MAINTAINING MCC MOMENTUM IN PARAGUAY

UNCLAS ASUNCION 001011

SIPDIS

PASS TO: WHA/BSC (MDRUCKER, KREAD, CCROFT,
BFRIEDMAN),MCC (MLONGI, MKLADAKIS, MHARRINGTON),
USAID/LAC/AA (PBONICELLE),USAID/LAC/DAA
(JCARDENAS),USAID/LAC/SA, USAID/ODP (PDELP,
KTUNER),TREASURY DAS (LMACDONALD),NSC (DFISK)

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PREL PA
SUBJECT: MAINTAINING MCC MOMENTUM IN PARAGUAY


--------------
SUMMARY
--------------


1. (U) US Embassy Asuncion Country Team endorses
Ambassador Danilovich?s recommendation to the MCC
Board that Paraguay be considered for a proposed
Stage II MCC Threshold Program. Our support is
based on progress made under Paraguay?s current
Threshold program, its empirical advances on the MCC
Performance Scorecard, and our view that both the
Threshold program and the future prospect of a MCC
Compact are powerful medicine in a country that is
both seeking to reform and modernize, and is
markedly open to US partnership. With national
elections taking place in April 2008, a Stage II
Threshold Program would present a vital opportunity
for both the USG and a new Government of Paraguay
(GOP) to directly address mutual interests and key
constraints that continue to hamper Paraguay?s
development and democratic consolidation, as well as
enhance long-term regional security.

--------------
Progress on the Threshold
--------------


2. (U) Approved in 2006 as Latin America?s first
Threshold program, Paraguay?s MCC effort (known
locally as ?Programa Umbral?) is a highly ambitious
anti-corruption initiative directed at reducing
rampant impunity and economic informality. Halfway
through its life (the bilateral grant agreement
expires in November 2008),Paraguay has demonstrated
tangible progress in addressing its systemic
corruption. In one of the most salient examples of
how the MCC program has helped promote economic
formalization, Paraguay has significantly
streamlined its business registration process,
slicing costs and time to the entrepreneur, and
leapt over 72 countries in the latest Doing Business
survey. The Threshold program also assisted the GOP
in taking the unpopular but necessary steps to
identify and suspend temporarily businesses that
have been evading taxes. More than 30 companies
have been suspended via judicial order to date. GOP
follow-through on the suspensions appears to be
changing behavior; based on the Tax Ministry?s
initial analysis, collections of value-added taxes
of surveyed businesses have increased by an average
of 21 percent.


3. (U) The program has catalyzed unprecedented
inter-institutional cooperation among the 28 public
ministries and branches of government that
participate in and benefit from the Threshold
Program. These includes forcing coordination among
seven ministries and the judiciary to simplify
business registration; the first-ever protocol
between the Public Ministry and Customs on how to
handle contraband seizures for evidence in
prosecution; and, improved services resulting from
integration of effort between ministries that manage
separate public registries.


4. (U) With MCC assistance, nearly USD 5 million has
been seized in contraband by specialized units.
These results reflect the GOP?s desire to formalize
economic activity in the country. As part of its
Threshold commitments, the Supreme Court developed
and approved a series of comprehensive internal
reform measures that include new methods for
improving efficiency, increasing transparency, and
ultimately holding judges accountable for their
actions. Finally, two specialized units supported
by MCC have developed and investigated nearly 300
suspected incidents of internal government
malfeasance or corruption resulting in 80 cases
submitted to the Attorney General?s office for
further investigation and possible prosecution.


5. (U) Paraguay has also made appreciable gains on
its position on the MCA Performance Scorecard.
Paraguay is ?green,? or above the median in
comparison with 95 other countries, on 13 of 17
policy indicators. On many of these indicators,
Paraguay ranks in the 80 or 90th percentiles.
Paraguay?s advances are particularly significant in
Economic Freedom, due to its solid macro-economic
management and Threshold-supported business climate
improvements, which are reflected in Paraguay moving
fully to green on all six indicators in this
category. On the high hurdle of ?Control of
Corruption,? Paraguay has also progressed steadily,
moving from its 8th percentile place in FY2005, to
its current position of 30th. While Paraguay still
has much work to do and many challenges remaining to
get above the mean on Control of Corruption, in
effect their lone MCC Compact deal-breaker, it is
clear that they are moving in a positive direction.
The Threshold Program has provided clear leverage
for those many Paraguayans actively working to
combat corruption.

--------------
What's Next?
--------------


6. (U) The MCC discussions about possible Stage II
Threshold assistance for countries that have
performed well but are not yet eligible for MCC
Compacts will be critically important to Paraguay,
and central to our ability to pursue and attain our
highest priority foreign policy and development
goals ? democratic consolidation and regional
security.


7. (U) The MCC Threshold Program, and the question
of what?s next for Paraguay if not a Compact, become
all the more important as we consider that Paraguay
will hold national elections for President, Vice
President, governors and all members of Congress in
April 2008, and a new government will take power in
August. The current Threshold Program for Paraguay
ends in November 2008; however, many of the
activities will be finished by June 2008. Stage II
Threshold assistance will be vital to consolidate
gains being made under the program now and to pave
the way for continued reform by the next
administration. The timing is such that a Stage II
Threshold program would play a pivotal role in the
USG?s ability to constructively engage and assist
the new government with its reform and development
agenda.


8. (U) While a Stage II Threshold program should be
shaped by the priorities of whichever candidate or
party wins the April elections, Threshold II should
address the major fault lines that continue to
affect Paraguay?s score on the Corruption Control
indicator. Based on the in-depth MCC indicator
analysis of Paraguay?s Control of Corruption that
MCC prepared and provided to the GOP earlier this
year, a Threshold Stage II program could have
considerable impact by tackling key corruption
issues that are not a direct part of our current
Threshold I assistance. These include items such
as, greater reforms of the criminal justice system
(including criminal procedure code improvements),
ensuring non-political selection of judges, and
promoting better access to information (FOIA
reform). Paraguay?s waning competitiveness and
economic prosperity prospects would also be
substantially boosted by attention to additional
business policy climate improvements. Threshold
Stage II could also have significant impact with
assistance to solidify and deepen the adoption of a
few select Threshold I objectives that will likely
require more time to take hold, such as
strengthening anti-corruption prosecution capacity,
improving GOP budget transparency/internal controls,
and strengthened customs enforcement capabilities.


9. COMMENT: The MCC Threshold program and the
promise of a future Compact have provided
significant leverage and incentive for Paraguay to
modernize and reform. Post firmly believes that
Paraguay?s performance and policy progress provide a
persuasive case for a Stage II MCC Threshold.
Paraguay?s path has been lit in part with support
from the MCC Threshold Program. The torch will be
passed to a new administration with new priorities
and a new agenda next few months. Continued MCC
Threshold assistance will be a critical part of our
ability to help the new administration keep the
torch lit, and leading down a path to democratic
consolidation and broader-based prosperity for
Paraguayans. END COMMENT

FITZPATRICK