TREASURY SECRETARY PAULSON'S VISIT TO URUGUAY JULY

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TAGS: ECON ETRD PREL EFIN PGOV UY
SUBJECT: TREASURY SECRETARY PAULSON'S VISIT TO URUGUAY JULY
11-12, 2007

REF: MONTEVIDEO 00629

Classified By: Ambassador Frank Baxter; Reasons 1.4(b),(d)


1. (C) Summary: Secretary Paulson's July 11-12 visit to
Uruguay was viewed as a positive follow-up to the President's
March visit and to Under Secretary Burns and Assistant
Secretary Shannon's visits the same week. The Secretary's

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initiatives on small businesses and infrastructure finance
were widely covered in the press prior to his arrival. The
visit to a small business incubator underscored the message
that Uruguay is an important partner in the region as a
stable democracy with solid economic policies. With President
Vazquez he praised Uruguay's good governance and stressed the
need for capital markets. Vazquez in turn pressed for market
access and certification for Uruguayan boneless lamb, which
Secretary Paulson promised to pursue with the U.S.

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Agriculture Secretary. The Secretary's message on the
importance of developing capital markets, however, did not
appear to resonate. The meeting of Finance Ministers provided
an opportunity to exchange views on economic policies,
infrastructure financing and the importance of spreading the
benefits of economic development. A joint press conference
with the Finance Ministers from Uruguay, Mexico, and Chile
highlighted their shared economic vision of bringing the
benefits of economic development to broader segments of
society with jobs and infrastructure. Although the overall
atmosphere of the visit was extremely friendly and the
Uruguayans were pleased with continued USG engagement, the
fact that only like-minded countries were invited to the
Finance Ministers' meeting was interpreted as an effort to
counteract Venezuela. This created a backlash of criticism
for Minister Astori from the more radical elements of the
ruling party. End Summary.

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President Vazquez Meeting
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2. (C) Secretary Paulson met for almost an hour with
President Vazquez in the President's personal office. The
Ambassador, Acting Assistant Secretary of Treasury Clay
Lowery and the PAO as notetaker attended the meeting. Vazquez
thanked the Secretary for his visit, noting how important the
Finance Ministers, meeting was for the GOU since
"governments here have a different vision of the region and
we want to meet with governments that share the same economic
philosophy." He noted that in the recent MERCOSUR meeting in
Paraguay, discussions with Brazil and Chile had focused on
energy, support for peacekeeping efforts in Haiti, and the
need to work together in multilateral organizations to
coordinate macro-economic policies and consolidate economic
growth. Paulson thanked the President and reiterated how the
IDB can help spread the benefits of economic development to
larger portions of the population through infrastructure and
small business development. He reiterated his discussions
with Brazilian President Lula and Foreign Minister Amorin
about Doha and the need for an integrated approach to
infrastructure. He also thanked Vazquez for the GOU's
leadership at the WTO. Vazquez commented that the reason why
the GOU was advocating for free markets in Doha was because
"there needs to be a solution within Doha so that developed
countries don't harm the smaller countries' ability to
produce."


3. (C) The President agreed that the development of
infrastructure is as important as energy for Uruguay's
future. He cited two examples: the lack of any
transportation system connecting the Atlantic with the
Pacific, and the fact that to fly from Montevideo to Quito
one must fly through Panama. In a May meeting with Chilean
President Michelle Bachelet, Vazquez said they had agreed to
provide each other mutual port access so that Uruguay may
access the Pacific in Valpariso and Chile may access the
Atlantic through Montevideo. This program needs concrete
planning and private sector investment, Vazquez noted.
Secretary Paulson encouraged the President to "come up with

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some projects that can get done." Noting that infrastructure

financing is the most time consuming and complex, Paulson
expressed hope that the IDB can focus on developing a shared
technology information resource so that governments can
provide objective information to attract private sector to
support. He urged the President to look at Chile for model
projects. This would be discussed at the Finance Ministers'
meeting, he said.


4. (C) The Secretary's second point was that the major
challenge for the U.S. and the entire region is to spread the
benefits of economic growth through the entire population. He
pointed out that globalization has brought major changes in
the capital markets and that financial capital is now less
important than human capital. He also noted that the widening
gap between high-low income levels is driven in the region by
many factors including education, health, infrastructure,
competition, technology and innovation. As a result, Paulson
said, those with technology training will move far ahead. He
added that in many countries he does not even make this point
because these countries are so far behind where Uruguay is in
developing an educated base and in implementing solid
economic policies.


5. (C) President Vazquez confirmed that GOU's strategy is to
make Uruguay a center in the region for technology innovation
and research. He noted that Uruguay is the third or fourth
per capita exporter of software in the world. He urged the
Secretary to talk with Finance Minister Astori about the

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overall global strategy. He stressed Uruguay's efforts to
attract foreign investment to sustain growth and said that
Uruguay wants to be the access point into Mercosur. He noted
that the GOU wants to negotiate bilateral trade agreements,
but also strives to maintain regional integration. Uruguay
also needs to specialize and have high quality to meet niche
markets, Vazquez said, such as blueberries, rice, beef, lamb,
dairy products and wine. He stressed that specializing in
quality products is how Uruguay can be efficient and set
priorities. Secretary Paulson agreed, adding that, as
Singapore did, Uruguay can become a location for corporate
headquarters and know-how to do business in the region.


6. (C) Noting that he and the Ambassador came from the
investment banking world, the Secretary stressed the
importance of efficient capital markets with liquidity to
attract foreign investment. The President pointed out that
what Uruguay needed was increased investment and trade. The
Secretary and the Ambassador reiterated the importance of

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robust capital markets. Vazquez did not appear to understand
the importance of capital markets, however, and reiterated
Uruguay's strong points for foreign investment: strong legal
protections, bilateral treaties, an independent judicial
system, low corruption and widespread security. Vazquez
clearly did not grasp the concept and at one point stated
that &I am a doctor, not an economist."


7. (C) Secretary Paulson then made some observations on the
regional economy, noting that Uruguay is in a "tough
neighborhood" with Argentina and Brazil as neighbors. He
emphasized that the economic picture is generally very
positive, but that governments always need to be vigilant.
Turning to Venezuela, he discussed several factors that could
affect the country's stability, apart from reduced oil
prices, such as a major human capital flight, under
investment, a much larger deficit than the publicly stated 3%
deficit, and major problems in managing the economy.
President Vazquez noted that Uruguay was also concerned about
Venezuela and did not want to repeat what happened in
Argentina in 2002 when Uruguay suffered the effects of its
neighbor's crisis. "We are worried and we are aware of our
vulnerabilities," he said, and "this is precisely why we have
increased our primary surplus international reserves.
Uruguay has had steady growth over the past 3-4 years, we
paid our debt early to the IMF and in our budget we are
insisting on not increasing public expenditures to control
inflation. We have focused on four priorities in our budget:
health, education, public infrastructure and public safety."
Paulson applauded this approach as the best way to reduce

inflation by reducing public spending.


8. (C) At the conclusion of the meeting, the Secretary asked
what he could do to help Uruguay. He noted that President
Bush hopes to have Uruguayan blueberries on his cereal in the
fall. Vazquez replied that hopefully President Bush would be
enjoying Uruguayan lamb as well and the Secretary promised to
follow up with the Agriculture Secretary on this. Vazquez
mentioned that Uruguay was developing its already dynamic
tourism sector into eco-tourism and had invested in security
infrastructure at its airport. Ambassador Baxter noted that
he planned to talk to American tourists on cruise ships to
encourage them to visit the rest of Uruguay ) not just
Montevideo.

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Lunch with Minister Astori
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9. (C) Minister Astori and his economic team (Under Secretary
Mario Bergara, Director of Macroeconomic Planning Fernando
Lorenzo, and Uruguay's financial representative in the US
Carlos Steneri) hosted a lunch for Secretary Paulson, the
Ambassador and the U.S. delegation (Acting U/S Lowery, A/S
Nancy Lee, A/S Brookly McLaughlin, and Chief of Staff James
Wilkenson). The Secretary reiterated the same themes
concerning Uruguay's importance to the U.S., our support for
increased multilateral investment and the President's
interest in going as far on trade as U.S. and Uruguayan
domestic environments would allow. He underscored the
importance of capital markets to increase foreign investment
in Uruguay. Lorenzo opined that most of the businesses were
too small to issue stocks and Bergara stated that most people
simply did not understand these types of investments here.
(Note: The Ambassador sensed that ideology was also be a
factor in opposing capital markets, together with their lack
of experience. End Note.) Minister Astori and Secretary
Paulson also discussed Uruguay's economic comparative
advantages, and possible growth areas. As a small open
economy, Uruguay is well positioned to act as a regional
financial services hub, especially for areas like back-office
operations. Astori noted that financial agreements within
Mercosur were impeding the integration of the regional market
for financial services, and Uruguay's ability to act as a
regional hub.

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Finance Ministers Meeting
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10. (C) The Finance Ministers meeting was attended by Chilean
Finance Minister Andres Velazco, Chile's Director for
International Affairs Raul Saez, Mexican Finance Minister
Agustin Carstens and Mexico's Undersecretary of Finance and
Public Credit Alejandro Werner, in addition to the U.S. and
Uruguayan delegations. Argentina, Brazil and Colombia sent
their regrets to Minister Astori's invitation and Peru failed
to show at the last minute. Astori opened by thanking Paulson
for selecting Uruguay to host the meeting and highlighted the
significance of the event for Uruguay,s international
standing. "There is no development strategy without a good
international insertion strategy," he noted. The Secretary
gave an overview of the global economic picture and the
impact on the region. Although the U.S. economy has slowed,
he was optimistic overall, given the diversification, strong
consumers and labor markets and good growth outside the U.S.,
as well as the low inflation figures. He noted that
developing countries were growing about twice as fast as
industrial counties with controls on inflation, sound fiscal
policies, and primary surpluses. The global economy is
strong, Paulson said, and keeping inflation under control is
a key element to continued expansion. He discussed the two
major risks: a global financial shock and protectionism. He
regarded a shock as less likely given the high level of
integration among more efficient and liquid economies. He
warned that countries had nevertheless to be vigilant and
that the best defense was liquidity. He noted that despite
evidence that countries pursuing market economies have
benefited the most, protectionism has grown over the past

several years, as the good economy has reduced pressure for
change. The region's number one challenge, Paulson stressed,
is to spread the benefits of economic development from the
top one percent of the population. For this, fostering small
and medium enterprises, implementing new lending policies and
developing infrastructure are key. Carstens, Velazco and
Paulson exchanged ideas on the potential end of the
high-liquidity era which, according to Carstens, "is
generating a bonanza type of environment" that makes him
"very nervous."


11. (C) Mexico,s Carstens talked about the role of
multilateral development banks in middle income countries. In
an assessment that was shared by several participants, he
stated that the IFIs have been shrinking in their capacity to
interact and lend to middle income countries that are
accessing financial markets in better conditions. As such,
IFI's credit products are no longer their best options. He
suggested a number of product innovations for IFIs including
financing in local currency, offering credit enhancements
supporting infrastructure development and providing insurance
against climate change and catastrophic risk. IFIs need to
focus on those strategic sectors where they are a good
complement to private sector resources and need to develop
new schemes for technical assistance through lending programs
that detach value-added cost from financing costs. Finally,
he called on Latin American countries to play a more active
role as shareholders, instead of acting as borrowers.
Minister Astori agreed with Mexico's conclusions and noted
that Uruguay is working with the Andean Development Bank to
develop key projects. Bergara added that the costs of market
development are not taken into account. He reiterated that
the key is to make the banks more competitive and focus on
specific priority projects. Reforms are necessary. He noted
that when Uruguay wanted to repay its debt early, the Fund
said "take your time."


12. (C) Chile's Velasco presented ideas for promoting
innovation in the region. He drew a link between research
and development and productivity growth and economic growth.
Latin America is still ranked middle in several important
indicators like access to higher education, number of
technology students, red tape to open and close businesses
and research and development. He suggested an expansion of
research to foster more applied research and use public
monies to hook private funding. He advocated that at least 3%
of GDP be invested in R&D. Minister Astori adhered totally
to Velasco,s approach and emphasized the similarities
between Chile and Uruguay. During the meeting he said
repeatedly that Uruguay and Chile look "dangerously" alike.
Astori also pointed out that Uruguay had created a
five-minister board to work on innovation. Secretary Paulson
noted that the key was to link research to innovation and
that the enemy of innovation is all too often the public
sector which is vulnerable to corruption. Countries need a
Silicon Valley with private business innovation and
investment. He cited Latin America as an example of
excessive regulation; regulations have to be transparent.
"Innovation does not come from the government, it comes from
private industry; governments need to let businesses
innovate,", Paulson said. Cartens added that the challenge
in Latin America is the quality of government spending, and
that evaluation methods are needed to ensure that people are
actually being better educated with the additional dollars
spent on education. Paulson agreed wholeheartedly, saying
that "innovation is not how to get more public education but
how to get the skills that will make people useful in the
21st century."


13. (C) In the final half-hour, IFC's Director of
Operational Strategy Department Bernard Sheahan and Richard
Frank of Darby Overseas Investments talked about
infrastructure financing in the region. They also commented
on the banks' pool of information and experiences that
governments could provide to the private sector to facilitate
private investments. Participants agreed that foreign
investments in infrastructure are largely successful but also

politically very unpopular. One suggestion was to recycle
investments from national retirement and pension investments
to broaden a sense of ownership of national infrastructure
among the population. Chile has done this with success and
offers excellent models, and Brazil is just beginning.

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Small Business Incubator
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14. (C) The Secretary, Mrs. Paulson and the Ambassador then
visited Ingenio, a business incubator for Information and
Communication Technology (ICT) created as a joint initiative
by the Uruguayan Technology Laboratory (LATU) and ORT
University with financial support from the IADB. After a
roundtable with LATU President Miguel Brechner, Ingenio
Director German Martinez and six different firms discussing
technology in education, teleworking, the development of
capital markets and access to financing, the delegation
briefly toured the facility. Among several firms visited was
the Ceibal Project for President Vazquez' one-laptop per
child initiative.

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Public reaction: Generally positive
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15. (C) The message that Uruguay plays an important role in
the region as a stable democracy with solid economic policies
was well-received and public reaction to the visit was
generally positive with broad coverage before, during and
after the visit. Although hosting the Finance Minister's
meeting was generally regarded as a coup for Uruguay, there
was continued editorial speculation as to who (Minister
Astori or Secretary Paulson) had invited the Finance
Ministers, given the notable absence of Bolivia, Ecuador and
Venezuela. The meeting was widely viewed as an attempt to
unify opposition to Chavez in the region. Editorials
questioned why Astori had rejected Venezuela's Bank of the
South proposal at the same time he embraced Secretary
Paulson's promise of $200 million in multilateral investment.
Nevertheless, even notoriously anti-U.S. Foreign Minister
Gargano welcomed the visit as an opportunity to press for
more Uruguayan exports to its second largest customer. The
Secretary's media roundtable (a transcript of this roundtable

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can be found on the unclassified system at:
http://uruguay.usembassy.gov/usaweb/2007/07-3 93En.shtml) and
press conference following the Ministers' meeting had
prominent and sustained coverage in all national and regional
radio, TV and print media.

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Comment: Radicals Backlash Against Astori
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16. (C) Secretary Paulson's July 11-12 visit to Uruguay was
widely viewed as a positive follow-up to the visit of
President Bush last March and a sign of U.S. concrete
engagement in the region. In the aftermath of the Secretary's
visit, however, and after a visit to Argentina on July 18,
where he expressed concerns about Venezuela's entry into
Mercosur, Minister Astori has been caught up in a storm of
criticism emanating from the more radical elements of the
Frente Amplio. His comments resulted in a sharp rebuke from
FM Gargano and Communist Senator Lorier and others in the
Frente Amplio called on Astori to explain why Venezuela,
Bolivia and Ecuador had not been invited to the Finance
Ministers' meeting. This has continued to generate headlines
in the press. In answer to mounting criticism, Astori
recognized that the U.S. Treasury had suggested the countries
to be invited, but that the invitations had been approved by
the President Vazquez. The Communist Party blasted Astori's
response as "a clear admission that the invitations were
issued at the behest of the U.S." The controversy opened up a
new battlefront for Astori, who was already the focus of much
criticism lately for his new tax reform and his firm stand
against Venezuela's Banco del Sur proposal. End Comment.

U.S. Treasury Office of Western Hemisphere Affairs cleared on
this message.



Nealon