By John Fitzpatrick

Back in the mists of time, just as he was creating the world, God singled out one man and said: "I intend creating the most beautiful country in the world. It will be called Scotland and you will be a Scotsman. Scotland will contain wild, rugged scenery - high mountains and deep lochs, sweeping glens and rolling moors - and be inhabited by red-haired, green-eyed girls and handsome men who are warriors and poets. There will be a musical instrument called the bagpipes which will strike terror into the heart of Scotland´s enemies and inspire its brave fighting men who will gladly lay down their lives for their homeland. On top of all this, I will create a magical water of life called whisky which will give the drinker a foretaste of Paradise." The canny Scotsman was suitably grateful but a bit apprehensive and asked God if there would be any drawbacks. "Well, just wait until you see the kind of neighbors I am going to give you", God replied, thus inflicting the English on Scotland. Brazil has a similar problem with its southern neighbor, Argentina. 

While the history of Argentina and Brazil may not be as bloody as that of Scotland and England, relations have never been close. They even fought a war in the early 19^th century over the eastern part of the River Plate which Brazil claimed. Neither side won and in the end it was agreed to make the territory an independent state, Uruguay, which would act as a buffer zone between them. Forty years later the two countries became allies against aggressive little Paraguay in a bloody conflict which left Paraguay with almost its entire male population dead and large parts of its territory in Brazilian and Argentinean hands. The alliance did not last long and there is still great rivalry between the two South American giants in everything from military prowess to footballing ability.
 
Brazilians, and other Latin Americas, see Argentineans as arrogant people with inflated opinions of themselves. "How can you make an enormous profit for almost nothing? Buy an Argentinean for what he´s worth and sell him for what he thinks he´s worth", goes one joke. Che Guevara may still be a cultural icon in Europe but for many Latin Americans he represents a typical big-headed Argentinean who thought he could go to Bolivia and bring about a revolution almost single-handedly. Argentineans are proud of their European heritage, conveniently sweeping the extermination of their native Indians under the carpet, and compare Buenos Aires with Paris. They revel in their image as being Latin lovers and tough gauchos at the same time, Carlos Gardel meets John Wayne. They are awkward neighbors and have been involved in longstanding border and territorial disputes with Chile over Patagonia and the UK over the Falkland Islands. In neither case have they succeeded and in 1982 they launched a disastrous invasion of the Falklands which caused over 1,000 dead among their ranks and the collapse of the military dictatorship.

Brazilians, on the other hand, are proud of their mixed heritage. Brazilians also generally avoid conflict and compromise is the rule in personal and political life. Brazil also has no boundary disputes and, despite its size, does not behave like a regional superpower.
There is, though, one area where Brazil does throw its weight around and that is within the Mercosul free trade group. There are now signs that Argentina is trying to change things and upset the Brazilians. Of the Mercosul´s  four members - Brazil, Argentina, Uruguay and Paraguay - only the first two are important economically. Even then, the Brazilian economy is much bigger than Argentina´s and Brazil´s flexible approach gives it greater freedom of movement. For example, while Argentina is stuck with its rigid currency board system, which fixes the Peso by law to the US dollar, the Real floats freely. The Brazil economy grew by 4.2% in 2000 whereas in Argentina GDP slumped by minus 0.5% and minus 3.4% in 1999.
 
Whereas Brazil can look back on some solid achievements over the last decade, Argentineans have to look back to the first half of the 20^th century when their country was one of the most dynamic in the world. Brazil´s population of around 170 million is not high considering the vast size of the country but Argentina, which is almost 30% of the size of the US, is under-populated. It has around 37 million inhabitants of whom one-third live around Buenos Aires, leaving vast tracts empty. When the Cold War was over the then President Carlos Menem offered one million Eastern Europeans the chance to emigrate but there were few takers. The period when millions of immigrants flowed into Argentina in search of new lives is long over.
 
Argentina is lagging economically compared with Brazil. A recent article in the Financial Times highlights how the two top Latin American economies, Brazil and Mexico, are making great strides while Argentina, the third largest, remains in recession. Argentina has only nine listed companies in the top 100 companies in Latin America. Compare this with Brazil´s performance where, in the telecommunications sector alone, it has 12 companies and three of its privately owned banks - Bradesco, Itau and Unibanco - are in the top 10. Chile, Argentina´s smaller rival, has 16 companies in the top 100.

It makes sense for Argentina to use Mercosul as a means of exercising pressure on Brazil. Argentina is still smarting from Brazil´s sudden devaluation in January 1999 which made Argentinean goods uncompetitive as they were, to all intent and purpose, priced in dollars. Cheaper Brazilian exports flooded into the country and the Argentinean Central Bank had to push up interest rates. Since it was set up 10 years ago, Mercosul has been a modest success, at most, and has been written off several times. There are now signs that its days may be numbered and its existence is under threat from the US-backed Free Trade Area of the Americas (FTAA). Argentina´s finance minister, Domingo Cavallo, has been publicly critical of Mercosul saying that his country should make a bilateral trade deal with US rather than wait for Mercosul to reach an agreement. Playing one big guy, the US, against another, Brazil, might be good tactics but shows that Argentina is not the big guy it likes to think it is.
 
Whether Cavallo will follow up his words with deeds is not sure but one of his first acts on taking office was to scrap unilaterally an import tax on capital goods from outside Mercosul. Brazil reacted calmly and has publicly backed Cavallo, who has kept close contact with Brasilia, but behind the scenes the Brazilians are not happy. Before proceeding to a FTAA Brazil wants to strengthen Mercosul but, at this moment, none of the other members is interested. Perhaps if Brazil had behaved more magnanimously and treated its fellow Mercosul members with more respect they would not be so keen on linking up with the US.
 
Brazil is also irritated with the way in which the Argentina crisis has tarnished its image with foreign investors. This crisis has led to an increase in the Brazil risk - the premium investors demand for lending to emerging market countries. For example, Brazil recently issued a US$1 billion global bond with a coupon of 11.25%. To do so, Brazil had to pay 0.7% more in costs than for a similar issue in January because of the instability on the market caused by the Argentina crisis.  
 

Moody's Investors Service and Fitch rating agencies have just confirmed Brazil´s sovereign risk ratings while Standard & Poor’s lowered Argentina´s rating, for the second time in two months. Moody´s felt Brazil was prepared for the impact of the Argentina crisis although Fitch felt political problems at home could threaten stability.