) which operates around the world, but which really has made Brazil incredibly competitive in almost all the agricultural products that are traded around the world. They just can't seem to transfer that to industry, unfortunately.

So Brazil will always, because of the water and land resources it has, will always be a very, very significant agricultural power, and that is a very positive thing for the world and, of course, very positive for Brazil as well.

HOCK: But I think—and it's more than water and land, though. I think it is the technology, it is in Barapa (ph), I mean, you know, you've got companies like DuPont that have 12 R&D centers there, mostly for seeds. I mean, it's—because not all of that land is super easy to use, so you do have a level of technology there, you know, that comes into play.

But I think, you know, in general—you know, to go back to where I started—you know, I don't think that things in Brazil are as bad as, you know, the media—there's a lot of opportunities there. Brazil is incredibly overpriced when everyone, you know, thought that, you know, it was the it market. And so what you're finding now is that a lot of the prices are kind of regularizing a bit, so there's still quite a bit that can be done that's incredibly interesting in Brazil at this point.

And, you know, you still have that larger middle class which is not going to go away. And, you know, looking at the—this is the budget that was rolled out at the end of last week and they go through the priorities for social spending, and Number One there is, you know, my house, my life. And the other programs that were the conditional cash—conditional cash transfer programs that allowed for a lot of the middle class to kind of start climbing up that ladder.

So, you know, while the boom years of a brand new middle class where, you know, you buy your first fridge, you buy your first TV, you know, that, you know, perhaps won't be re-lived but for the next generation or when those fridges, you know, fall apart. But you are seeing still a growth in a lot of the services sectors, so health care is very, very interesting right now, where a lot of people are moving out of Suis (ph). Brazil has the largest single payor system, health care system in the world. They're moving out of the Suis (ph) system and going to Affinity plans or private insurance. So there's a lot of trend lines that continue to be extremely interesting in Brazil.

ROETT: You know, the hope for Brazil is the 40 million people who were brought out of abject poverty into Class C, as they call it, the lower middle class in Brazil. And they're the ones we hope are going to put the pressure on the government at some point because now that they do have the fridge and the car and the television, what they want is better education for their children. The education system, public—

HOCK: And that's where the health is coming from too. No, absolutely. The definition of a middle class is that a middle class is aspirational.

ROETT: That's right.

HOCK: You never say I'm in the middle class and this is great. No, you say I'm in the middle class and that's what I want next. And that's probably not going to happen within 10 years—

ROETT: Right away.

HOCK:—but—yeah. Looking 20 years down the line, it's going to be a really interesting social dynamic.

ROETT: Yeah, because public schools and public hospitals are terrible in Brazil.

GRAYER: And one (inaudible).

QUESTION: Thank you. I'm Jerry—sorry. I'm Jerry Johnson with RLJ Equity Partners. A question about the impact, if any, of the U.S.-Iran deal in Brazilian-U.S. relations, given their relationship with Iran.

HOCK: I think they've decided to stay out of—

(LAUGHTER)

-- those issues. I mean, partially, because, as I said, President Rousseff doesn't really love the international scene as much as the president did. And right now, she's focused on what's important. She's focused on getting this economy right on—back on the right track and dealing with an incredibly complex domestic political situation. I wouldn't see them dipping their toe in that water.

ROETT: And Brazil is very burnt with the trip by Lula and Prime Minister Erdogan, then-Prime Minister Erdogan of Turkey, which they thought was a positive development. It was really a very negative development from the point of view of the United States.

And if you go back and look at the coverage, who got all dumped on? Brazil, not Turkey. Why? Because Turkey, of course, is a member of NATO and our relationship with Turkey is very important. Brazil is, Brazil.

GRAYER: Yeah?

QUESTION: Thank you for your presentation. I'm James Gibney from Bloomberg View. Despite what you said about Dilma's wanting to keep her eyes focused on home, I'm wondering what you think is the possibility that Brazil might influence Venezuela's trajectory in a more positive direction.

HOCK: I was very encouraged a couple of weeks ago when Brazil came out and made it clear that they expected that the parliamentary elections will take place before the end of the year. That's unusual for Brazil.

It is not in Brazilian DNA to interfere in a Brazilian—from a Brazilian standpoint in the foreign affairs of other countries, to opine on the foreign affairs of other countries. You know, this actually has been a bit of a sticking point in our bilateral relationship at times where the U.S. has wanted to say, you know, get in there and tell the Venezuelans to straighten up or fill in your country that we're having a complicated moment with, and the Brazilians have said, look, that's not—that's not, you know, what we plan to do here.

I think that the situation in Venezuela has become so difficult that I'm hoping that that public statement might be a harbinger of some statements—or at least behind the scenes work to come because it's an incredibly unstable, potentially unstable, you know, situation and you have a lot of Brazilian investment there, which does matter. So I think that that dynamic is going to be interesting.

And, you know, when Venezuela was invited, essentially by Brazil, to become a member of Mercosur, there were a lot of critics, a lot of people in this town, you know, were incredibly concerned about it. You know, but—you know, if you talk to the folks at Itamaraty, their foreign ministry, they said, look, you know, we don't know what's going to happen in Venezuela, but we do know that we need to have as many institutionalized channels with them to try to move them on the right path as we can. So that's—those were at least their talking points on the justification for that, and I think that that's—that is how they view, you know, how they can hopefully—whatever ends up happening in Venezuela to be a bit less disruptive.

ROETT: I think they've made the decision that it's very difficult to work with President Maduro. It was much easier with President Lula and President Chavez. And I have nothing against bus drivers, if they're smart and they become presidents of countries, but this guy is not smart and he's running his country into the ground. And there's no reason why Brazil would want to be associated with that, other than in a diplomatic way possibly, but certainly non-intervention is a critical part of Brazilian foreign policy since it became independent.

GRAYER: (OFF-MIKE)

QUESTION: Nelson Cunningham with McLarty Associates. Last year, President Dilma was set to come up to Washington for a visit with President Obama in what was sort of viewed by many people as an important—an important meeting, an important move in U.S.-Brazil relations. She famously canceled because of the Snowden revelations that her phone had been tapped, and now we find ourselves a year and change later with—she's coming here at the end of June in a meeting that is being sort of thrown together in a hurry. I don't think it's viewed by anybody as much of an important move between the two countries, at least that's my view.

Was it a mistake for her to cancel a year ago? And would it have made a difference if she had come last year and would be in a different place with Brazil today?

HOCK: My own view is I think given the domestic politics in Brazil, I think that she felt like she didn't have a choice. I think that at that point, she was worried, you know, if I don't cancel and there's more revelations, or if I don't (AUDIO GAP) revelation the day I'm supposed to get on the plane, what do I do. And that, I honestly think was her calculation and she was just trying to mitigate risk.

You know, whether or not that was the right or the wrong thing to do, I think that's why she did it. Fast forward to today, and having a difficult economic situation, as I said before, does lead one to a situation where you want to be sure that you're drawing investment from every potential source, and U.S. investment is obviously incredibly significant in Brazil.

So this is viewed—while I would agree with you that the substance of what we love to call deliverables in Washington will not necessarily, you know, knock anyone's socks off, I do think that the fact that we're engaging at this point is important, and—and the fact that they're taking this seriously.

You know, virtually every ministry has been told that they need to turn over every stone to try to figure out if there's anything substantive, positive that can be developed for the agenda of this trip. Very senior levels. They don't have little, you know, lackeys working on this.

And—and just the fact that, you know—so this week, actually, today and yesterday, the minister of science and technology has been here. The minister of defense should be coming in a couple of weeks. The foreign minister has been back and forth preparing the trip. You know, Minister Levy, who I mentioned before, the finance minister was here a few weeks ago.

So you definitely have a lot of, you know, high-level political power, which, you know, I would argue that the list of deliverables doesn't matter. The rebuilding of trust matters incredibly, because this is a bilateral relationship that has historically has had an enormous trust deficit that was—Snowden was the worst example, but there's a long list of other examples, the Iran-Turkey deal being one of them, our reestablishment of the 5th Fleet being another. I mean, the list goes on and on.

So, you know, I do think that—that as—as a—perhaps heavy on the simple side, light on the substance side, but I do think this is a symbol that—that the significance of this shouldn't be overlooked.

ROETT: Our interests just don't align. Brazil wants no part of our disastrous wars. Brazil doesn't want to really participate in the TPP or any of the larger trade enterprises in which the United States is involved.

If the president of the United States publicly endorses Brazil for a seat on the Security Council of the United Nations, it will be a very successful trip. I would not take a large bet that he will do so.

There's also the fact that there is a very important part of the P.T., the Workers' Party, driven by Marco Aurelio Garcia, the foreign advisor to President Lula and President (inaudible) basically anti-American. There is a very deep, visceral anti-American part of Workers' Party, and therefore, coming to Washington from that part of the party is not, frankly, very attractive.

But I think Kellie's quite right, if we can rebuild some of the trust. But there isn't a common agenda. There has never has been a common agenda between Brazil and the United States, save during World War I, World War II. In times of conflict, the Brazilians did step up to support the United States. That was very, very important.

But during the Cold War, there was no alignment, and there's no alignment now in terms of the major U.S. foreign-policy goals.

HOCK: In a weird way, I think that kind of accepting that nonalignment—I feel like just even in, you know, the 20 years I've worked on the Brazil—I can only imagine all the years you have—that there's been this kind of recycling of attempts to—"Well, we should—we should be aligning on X, Y or Z," and—and kind of trying to stick a square peg in a round hole.

Perhaps as part of this rebuilding of trust, or building of trust, you know, perhaps if we can come at it with a more realistic expectation as far as where our—our interests truly do align, maybe that can be part of the formula for success.

ROETT: Even at the ambassadorial level, we've had some superb ambassadors to Brasilia or to Rio de Jainero. We've also had some real duds. And Brazil would never send a dud to the United States; they send their very best.

The current—the last ambassadors know (ph) the foreign minister. That is the kind of respect Brazil has for international diplomacy. That is not the vision they have of our diplomacy very often.

QUESTION: Jorge Kamine from Skadden, Arps.

I just wanted to go back to the discussion on political leadership in Brazil and ask you if the crisis is opening up opportunities for young leadership or leadership with different visions, for example, the relationship between the state and the economy and the private sector. Be interested in your thoughts on that.

HOCK: I see it less in the politicians, but I do see—which I think eventually will trickle into the politicians, you do see organizations like CNI, like the—the Brazilian National Confederation of Industry being more forward-leaning on, you know, "Gosh, we shouldn't be in this (inaudible) box. We should be talking to other countries. We should be thinking about who else we can trade. We should be opening up the economy a little bit more," which is a new thing, because historically, the industrial class in Brazil had been, you know, part of the reason that they were more closed.

I think that as some of those companies, the bigger companies have—have become (inaudible) become multinational companies themselves and—and, frankly, have just really suffered, particularly when the real was as strong as it was, just not being able to export, you know, much at all or compete on the global stage.

I think that—that's where I'm seeing more of the spark is in the community, which—you know, from a U.S. perspective, we would say, "Well, sure." The business community, of course, they, you know, want—want you to just kind of let the free market run (ph) and reign (ph), but that hasn't always been the case in Brazil historically, so I think that's where I would point to that new dynamic.

ROETT: I agree with Kellie. The private sector is where you want to look.

In all the years I've been teaching at John's Hopkins, I've had lots of Brazilian students. Not one has ever gone home to go into politics. Not one. They go into the foreign ministry, but they will not go into electoral politics.

And I've asked them, time and again, why. Corruption. Once you're in, you can't get out. And until the party system changes, they're just not going to attract bright, attractive young men and women into the political process.

QUESTION: Thank you. Good to see you. I'm Esther Brimmer, now at George Washington University (inaudible) and also survived (ph)—let's say, the last time Brazil was on the Security Council, so I have a question to ask you...

(LAUGHTER)

... again about the conceptions, plural, Brazil's conceptions of its role in the world and the future, and there may be a space which may also be advantage for the United States for countries that want to take some greater responsibilities.

So as their resources are hopefully rebound, they are playing some role contributing some development assistance to other countries to some degree. It's not a surprise there's a Brazilian who heads the Food and Agricultural Organization. They are involved in peacekeeping.

Is there a space for what we used to call the, quote, middle powers that countries that are able to provide some positive contribution to international peace and security and international issues Brazil might play that also might be a positive role in his relations to the United States.

ROETT: Well, Brazil is helped put together IBSA, which is India, Brazil and South Africa. That certainly is an interesting diplomatic initiative in which the Brazilians have been very active.

I still think they need diplomacy that involves the BRICs. An important part of middle power is attempting to find a role for themselves.

They'll talk (ph) about changing the voting rights at the IMF. To give those countries a larger say would be very, very important as well, I think

So the Brazilians, do they deserve to be a permanent member of the Security Council? That's a great debate. Does China want Japan? The problem is there'll be so much (inaudible) trading to really decide who is going to get onto the Security Council, if it were to be enlarged. I think that's going to be a very long debate for a very long period of time.

QUESTION: Thank you. Antonio Miralles (ph) from the Brazilian Industries Coalition.

My question is about the—the historic prospects (ph) of the developments of the corruption scandals and the current situation of Brazil. What do you foresee in terms of positive reactions of the Brazilian Dilma administration, because if you take into consideration those latest corruption scandals in Brazil and we see how they are being developed and received (ph) very important leaders being arrest and—and—and going to jail because the legal system in Brazil is working and because we—we have a democracy there and so the election is very—is very clear to the democracy standards.

And if you take into consideration the economy development, for instance, in—in the Brazilian relationship with the United States, 10 years ago, for each dollar that the U.S. companies invested in Brazil, Brazilian companies invested—for each dollar that the Brazilian companies invested in the United States, Brazil—United States companies invested eight dollars in Brazil, and now the ratio is one dollar for three.

So this is not because the Brazil—U.S. companies are not investing anymore in—in Brazil; they are increasing their investments there. This is why—this is because Brazilian companies are investing more in the United States, and this is creating economic common interest that can impact, in both countries, foreign policies.

So it should be interesting to have a perspective from you in terms of the positive insights of the Brazilian government reaction to the current economic and political crisis as we—Workers' Party is implementing a very economic—conservative economic policy, so this—this could be a good sign and also the work that the legal institutions are doing since the latest scandal—I'm not talking only about Petrobas.

HOCK: I think—I think everything you said reinforces a lot of the things I've said over—over the course of—of—of this afternoon.

You know, the dynamic that you highlighted as far as the increase increase in Brazilian investment in the United States is an incredibly interesting dynamic that we haven't talked about, and it is something that I think should be highlighted more that I'm hoping, during the president's visit, will be highlighted more—hopefully you're working on that—because, you know, Brazilian companies traditionally haven't had the culture that we have in the U.S. In the U.S., we, you know, write our talking points, and we, you know, invest heavily in—in institutional relations and really speaking to government about what our priorities are, what our needs are.

And the economic contributions that we're making to the countries where U.S. companies invest, I think that that's a space where Brazilian companies are leaving an enormous amount of value on the table because—I know the cases personally because it's what I work on, but, you know, if you didn't work on Brazil bilateral relations, you wouldn't necessarily know that, you know, the point that Detroit was going bankrupt, Stefanini, an amazing Brazilian I.T. company set up a new operation in Detroit to sell their auto software to the—the—the—the auto companies in Detroit as they were coming out of—of our recession.

So great stories, but I do think that they can be told better, and I'm hoping that the president's visit to the United States can be a really important vehicle for that.

ROETT: I mean, the private sector's a very important part of the dynamic in Brazil, but you talk to anybody at Fieshbe (ph) or in any major companies, the problem in Brazil is Brasilia. It's the government. It's the tax system. It's a lack of infrastructure.

Businessman can't build roads. They can redo the tax system. They wish they could.

But that really is a very, very heavy drag on the private sector.

But the younger people coming up in the private sector—one of the largest groups, (inaudible) the largest group, MBA candidates at Wharton—we have a joint program with Wharton—all Brazilians. So Wharton and other business schools are training a new generation of younger people who, 25 or 30 years ago, wouldn't think about going to business school. That is a very important turning point.

And hopefully, some of them at some point will decide to go into electoral politics and begin to clean up the mess in Brasilia.

HOCK (?): All right.

ROETT: Margaret? No, John first.

QUESTION: Hi, John Negroponte. I just was wondering, to follow up on what you just said, is there another political party or force in Brazil that gives expression to some of these ideas? Or is the Partido Trabajador (ph) going to be in power forever?

ROETT: You have a very weak opposition in Brazil at the present time. The Social Democrats who did run Brazil I thought quite well for years after 1994, they produced the Real Plan (ph)—have now really fragmented. There are too many political parties in Brazil. It's very easy to organize and register a political party.

There are now I think—I lost count. How many parties in congerss—18, 19?

(CROSSTALK)

ROETT: In congress?

HOCK (?): It's almost 30, if I (inaudible).

(CROSSTALK)

ROETT: That's right. That's how many ministries there are because if you're a party, and you are asked to vote for the government, you have go get a ministry or a vice-ministry or a sub-ministry or a cabinet position of some sort. So that's what Dilma has spent a lot of her time doing, handing out these positions in the public sector.

Try to cure that, and then you might have a more competitive political party system as well.

President Cardozo (ph) is right, the political party system is broken. And there really is no clear successor—Ezio Nuevez (ph) barely lost to Dilma in the election last year; did come from Zoltador (ph) party, ran a tremendous governorship in the state of Minas Gerais, would have—his program is being put into place because this is not a PT program. This is (inaudible) program and that's a very big difference.

---

PT doesn't want this program. In fact, the PT isn't supportive of the president very often in the congress. Why? Because they like the old way of doing things. And where is my monthly envelope, is what they're looking for.

HOCK (?): I think the PSTP (ph) is fragmented and they are weaker than they've been historically, but I do think that as the political crisis has been progressing, that there is a bit of a movement to try to, you know, get themselves a bit more organized. I think that part of the challenge there is that it's mostly the—the faces of the past that are engaging in that effort, as opposed to, you know, fresh new faces of the future.

And so I think that that's—that's going to be the challenge for them going forward.

(CROSSTALK)

QUESTION: Lloyd Henching (ph) (inaudible). I just want to expand on Ambassador Negroponte's question.

Much has been said about corruption in Brazil. If you were Brazil looking back to the U.S., you would say: "Well, why are there so relatively few scandals? We have a very enforceable rule of law; we have a very active press, and we have a general public moral compass."

Say a few more words, if you will, about the media infrastructure, the digital communications, the press ferreting our corruption. What—what do you see as the way of changing what seems to be a national pattern?

HOCK (?): The media in Brazil is very aggressive. And, you know, the Petrogas (ph) scandal, it started to trickle out before the election. And there was a famous Veja (ph), kind of their Time magazine cover, the week before the election that the PSTP (ph) was very excited about and thought might—might swing the election their way.

So I would say, you know, the press is very, very aggressive. Social media is incredibly aggressive. You know, most of the protests and such that you have seen, you know, have been organized through social media. It's an incredibly digital country, despite the—the gap of connectivity in some of the poorer neighborhoods. You'll even—you will have the little wifi spots. I mean, so it's—they love these technologies.

So that definitely has had a huge impact on how information is shared around the political system. You know, in the past, you know, it was whatever was on Global (ph). You know, it was the joke—"Well, Global (ph), their big, you know, television network decides who wins the presidential election." That was kind of the joke, but it was kind of a joke that had some perhaps roots in reality.

Today, the situation is a lot more diffuse.

ROETT: There's a famous phrase in Brazil in Portuguese: (PHRASE IN PORTUGUESE) "Do you know who you're talking to?" And that is the attitude of the political class. "Don't ask us any questions; we're the political class; just do what we tell you. If you don't like your healthcare, it's not my problem; I have good healthcare. If you don't like your public schools, I don't care. My kids go to private schools. If you don't like X, Y or Z, I don't care; I benefit from the system."

So the idea that there is a tremendous breakdown between civil society, which is developing, savvy on media, wants better education, that want better health, and the political class in Brasilia who don't understand. I don't think they still understand the import of the protests. They were major protests and Brazilians don't protest very often. They were angry.

But the political class has done nothing to respond to the demands. It wasn't just about raising the bus fares. It was about the kinds of bread-and-butter things we've been talking about here. Why can't my kid get a decent education? Because if he doesn't, he or she will not be competitive.

(inaudible) Sao Paulo (ph) is a major paper, and Sao Paulo (ph) ran a story last year: It took three months to get an X-ray in a public hospital. The person died. Had he gone to private care, he would have gotten the X-ray the same day.

Those are the issues that are now being raised in Brazil. And the political class just doesn't seem to understand. And to me, having worked on Brazil now for almost 40 or 50 years, that to me is the great, inexplicable problem. But it does get back to this sense of entitlement. And with entitlement comes impunity.

These guys and women—there are more women now, thank God—get reelected without doing very much. And therefore when they get reelected, they don't have to do anything (inaudible). What they really are in Brasilia for is to shovel stuff back to the state or municipality where they came from, because they're going to go back and run for mayor or governor or senator at some point.

So this vicious circle in which Brasilia really does become a (inaudible) to be distributed at their will without any real concern for the public good.

HOCK (?): I take a little bit of a different perspective. I think—I do think that there are a number of public servants in Brazil, and even politicians in Brazil, that truly are trying to make it a better place, you know, for—I mean, otherwise how would they have grown the middle class? I mean, you know, I think that where the gap is for me isn't necessarily on intention. The gap for me is on implementation.

I think that the healthcare system is a perfect example of that. And I think that, you know, any country that—that has a single-payer system the size of Brazil's is trying to help to keep their country—you know, their populace healthy. Does it work? As you said, there are some really dramatic examples of how it doesn't work. How do you fix that? I would argue that you fix that by engaging in pragmatic public-private partnerships, you know, in creative ways.

And I think that, you know, that is to my mind what the next steps needs to be. And, you know, what you do need to do obviously in order to be able to implement a strategy like that effectively is shake off some of the statist, you know, rust from the past and say, "OK, we're going to turn the page on that strategy." Brazil will never drop industrial policy. They've been doing it since the '50s. They'll continue to do it. I'm not arguing that.

But I am arguing that, you know, the way to—to actually implement more effectively some of those good intentions will be through partnering more effectively with the private sector.

(CROSSTALK)

GRAYER (?): We have time only for one more question. This has been fantastic. Thank you very much. A quick reminder to all the participants that this is indeed on the record.

And Margaret (ph), if you could close us out with...

ROETT: Just don't quote me.

(LAUGHTER)

QUESTION: Thank you.

Margaret Hayes (ph), I'm a recovering Brasilinista (ph); once worked with (inaudible). So...

(LAUGHTER)

I want to ask one short and one longer question. (inaudible), they are discussing electoral reforms and there have been—proposals have been voted in congress. Are those likely to pass and have the kind of impact on the party system that we all would like to see?

And then second, is there a discussion in Brazil about economic policy and—and what all the international—World Bank and IDB and IMF and everybody else is saying Brazil needs to do—invest seriously in education, particularly the primary and secondary level; get into technology. We've talked about building infrastructure, but about diversifying—also diversifying the manufacturing base so that Brazil looks more like Mexico in terms of complexity—the new word on the block.

But—and it occurs to me, is Dilma talking to Pena Nieto about some of the reforms that Mexico is undertaking? Would one of the outcomes from Dilma's visit be creating a high-level economic dialogue to kind of, you know, encourage dialogue with Brazil and the United States across a number of issues?

Are any of these kind of ideas being vetted and—as we look toward the future?

HOCK (?): We have a lot of dialogues with Brazil. We have too many dialogues with Brazil. I think it's become too diffuse. I think that we need to bring them together and actually turn it into something a little bit more like what we have in China, where it's extremely senior and more consolidated.

So that would be a positive if that ends up being one of—one of the results.

I mean, you know, as far as, you know, the discussions that are going on, I mean, I'll just tell one quick anecdote. But, you know, when actually the previous commerce secretary was speaking in New York a couple of years ago, he said, "You know, in Brazil, we have a public consensus around controlling inflation. As a policymaker, we can—we can do anything we want to and control inflation. If we explain to the public this is to control inflation, the Brazilian public will say: 'We don't want inflation, OK, we'll—it might be hard, but we'll do it.' What we lack in Brazil is a consensus around competitiveness."

And so I think it has to be a process. I think that you do have to, you know, shift that public consensus—it's a democracy, obviously—you know, from just focusing on inflation to focusing on the broader competitive elements of the economy. I think it would be great for Brazil to start talking more to Mexico about that. But I do think, you know, whatever would emerge would be, you know, it would be in stages.

ROETT: I wish you would go on the web and go to the World Economic Forum website and look at the global report on competitiveness. There are two columns. This is the public sector, where Brazil is 145 out of 146. And then—not really—but then there is the private sector where they do very, very well. What's holding this column back is this column.

That is the great problem in Brazil. It's implementation. And people in the private sector don't run the government, unfortunately.

One final anecdote. A couple of years ago, I was at a conference, and the minister of education was there. And he said, "We're putting a computer in every school in Brazil." We all applauded. And a journalist from Brazil raised his hand and said, "But, Mr. Minister, only 40 percent of the schools have electricity."

(LAUGHTER)

GRAYER: I want to thank you both.

ROETT: Thank you, Carol. (ph)

GRAYER: This has been enlightening and a really fantastic afternoon. And thank you all to the participants who were on the phone and also who were in the audience.

(APPLAUSE)