TITEL: Paraguay


Status Index
(Democracy: 6.60/ Market economy: 5.11)
5.85 Management Index 4.95
HDI 0.755 Population 5.6 mn
GDP p. c. ($, PPP) 4,684 Population growth 2.8% 1)
Unemployment rate n/a Women in Parliament 9.6%
UN Education Index 0.86 Poverty 16,4% 2)
    Gini-Index 57.8 (2002)
Source: UNDP: Human Development Report 2005. Figures for 2003 - if not indicated otherwise. 1) Annual growth between 1975 and 2003. 2) Population living below $ 1 (1990-2003). Source: UNDP: Human Development Report 2005. Figures for 2003 unless otherwise indicated.


 

 

A. Executive summary

 

Thestarting conditions for the transformation toward a market-baseddemocracy were rather negative in the case of Paraguay. Democracy wasnot achieved by means of legitimate struggle, but was merely theperipheral outcome of power struggles among the elite in the Stroessnerregime. The result was a broad continuity among the elites in politicsand bureaucracy. In economic terms, at the beginning of transition,Paraguay was characterized by a comparatively low density of regulationand a very open economy. Handicaps included low productivity, a largesector of loss-making state enterprises, a large informal sector andinstitutional conditions that inhibit growth. These include aninefficient, politicized state administration and a defective andcorrupt judicial system. The weakening of the military as an actor withveto powers since the late 1990s can be considered an advancement onthe way toward democratic transformation. However, support fordemocracy has waned; a high percentage of the population is open toauthoritarian solutions. The political parties remain very inadequatein their functions of articulating and aggregating interests. Theirelectoral success is based on a close-meshed patronage network.

The government of President Luis Angel González Macchi (1999-2003) wasmarked by political corruption, political stalemate, recurring crisisin the banking sector, an economic recession and a growing fiscaldeficit. International donors and financial organizations reduced theirpresence in Paraguay. In this context the new government of NicanorDuarte Frutos, which took up office in August 2003, got a good start.Though only at moderate levels, the GDP grew in 2003 and 2004, theurban unemployment rate fell, investment grew, the inflation rate wasreduced in a significant way and the budget deficit was cut down. Thegovernment started a reform of the tax administration, broadened thetax base, began a reform of the social security system and tried tocurb corruption in the public administration, state enterprises and thejudicial system (including the removal of six of nine Supreme Courtjudges). International financial organizations and donors supportedthis reform drive. For the first time since 1960, Paraguay signed astand-by-arrangement with the IMF.

It remains to be seen whether the reform process proves sustainable.The government has no majority in Congress and the ruling party isfragmented. Tax and banking reforms still have to confront vestedinterests. In the process of reforming the public administration andstate enterprises, the government will have to act against its ownpower base. While the advances in the fight against poverty have beenminimal, a partially violent conflict between landowners and landlesspeasants is unfolding in the country's rural areas.

The major political challenges in the future will be a broadening ofthe reform coalition, a de-politicization of public administration, thecontinuity of a sound fiscal policy, the fight against corruption, anda focalization of policies toward poverty reduction. One main issuewill be land reform, because of the impending threat of violent clashesbetween landowners and a radicalized movement of landless peasants.

 

 

B. History and characteristics of transformation

 

Thetransition to democracy in Paraguay was initiated in 1989, after 35years of dictatorship under General Stroessner. It was the result ofpower struggles within the political elite. Initially, the politicalopposition and civil society played no role in the transition process.Thus, the transition to democracy was characterized by extensivecontinuity among the elites in politics and the bureaucracy (publicadministration, military and judiciary). Stroessner had used theColorado Party as a tool in safeguarding his rule. Party membership wasa prerequisite for a career in the administration or the military.

Through the party, the country was covered with a closely linkednetwork of control and patronage. Even after the transition todemocracy, the Colorado Party remained in power. It is now thelongest-governing party in Latin America, having been in power since1947. While it is true that a process of democratization in politicalinstitutions was initiated under Presidents Rodriguez (1989–1993) andWasmosy (1993–1998), with a new constitution in 1992, in the 1990s themilitary still played a troublesome role: It was highly politicized, itviewed itself as part of the Colorado Party and it openly took partisanpositions. President Rodriguez, as leader of the coup againstStroessner, had formerly been Commander-in-Chief of the army; GeneralOviedo, the Commander-in-Chief under President Wasmosy, tried to usehis position as a political springboard.On March 28, 1999, PresidentRaúl Cubas Grau resigned to avoid impeachment. Cubas (Colorado Party)had taken office in August 1998 and was considered the puppet ofGeneral Oviedo, who because of a failed 1996 coup attempt was bannedfrom the May 1998 presidential elections that he would have otherwisepresumably won. The president thwarted judicial arrangements to arrestOviedo, who mobilized his adherents in the party and the army. Therewere open threats against the judiciary, parliament and opponentswithin the party.

On March 23, 1999, Vice President Luis María Argaña was murdered.Argaña had been considered Oviedo’s main opponent within the rulingColorado Party, and Oviedo was therefore thought to have been behindthe assassination. After mass protests, especially by youths, resultingin deaths and injuries, Cubas and Oviedo eventually left the country(for Argentina and Brazil respectively), seeking political asylum. Inspite of this, Oviedo remained a destabilizing power factor inParaguayan politics, especially because repeated demands forextradition by the Paraguayan courts had been refused. In June 2004, hereturned to Paraguay, where he was immediately placed in militarycustody. At the time of this writing, he is trying to overturn a10-year sentence and to refute other charges. He still hopes for apolitical comeback. His political party Unión Nacional de CiudadanosÉticos (UNACE), an off-split from the Colorado Party, is represented inparliament.

After the resignation of President Cubas in 1999, the head of theSenate, Luis Angel González Macchi, was sworn in as the new presidentfor the remainder of the term until August 2003. Because of his lack ofdemocratic legitimacy (he was not popularly elected) and the fragmentednature of the ruling Colorado Party, González was in a weak position.Therefore, it is no surprise that planned economic reforms could not beimplemented. Political stalemate, economic backsliding, widespreadcorruption and a clear deterioration of the social situation havecharacterized his presidency.

In April 2003, Nicanor Duarte Frutos from the Colorado Party won thepresidential election with 37.1% of the votes and assumed office inAugust. His party is in a minority position in both chambers ofCongress (37 out of 80 deputies; 16 out of 45 senators). Nevertheless,the new government marked a good start. In 2003 and 2004 there was aneconomic upturn, the government increased the tax collection in asignificant way, it curbed fiscal deficit, contained inflation, andstarted a program of structural reforms. In opinion polls, PresidentDuarte retains a high level of popular support.

 

 

C. Assessment

 

1. Democracy

 

Intransforming its political order, Paraguay has made slow progress instrengthening its political institutions. There are still shortcomingsat the level of political participation and representation, the qualityof its democratic institutions and the rule of law. Some progress hasbeen made in stabilizing democracy (veto powers of the military havebeen neutralized), but this progress has to be consolidated further.

 

 

1.1. Stateness

 

Inprinciple, the state’s monopoly on the use of force has beenestablished nationwide, but it does not come into effect everywhere,especially in border areas. Great parts of the country are sparselypopulated, with no control of the borders and the airspace. In the“tri-border area” where Paraguay, Argentina and Brazil meet, around theborder city of Ciudad del Este, the state’s power and will have failedin the battle against smugglers and illegal drug dealers. The U.S.government still includes Paraguay in its list of major drug-transit ormajor illicit drug-producing countries. Concerns of security expertsthat the region could be converted into a refuge for internationalterrorists, however, have not been confirmed so far. There is asignificant population of Brazilians in the border area (so calledbrasiguayos), many of them landowners in possession of great stretchesof arable land, which is used for soybean production. Their loyalty ismore to Brazil than to the Paraguayan state. The possession of largetracts of land by foreigners gives a special twist to the conflict overland in Paraguay.

All citizens share the same civil rights. However, in practiceindigenous groups cannot assert their rights adequately. This is partlybecause they are few in number (90,000 or 1.8% of the population) andpartly because they are a poorly organized minority. Ninety-fivepercent of the population is "mestizo", of mixedparentage. Constitutionally, Paraguay is a multicultural, bilingualcountry. Guaraní and Spanish are the official languages.

Church and state are largely separate, and religious dogma has no noteworthy influence on policy or law.

The state has a functioning basic infrastructure throughout most of thecountry, including administrative institutions, officials, fundamentaladministration of justice, making and implementing political decisions.However, there is low state presence in the San Pedro and Chacoregions. Corruption and political colonization of the administration,however, has affected the functioning of the state.

 

 

1.2. Political participation

 

Whilenational elections largely satisfy requirements of a democracy,irregularities in the manner of nomination of candidates by partyleaders have been repeatedly reported. Moreover, forms of patronage andpolitical dependencies (particularly in the civil service) influencethe election process, so that the Colorado Party is structurally in afavorable position.

Democratically elected representatives have the effective power togovern, and the influence of actors with veto powers, especially thosein the military, has declined. The military is subordinated to civiliancontrol but civilians do not exercise this control in a satisfactoryway.

Independent political and civil society groups are generally allowed toform freely. However, there are legal and bureaucratic barriers to thepossibilities of union organization due to a high minimum membershiprequirement. Private sector employers oppose the formation of unions.The level of unionization is around 15% of the formal labor force.During the period under review, the state sometimes reacted to unionprotests with extreme severity. Farmers and the landless are alsoorganized. Their mobilization in favor of state subsidies, landallocation and land ownership is sometimes suppressed violently by thestate or private actors.

Freedoms of opinion of the press are constitutionally guaranteed. Thereis a pluralistic media sector, including private and public radio andTV broadcasters. However, media pluralism is greatly threatened by thegrowing concentration of press ownership. The second biggest newspaper(Noticias) declared bankruptcy at the end of 2004, the third biggestnewspaper (Ultima Hora) was bought by a TV Channel (Canal 4) in 2003.Press access to information is occasionally restricted by politiciansand the administration. Critical journalists are sometimes physicallythreatened, especially if they report on corruption and organizedcrime. The independence of the press is further hampered by theextensive influence of business interests and politicians over themedia. Defamation and libel laws are applied quite arbitrarily and areused to intimidate journalists and media owners.

 

 

1.3. Rule of law

 

Constitutionally,Paraguay has the separation of powers and mutual checks and balances inplace. This is particularly the case in relations between the presidentand Congress, which has improved in the review period under theconditions of divided government.

The judiciary, especially the Supreme Court, has a relativelyindependent position in principle, though it cannot be consideredpolitically neutral. Apart from professional criteria, judges areappointed according to political criteria as well. At all levels, thereare problems with professionalism and a severe vulnerability tocorruption and political influence in trials. After his inauguration,President Duarte initiated a clampdown on corruption in the SupremeCourt, four members of the tribunal resigned voluntarily and two wereremoved by an impeachment proceeding. Only three judges of the SupremeCourt remained in office. Party-based quotas heavily influenced theselection of new judges in the Supreme Court. While the introduction ofa new code of criminal procedure (1999) better protects the rights ofthe accused, deficiencies in the rule of law result from the prolongedduration of proceedings and investigative arrests.

At the level of political leadership, corrupt officials have beenprosecuted in isolated cases—for example, former President Wasmosy—butthey often take advantage of political, legal or procedural loopholes.Therefore, the vast majority of cases of political corruption are notprosecuted. While the government of President Duarte started with thepurge of corrupt officials in tax recollection, customs administration,police and the courts, the Corruption Perception Index of TransparencyInternational (2004) still ranks Paraguay (at rank 140) as the worstcase in Latin America.

Civil liberties are largely secure, especially basic political rights.There are no political prisoners. Conditions in the hopelesslyovercrowded prisons have repeatedly sparked criticism. However, someprogress has been made with the construction of new prisons. There arerepeated reports of excesses by the security forces, including tortureand extralegal executions, against prisoners, those suspected of crimesand draftees. The forcible draft of minors, which is against the law,has decreased. In a few spectacular cases, human rights violations fromthe Stroessner era were criminally prosecuted. However, most cases havenot been processed yet, even though the office of the ProsecutorGeneral includes a special advisor for human rights who actively worksto prosecute crimes under the dictatorship.

 

 

1.4. Stability of democratic institutions

 

Democraticinstitutions perform their functions, but frictions arise in theinterplay between the president and Congress. This is because theruling Colorado Party, lacking an absolute majority in both chambers,is splintered into several factions, and except for election periods,intramural competition undermines the party’s coherence, thus hamperinggovernment action.

Democratic institutions are supported by the relevant actors, but inthe case of the governing party or some of its factions, some doubtremains as to whether this support is a matter of principle. Hithertothere has been no transfer of power between the government and theopposition at the national level. Additionally, in Paraguay, there is alatent risk that free and fair elections might bring antidemocraticpoliticians into power.

 

 

1.5. Political and social integration

The Paraguayan party system is dominated by two parties, theColorado Party and the Liberal Party. Each is more than 100 years old.They will continue to form the axis of the country's political systemfor at least the medium term. From time to time splits occur within theColorado Party or new parties emerge, but it is doubtful if they willsurvive with a significant electoral basis. At the end of the reviewperiod, more parties are represented in the new Congress (5 in theChamber of Deputies, 6 in the Senate). The effective number of partiesis 2.57 in the Chamber of Deputies and 4.0 in the Senate.

The Colorado Party is still the dominant party. After more than 50years in power, the party has a closely enmeshed patronage network.Many of the 190,000 government employees owe their jobs to their partyaffiliation. Both traditional parties have a broad social base. Directelections for executive offices in the party and the nomination ofcandidates for elective office generate possibilities for mobilizationin both parties. However, the parties only sometimes work asinstruments for articulating and aggregating social interests; they aremore likely to serve as tools to mobilize voters for party caudillos.Hence, the internal fragmentation of the two parties among competingparty leaders is also typical, though stronger in the Colorado Party.

Compared to the political parties, the system of social interest groupsis weak, not very well connected and dominated by only a few interestpositions. There is no link to the parties in terms of collateralorganizations, although one of the umbrella labor organizations isclose to the Colorado Party. The labor movement is weak and fragmented.However, contacts exist with the movement of landless peasants. Strongorganizations represent the interests of rural landowners (cattleranchers and soybean producers), like the Asociación Rural del Paraguay(ARP), Coordinadora Agrícola de Paraguay (CAP), the Asociación deProductores de Soja (APS) and the Confederación Paraguaya deCooperativas (CPC). Landless peasants and small farmers are mainlyorganized in the Mesa Coordinadora Nacional de OrganizacionesCampesinas (MCNOC), which represents about 40,000 families, and in theFederación Nacional Campesina (FNC).

Support for democracy is low amongst Paraguayan citizens (between 30%and 50%) and has been receding in the past few years. Compared to therest of Latin America, a high percentage of the population is open tothe idea of authoritarian solutions. A comparative study of the UnitedNations Development Program (UNDP) in 2002 identified more than 60% ofParaguayan citizens as non-democrats, the highest percentage in LatinAmerica. Voter turnout is low (64% in the last presidential andparliamentary elections), only 53.5% of the population in voting agecast their vote in 2003.

Autonomous organization in civil society is uneven. It facessocioeconomic barriers and suffers from a lack of civic culture. Trustamong the population is rather low. In 2004, only 6% of Paraguayanstrusted their fellow citizens (Latinobarómetro); this is one of lowestpercentages in Latin America. Less than 15% of the population isorganized in some civic or interest organization, most participate inreligious organizations. Around 200 NGOs exist in the country.

 

 

2. Market economy

 

Duringthe presidency of Luis González Macchi, the transformation andmodernization of the Paraguayan economic regime stagnated. Deficienciesstill exist in the organization of competition, the role of stateenterprises, bank supervision, and control of the informal or shadoweconomy, in combating corruption, property rights and strengthening therule of law. Some progress in economic reform has been made only sincethe regime of President Duarte.

 

 

2.1. Level of socioeconomic development

 

Paraguayis ranked 89th of 177 countries in the 2004 Human Development Report.In Latin America, only Ecuador and Bolivia have lower HDI. Socialexclusion is quantitatively and qualitatively extensive andstructurally ingrained. The indices of income inequality worsened inthe 1990s: the richest 10% of the population now has 70 times as muchdisposable income as the poorest 10% (the Gini Index in 2003 is 0.504for urban and 0.581 for rural populations, Dirección General deEstadística, Encuesta y Censos). According to 2003 national povertystatistics, which include an estimation of the value of housing andreal estate, 41.4% of the population lives below the poverty line,nearly half of it (20.1%) in extreme poverty. The CEPAL data of 2001,which includes only monetary income, classifies more than 60% of thepopulation as poor. There is also an urban-rural gradient; theproportion of the poor in rural areas is much higher than in urbanareas. Of the extreme poor, 80% live in rural areas. More than 60% ofthe urban labor force works in the informal sector (2003; ILO). Thelower GDI (0.736) compared with HDI (0.751) reveals inequalities inachievements for women.

 

 

2.2. Organization of the market and competition

 

Marketcompetition operates under a weak institutional framework. Freecompetition and the protection of property rights are limited byendemic corruption and political influence in the administration andjudiciary. There is a strong state sector in telecommunications,electric power generation, oil refineries, cement production, railwaysand water utilities. In addition, the government sets minimum wages.The informal sector is large and substantial and includes activitiessuch as cross-border smuggling and the illegal production and sale ofnarcotics, pirated music, stolen automobiles and weapons.

The formation of monopolies and oligopolies is neither regulated norimpeded. Foreign trade has a medium level of protection. Membership inMERCOSUR has largely liberalized trade with Argentina, Uruguay andBrazil; an average duty of 12.5% applies for the rest of the world.

The banking system and capital market are poorly differentiated, withinadequate regulation and supervision. The banking sector went throughcrises in the 1990s and in 2002-2003. Many banks and more than 50enterprises in the financial sector had to close down between 1995 and2003. The bulk of deposits (more than 80%) are now in foreign banks.Banking supervision has improved, but it is still inadequate because ofscarce qualified personnel and because of political influence overbanking decisions. In 2003, a new deposit guarantee scheme was createdto protect clients against bank insolvencies. International financialorganizations demand strengthening the independence of the central bankand a public bank reform law, because public banks, such as theNational Development Bank (BNF), possess a high percentage ofnonperforming loans and are susceptible to corrupt practices.

 

 

2.3. Currency and price stability

 

Controllinginflation and an appropriate foreign exchange policy are recognizedgoals of economic policy, but have not been consistently pursued and donot have an adequate institutional framework. The inflation rate of14.6% in 2002 was reduced to 2.1% in 2004. Paraguay has a floatingexchange rate. Because of the close ties to its two big neighbors inMERCOSUR, the Paraguayan currency (the guaraní) depends on the economicdevelopment and the currency rates (measured against the U.S. dollar)in Argentina and Brazil. The guaraní appreciated against the U.S.dollar in 2003, which in part reflects the strength of the currenciesin the neighboring countries Argentina and Brazil. While the guaraníweakened again in the last quarter of 2004, it is expected that it willremain stable immediately after the end of the review period.

There are signs of a consistent policy for stability but withoutsufficient institutional safeguards for the future. Thus, there is apermanent risk of policy changes in response to domestic lobby groups.The government’s 2005 budget proposal was partially defeated inCongress. The budget now includes a rise in the public wage bill aswell as an increase in social expenditure. Principal causes of thefiscal deficit until the review period are the high expenses forpersonnel in the public sector, deficits at state enterprises and aboveall, in public pension funds, misuse of public money due to corruption,tax evasion and a small tax base (around 10% of the GDP). There is alsoa problem of efficiency in tax collection, because the tax lawsestablish a framework of tax pressure of about 20%.

 

 

2.4. Private property

 

Propertyrights and the regulation of the acquisition of property arefundamentally well defined, but there are problems with theirimplementation under the rule of law, not least of all because ofdeficiencies in the judicial system. Land titles are often ill defined,especially in the agricultural sector. A latent and sometimes violentconflict exists between the interests, which large agriculturalcorporations (some of them foreign-owned) have in consolidating andexpanding their holdings on the one hand, and the demands of thelandless and small farmers for agrarian reform and land redistributionon the other. Protesters often occupy land, with subsequent conflicts,which both sides often conduct outside the rule of law.

Private activities represent the backbone of the economy, butconcentration of market power is tolerated by the state. In somesectors such as telecommunications, electric power generation, oilrefineries, cement production and water utilities, state enterprisesexercise a monopoly or subvert fair competition. Privatization programscame to a halt, because they proved to be very unpopular. However, thegovernment plans to attract private capital for joint ventures withstate enterprises.

 

 

2.5. Welfare regime

 

Becauseof the size of the challenges involved, as well as the state’s limitedresources and poor economic performance, the country is unable tocombat poverty systematically under the actual conditions. There arerudimentary measures to avoid social risks, but they are sharplysegmented in terms of territory, class and sector. The social securitysystem extends only to those employed in the formal sector of theeconomy. The pension system is organized on a pay-as-you-go basis; itcovered only 12.5% of the workforce in 2001. Only 21% of seniorcitizens (aged 60 and over) receive pension benefits. Social insurancefor employees in private business is still a relatively young concept,which manages to keep its budget balanced, though it has been adverselyaffected by recurring banking crises. The pension fund for stateemployees runs into chronic deficits, and must rely on injections ofcash from the government budget (nearly 2% of GDP), because it includespayments for retired military personnel, veterans of the Chaco war andtheir descendants. This is an ill-defined category, giving rise to thesuspicion that a great number of people receive unjustified benefits.Because of the demographic structure of the population (high fertilityrates and high population growth rates), there is less necessity for ageneral overhaul of the pay-as-you-go pension system. More importantare an increase in administrative efficiency and a curbing of corruptpractices.

Society is severely segmented, and there are hardly any institutions tomake up for vast social discrepancies. Programs of social assistancereceive only 0.3% of the GDP. Social expenditures (as percentage of theGDP) are low in comparison to other South American countries. There areparticularly marked differences in the delivery of health care.Violations of labor law and other legal protections, such as forchildren and health care, are not adequately monitored or sanctioned bythe government. At the operating level, collective bargainingagreements are often impossible because of opposition raised by thebusiness class. Women have comparatively little access to highereducation and public office. There is a sharp urban-rural gradienthere. The GDI is 0.736 as compared to the HDI 0.751.2.6. Economic performance

Realper capita income shrank in the 1990s, and growth of per capita GDP wasnegative from 2000 to 2002, with a modest recovery in 2003 and 2004. Ona per capita base the economy is still stagnant. Urban unemployment hasrisen by over 10% since 2000. But unemployment is not the main problemof the Paraguayan economy, it is underemployment. Public debt is nowabout 50% of GDP. But there are some positive signs too, as the budgetdeficit has been reduced. The volume of investment and trade has grown.However the unfavorable trade balance can endanger the economicrecovery. Low productivity and underdeveloped technological capacitiesare still the greatest challenges for the Paraguayan economy. In the1980s and 1990s, productivity sank 1.8 % on an annual base. Accordingto the World Economic Forum’s growth competitiveness index, Paraguayscored 95 out of 101 in 2003 and 100 out of 104 in 2004.


2.7. Sustainability

Ecologicallysustainable growth is given only sporadic attention and has a weakinstitutional framework. This is particularly evident concerning theecological impact of the country’s large hydroelectric plants. There islittle control of deforestation in the border regions, whichaccelerated because of the recent soybean boom. Reducing air and waterpollution is not a priority. Despite the appointment of an EnvironmentSecretary, coordination on ecological issues in the government islacking. Organizations of small farmers and landless peasants protestagainst the indiscriminate fumigation of soybean plantations and theuse of herbicides, because of the environmental damage and waterpollution caused by this practice.

In spite of an improvingschool enrollment rate during the period of review, the educationalsystem has great deficiencies. Only rudimentary research anddevelopment facilities exist. Quantitatively, investment in educationand training, as in research and development is rather low.

 

 

3. Management

 

 3.1. Level of difficulty

 

 Thestructural constraints on governance are high. At the beginning of theperiod under review, Paraguay showed marked recessive tendencies in theeconomy and great social disparities. The country is unable to combatpoverty systematically on its own. Future development is hampered bythe lack of an educated labor force, an inefficient and overstaffedpublic administration, widespread corruption in politics and societyand severe deficiencies in infrastructure. Only 5.4% of households havea personal computer, 37% own a telephone (2002). While the forces forreform in politics and society are weak, many veto points that blockpolitical and economic transformations exist.

Thedemocratization process in Paraguay began in 1989, after a long phaseof authoritarian rule, with a weak autonomous civil society, a weakpolitical opposition, and great continuity among the elites in politicsand officialdom. Politics is based on patronage networks, which subvertcivil society.
Great ethnic homogeneity is certainly anadvantage for the Paraguayan government. There are no religiousdifferences that could be seen as sources of conflict. Politicalparties do not articulate social rifts between the poor and the rich.However, a growing class conflict between landowners and organizedlandless peasants in the rural areas is observed.

 

 

3.2. Steering capability

 

 Thepolitical leadership is committed to constitutional democracy and asocially responsible market economy, but it has to compromise its powerbase. As a clear signal of his reform impetus, President Duarte namedan independent candidate, Dionisio Borda, as Finance Minister. Theminister and his collaborators receive most credit for the eliminationof the budget deficit. He is well connected with international financeorganizations, respected by the opposition and parts of the NGO sector.His main critics are in the governing Colorado Party. President Duarteand the Finance Minister seem to have set clear strategic aims. Thefirst aim is to cut down the budget deficit by curbing tax evasions andreforming the public pension system. The second aim is to normalizerelations with international donors and finance organizations as acondition for new credits and grants. The third aim is to reform theadministration and create a broader tax base (including new progressivetaxes on property and income). Finally, the fourth aim is to use newfiscal revenues to combat poverty and confront the demands of landlesspeasants. However, not all cabinet members have the same standing asthe finance minister; most have been appointed due to their politicalloyalty. It has to be seen whether the strategic priorities aremaintained over periods of crisis and stalemate. While critics approvethe reform policy of President Duarte, they point to certainauthoritarian and populist traits in his governing style. For thatreason, his plans to reform the constitution to allow a consecutivere-election could become a destabilizing factor. There is a risk thatPresident Duarte could subordinate his economic policy to maintaininghis personal power.

The government is committed to democracy anda market economy. It largely achieved its reform goals for the firstperiod of review by balancing the budget, avoiding a debt default,getting fresh money, reforming the pension system for public employeesand creating new taxes. In December 2003, Congress approved a reform ofthe public employees’ pension system: The law increases thecontribution rate from 14 to 16% and the retirement age to 62. Iteliminates bonus payments for the 13th month. The government expectsthat the reform will generate savings of around 0.3% of the GDP in2004, but the reform has only a limited impact on the deficits of thepension plans for retired police and army officers. Finance ministerBorda purged the tax administration of offending officials to combattax evasion. In the first 10 months of 2004, the collection of taxreceipts was 36.8% higher than in the same period in 2003. In February2004, the government issued a decree imposing an export tax onsoybeans, and in July 2004, the Congress passed a new fiscal law (Leyde Adecuación Fiscal). The opposition Party Patria Querida supportedthis law. The new law reduced the profit tax from 30 to 10%, buteliminated all exemptions and widened the tax base of many other taxes,especially the value-added tax. It introduced for the first time anincome tax for high-income earners, which is not in application at thetime of this writing. In October 2004, the government submitted toCongress a bill with the aim to introduce a tax on large rurallandholdings. Tax collections shall be used for poverty-reductionprograms. With the declared objective to combat corruption in thejudicial sector, the government and Congress pushed through theretirement or impeachment of six of nine Supreme Court ministers.However, quotas based on party affiliation tainted the renewal of theSupreme Court, and new corruption scandals erupted in the courts during2004.

The political leadership responds to mistakes andfailed policies with changes; learning processes take place morefrequently than in former times. However, the authoritarian andpopulist traits in the governing style of President Duarte set a limitto his willingness to change policies.

 

 

3.3. Resource efficiency

 

 Thegovernment uses only some of the state’s available resourcesefficiently, but is committed to increase the efficiency. The statebureaucracy is still oversized, civil servants being almostinvulnerable to dismissal. Recruitment of administrative personnelstill puts a heavy emphasis on political loyalty. Nevertheless, thestate budget seems to be balanced. Tax evasion has been curbed andfiscal revenue has increased in significant way. The administrationpromotes the external auditing of public enterprises; it changed themanagement of several state enterprises and institutions responsiblefor social security. A new procurement law reduces the scope ofcorruption in the public sector.

The government tries tocoordinate conflicting objectives and interests but with only limitedsuccess. There are significant intra-governmental friction,redundancies and lacunae. A conflict of interest exists between thefinance minister and the governing party. While the finance ministerlikes to reduce the costs of the public administration, the governingparty is interested to buy support in future elections. As a result,the parliament raised the wage bill in the 2005 budget proposal of thegovernment. Another conflict refers to the financing of land purchasesfor redistribution. In October 2004, the finance minister threatened toresign over the use of government funds to gratify protestors outsideof the normal procurement procedures.

The government seeks toprovide more integrity mechanisms. Some mechanisms ensuring integrityare effective, while others do not work. Corruption is still a centralfeature of state and administrative culture; many of the resources ofthe state are distributed based on patronage networks. However, thegovernment has provided positive signals with the purging of the taxadministration, the national police, the directors of stateenterprises, customs and the social security institution, moretransparency in government procurements, and the impeachment of corruptjudges. After only two months in office, President Duarte forced theInterior Minister, his personal friend, to resign on the grounds of hisinvolvement in a case of smuggling of compact discs. However, the sameperson was immediately appointed to a well-paid job as counselor of theYacyretá hydroelectric plant. In March 2004, he returned to the cabinetas defense minister.

 

 

3.4. Consensus-building

 

 Themain political actors agree on establishing a market-based democracy.Nevertheless, there are problems with implementation, because there aremany veto points in the political system, and economic reforms harmvested interests of the political elite. The government has tonegotiate its way through this, looking for support from the differentopposition parties. Politics has been marked more by dissent than byconsensus. In June 2004, the favorite of President Duarte for the LowerChamber lost against another candidate from the ruling Colorado Party,who was supported by the opposition. There is a lack ofconsensus-building mechanisms, for example between business owners andunions or between politicians and actors from civil society.

Reformerscan successfully neutralize or at least co-opt anti-democratic vetoactors. The military is under control, and former General Oviedo isserving his prison term.

Although the political leadership istrying to prevent the escalation of political rifts into conflicts, itcannot reduce existing divisions. Conflict over farmland is growing.Landless peasants are invading large landholdings. Evictions areviolent with victims on both sides. The risk of a further escalation ofconflicts between landowners and occupants is high. The landless areorganized in a broad movement and represented by differentorganizations. However, the conflict over land is not articulated alongparty lines. The government tried to mitigate the conflict and startedtalks with the movement of landless peasants. At the same time, ittried to pacify agro-exporters and large landholders, using policeforces and military to expel farm occupants.

Though thegovernment has attempted to promote the population’s sense ofsolidarity, President Duarte seems to prefer a populist top-downapproach to social problems.

The political leadership frequentlyignores civil society actors and formulates its policy autonomously.However, it takes into account and accommodates the interests of civilsociety organizations, when these organizations can put pressure on thegovernment, or when they form part of the power base of the governmentparty. Hence, the interest organizations of teachers could negotiatesome modifications in the public pensions reform bill. Under pressure,President Duarte and Vice-President Luis Castiglioni started a dialoguewith movement of landless peasants and created a rural crisis cabinet.On September 24, 2004, the government reached an agreement with theumbrella organization of the peasants, the Frente Nacional por laSoberanía y la Vida, to distribute immediately 13,000 hectares of land.Simultaneously the government tried to accommodate the interests ofsoybean producers and cattle-ranchers, organized in the CoordinadoraAgrícola del Paraguay (CAP). Police forces and military acted againstland invasions and roadblocks. By the end of 2004, there were noadvancements in land distribution, nor were any special funds earmarkedfor this program.

The political leadership recognizes the needto deal with acts of injustice and human rights violations during theStroessner dictatorship, but the process of reconciliation is slow. Atthis time of this writing, only a few victims of the dictatorship havebeen comprehensively indemnified, and the compensations are quite low.As a response to pressures from civil society, a commission of truthand justice was created by law, which commenced work in the second halfof 2004.

 

 

3.5. International cooperation

 

 Thenew government of President Duarte works with bilateral andpredominantly with multilateral international donors and financialorganization, including the IMF, the IADB and the World Bank, with theaim of integrating international assistance into the domestic agenda ofreforms. During the former regimes, projects for technicalcollaboration had a very limited impact.

The government ofPresident Duarte tries to act as a credible and reliable partner, andit receives more external support than the government of the formerpresident Luis Gonzalez Macchi. In December 2003, the IMF granted theParaguayan government a 15-month $73 million standby arrangement toavert a default on the external debt, to support the reform program,stabilize the economy and to advance structural reforms. It was thefirst IMF program for Paraguay since 1960. The government cleared itsarrears with World Bank as a condition for the agreement with IMF, andit received new loans from World Bank and the IADB totaling $45 millionin 2004. However, major international actors still express doubts onthe sustainability of reforms because of the weak power base of thegovernment. The public sector is considered as inefficient to carry outreform projects.

Paraguay is a member of MERCOSUR, along withArgentina, Brazil and Uruguay. The population generally supportsbelonging to this common market (Asuncion is the headquarters of theMERCOSUR Court of Arbitration), even if some voices loudly advocate thecountry’s own path during periods of political or economic crisis. TheParaguayan economy is closely tied to those of the neighboring states,so that economic crises in Argentina and Brazil have directconsequences in Paraguay. Membership in MERCOSUR has helped stabilizeParaguayan democracy in the sense that these two big neighbors haveintervened diplomatically in active ways during periods of politicalcrisis (e.g. threatened coups in 1996, 1999 and 2000). ThroughMERCOSUR, Paraguay is also involved in negotiations on a free-tradeagreement with the European Union. Together with the MERCOSURcountries, it is conducting parallel negotiations on easing trade withthe United States, within the FTAA process. In November 2004, theParaguayan government signed an energy co-operation agreement withVenezuela, whereby the government of President Chavez will supplypetroleum on preferential financial terms. In October 2004, presidentDuarte visited Germany and Italy in order to expand trade andcooperation.

 

 

4. Trend of development

 

 4.1. Democratic development

 

 Stateness,political participation and the rule of law maintained their levelsprior to the period under review. While the Paraguayan borders arestill porous for illegal activities, the so-called lawless area in thetriple border around Ciudad del Este seems to be under the control ofdomestic and foreign intelligence services. Voter turnout and politicalparticipation are low. The scope of corruption, deficiencies in justiceand shortcomings of party structures have changed very little or not atall. According to Transparency International’s Corruption PerceptionIndex of 2002, Paraguay was placed 98th among 102 countries studied; in2004, it was 140th out of 146 countries, and ranked the worst of allSouth American countries. Some reforms have been implemented in thejudicial system, which included the expulsion of corrupt judges.

 

 

Table: Support for democracy (in %)



 
2000 
2002 
2003 
2004  
Satisfaction with how democracy is working (percentage of “satisfied” or “very satisfied” responses) 
12 
13  
“Democracy is preferable to any other form of government” 
48 
41 
40 
39 
“Under some circumstances, an authoritarian government is preferable to a democratic one” 
39 
38 
44 
39 


Source: Latinobarómetro 2000–2004 (http://www.latinobarometro.org)

The Colorado Party remains fragmented, and its ability to act as the bearer of governmental responsibility is restricted. The opposition parties offer no clear alternative programs and place short-term power interests above political reforms and a strengthening of democracy. The parties’ deficiencies in articulating and aggregating interests have led social actors to try to impose their interests directly, through political protest. While the population’s skepticism about democracy is still very high, satisfaction with the working of democracy has risen a little bit after the induction of President Duarte, but it is still on a very low level.

Democracy has become more consolidated in some aspects. The position of the military as an independent powerbroker in the political process has been further weakened and the risk of a takeover by the armed forces has sharply declined. The presidential and parliamentary elections of 2003 met democratic standards, and the transfer of power was peaceful. The presidency regained democratic legitimacy and political support by the citizens. The return of General Oviedo has had no destabilization effect. He serves his prison sentence and his political influence is on the decline.

 

 

4.2. Market economy development

 

 While the HDI value increased from 0.738 to 0.751 between 1995 and 2000, the country’s level of human development has not changed since 2000. HDI values have increased less than the worldwide as well as the Latin American average. The per capita income has shrunk and poverty tended to increase since 1997. The CEPAL indicates that the Paraguayan economy would have to grow by more than 4% per annum until 2010 to recover the GDP per capita of 1995.

The institutional framework for working toward a market economy has improved in some segments such as finances and taxes, but not comprehensively. Most of the state administration is still inefficient, corruption runs high, and the justice system is deficient.

 

 

Table: Development of macroeconomic fundamentals (2000-2004)



 
2000 
2001 
2002 
2003 
2004a  
Growth of GDP in % 
-3.3 
2.0 
-1.6 
3.8 
2.8  
Growth of GDP p.c. 
-5.7 
-0.6 
-4.0 
1.3 
0.3 
Export growth in % 
-14.2 
-0.7 
0.1 
17.5 
13.3  
Import growth in % 
-6.0 
-1.7 
13.5 
15.3 
26.4 
Inflation in % (CPI) 
8.6 
8.4 
14.6 
9.3 
2.1b  
Investment in % of GDP 
18.3 
16.8 
16.0 
16.5 
20.3 
Tax Revenue in % of GDP 
n.d. 
9.6 
10.1 
n.d. 
n.d.  
Urban Unemployment in % 
10.0 
10.8 
14.7 
11.2 
10.0 
Budget deficit in % of GDP 
-4.3 
-1.1 
-3.0 
-0.4 
0.7  
Current account balance in billion $ 
-192 
-275 
73 
146 
-223 


a) Provisional figures; b) November 2004 (variation 12 months)
Source: CEPAL, Balance Preliminar de las Economías de América Latina y el Caribe 2004, Santiago de Chile 2004; CEPAL, Balance Preliminar de las Economías de América Latina y el Caribe 2003, Santiago de Chile 2003 ; World Bank, World Development Indicators.
Overall, economic development has essentially stagnated during the period, both quantitatively and qualitatively. The economy is recovering from the worst recession of the past 20 years; GDP has grown by 3.8 and 2.8 in 2003-2004. However, on a per capita base the growth has been very modest. Tax revenues as percentage of GDP are very low.

 

 

D. Special topic: Political extremism and violence

 

 There are no relevant political extremist groups. A left-wing splinter group (Patria Libre) has probably been involved in kidnappings, but it is very weak and has no social support. Illegal activities such as money laundering and arms traffic exist along the triple border with Brazil and Argentina around Ciudad de Este, which are related to terrorist groups in the middle and near East and guerrilla groups in Colombia.

New political extremist groups are unlikely to emerge in 2006. However, there is a certain risk of a radicalization of the movement of landless peasants, as well as an increase of illegal land occupations and violent clashes between peasants and landowners or the police forces.

 

 

E. Strategic perspective

 

 The Paraguayan presidential democracy is characterized by a strong Parliament with a bicameral structure and a fragmented party system. The consequence is that many issues in the political decision-making process are vulnerable to vetoes. Comprehensive political and economic reforms must therefore draw on broad coalitions. At the same time, Paraguay’s democracy suffers from the presence of a hegemonic party that was already in power during the dictatorship, which still contains authoritarian residues. A successful modernization of the state and the economy would undermine the power base of the governing Colorado party. The party landscape – including a divided opposition and internal party factionalism — will change little in the near future and will hinder the formation of stable majorities. In addition, the still heavy sediment of authoritarianism in political culture, combined with the country’s unresolved social problems, can foster authoritarian tendencies in politics.

What are the main problems in the future? It will be difficult for the government to consolidate fiscal stability, because there are many unsatisfied demands. In the end, the way out for the government will depend on the capabilities of the president to control his own party and to establish a working relationship with parts of the opposition. President Duarte still receives much support from the citizens. However, this support will evaporate if there are no clear and permanent results in the fight against poverty and corruption. The greatest challenge for the government constitutes the conflict over land, which can quite easily get out of control. There is no easy way to reconcile the conflicting interests of landless peasant and large agro exporters, many of whom are foreigners, in particular Brazilians.

To accomplish its social agenda, the government needs medium to high economic growth rates. However, economically, Paraguay is dependent on the world economy and the demand for its most important (agricultural) export products, as well as on developments in the neighboring MERCOSUR countries. Any leeway for independent action is rather limited.

There are many challenges ahead for President Duarte until the end of his term in 2008. Real politics will maintain a course between the following two extremes:

- President Duarte is capable of continuing his reform course. He unites the factions of the governing party behind his leadership and he establishes a stable pattern of cooperation with parts of the opposition. Constitutional reform enabling a re-election is perceived as a stabilizing factor in politics. The government moves forward with a reform of the public administration and state enterprises. Corruption in the public administration and the judicial system are reduced. While the government sustains a sound fiscal policy, it also gets extra funds to confront poverty and to start a policy of land distribution. There are still conflicts in the countryside, but these are diminishing in volume and violence. The external economic context is positive; the Paraguayan GDP grows moderately.

- Political infighting in the governing party increases, because caudillos in the different factions seek to consolidate their power base. The opposition majority in Congress practices a politic of confrontation, blocking government initiatives. In this context the debate over a constitutional reform is an aggravating factor. The president succumbs to populist temptations; fiscal discipline is loosened. Economic reforms come to a halt. Violent clashes in the rural areas intensify. The government takes repressive measures; and human rights violations increase. Because the economy stagnates, poverty indices stay high.
External actors should support the Paraguayan government with its tax and fiscal reforms. This is the only way to create more resources for an active social, labor market and educational policy. Special importance should be given to the reform of the public administration: Paraguay needs a more efficient and less politicized administration. External actors should support the Paraguayan government to develop programs for poverty alleviation. In addition, they should help the government to find a sustainable and fair solution to the land conflict.



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