Paraguay's Outgoing President Draws Scant Political Benefits from Pro-Investor Laws

By Gaudin, Andres | NotiSur - South American Political and Economic Affairs, March 9, 2018 | Go to article overview

Paraguay's Outgoing President Draws Scant Political Benefits from Pro-Investor Laws


Gaudin, Andres, NotiSur - South American Political and Economic Affairs


When he took office as president of Paraguay in 2013, Horacio Cartes began putting together a collection of laws and regulations with which he hoped to industrialize the country, tame its chronic unemployment problem, and launch major infrastructure projects that would encourage economic growth. Those accomplishments, he reasoned, would then allow him to seek and win a second term and thus stay on as president until 2023.

But with the presidential elections now just five weeks away, few of his plans came to fruition, including his hope of running again (NotiSur, May 26, 2017), which ended with a reminder from the judiciary that the Constitution expressly prohibits reelection. Nor was he able to continue his crusade through an heir apparent, in this case his political disciple Santiago Pena, who lost an internal election in December for a chance to represent the governing Partido Colorado (Colorado Party, PC) in the elections scheduled for April 22 (NotiSur, Jan. 19, 2018).

Cartes pinned his hopes for an economic turnaround in Paraguay on new incentives and regulations for maquiladora (assembly and manufacturing) plants; a public-private partnership scheme called the Alianza Publico Privada (APP) to develop infrastructure and create jobs; and legislation aimed at boosting youth employment.

Paraguay's laws regulating maquiladora activity date back to 1997, but they underwent changes in 2013 after Cartes took office (NotiSur, Oct. 16, 2015). The government and the business-sector association Union Industrial Paraguaya (Paraguayan Industrial Union, UIP)--both eager to create partnerships with Brazilian investors--hail the model as "very good," because it was designed to resemble the Mexican maquiladora system, which is geared toward attracting US investments within the framework of the North American Free Trade Agreement (NAFTA). The changes introduced starting in 2013 focused on adapting the norms to the even laxer rules used in the Mercado Comun del Sur (Southern Common Market, MERCOSUR) trade bloc, which ties Paraguay to Argentina, Brazil, Uruguay, and Venezuela (currently suspended).

The system guarantees low taxes and production costs for investors based on the idea that companies coming into Paraguay will boost state coffers, create jobs, and bring technology and technical-scientific knowhow. It also allows for the duty-free import of equipment and machinery and facilitates the subcontracting of local companies (which also benefit from the generous tax rules) to carry out partial or complementary activities. Little wonder that the UIP became one of the principal private voices championing the maquiladoras.

In many ways, though, the rules undermine many of the system's supposed benefits by allowing foreign investors to set up shop wherever they please (without having to follow government plans and locate their plants, for example, in designated development hubs), pocket the vast majority of their earnings (i.e. pay only minimal taxes and tariffs), and send all of that money back to their respective parent companies.

Positive press

The opposition accused the Cartes administration of spending large amounts of money to promote its economic policies abroad, including through costly press campaigns in Brazilian and US media outlets. Indeed, starting in mid 2017, when Cartes still thought he could seek reelection, there was an uptick in favorable news articles that seemed to follow the same line of reasoning.

Brazilian media outlets such as RecordTV and the dailies O Estado de S. Paulo and Gazeta do Povo all highlighted the same six arguments for doing business in Paraguay: 1) the proximity to Sao Paulo, Brazil's industrial center; 2) the incentives offered; 3) "the social stability that has made Asuncion the second safest capital city in South America after Montevideo, in Uruguay"; 4) inexpensive labor and energy costs; 5) a policy of repression that makes labor organization all but impossible, according to the UN's International Labor Organization; 6) the absence of the state when it comes to regulating labor relations. …

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