SCENE-SETTER FOR LUGO INAUGURATION

C O N F I D E N T I A L ASUNCION 000535 SIPDIS STATE FOR WHA/FO CKELLY, WHA/BSC MDRUCKER, BFRIEDMAN, KBEAMER, S/CPR FOR RMARTINEZ, JPEARON, COMMERCE FOR SECRETARY GUTIERREZ, SENIOR ADVISOR LGUTIERREZ, TMICHAEL, ENEWLIN, ADRISCOLL, SCOOK E.O. 12958: DECL: 08/02/2028 TAGS: PREL ECON PGOV SNAR PA SUBJECT: SCENE-SETTER FOR LUGO INAUGURATION Classified By: A/DCM Joan Shaker for reasons 1.4 (b) and (d). -------------- SUMMARY -------------- ¶1. (C) Embassy Asuncion warmly welcomes Secretary of Commerce Carlos Gutierrez and members of the U.S. delegation attending the August 15 inauguration of President Fernando Lugo. The Lugo administration represents the first interruption in Colorado Party rule in 61 years. Your visit provides an opportunity to promote U.S. interests in strengthening bilateral commercial ties; combating corruption; shoring up democratic institutions and respect for the rule of law; promoting sound economic policies and good governance; and disrupting criminal organizations. Many Paraguayans support closer U.S. ties; Lugo privately assures the Embassy that he wants strong relations, but he has sent some mixed signals on his possible foreign policy. Your visit demonstrates strong USG interest in the bilateral relationship and U.S. support for the new Paraguayan government at a critical moment in Paraguayan history. END SUMMARY. -------------- THE POLITICAL SCENE -------------- ¶2. (C) During his five years in office, outgoing President Nicanor Duarte Frutos dealt with a pressing fiscal crisis and put Paraguay's economy on a stable course. Despite his economic successes, he leaves offices with a 5 percent approval rating. Duarte -- in an attempt to win the populist vote -- shifted his government and the ruling Colorado Party to the left, formally declaring (to wide derision) the Colorado Party as "socialist." Duarte repeatedly criticized President Bush and expressed appreciation for Venezuela's "commitment" to the region. ¶3. (C) President-elect Fernando Lugo won 40.8 percent of the vote in the April 20 national elections, 10.2 percent more than his nearest rival, Colorado presidential candidate Blanca Ovelar. Lugo's Patriotic Alliance for Change (APC), including the Authentic Radical Liberal Party, won a large block of seats in Congress (17 of 45 seats in the Senate; 31 of 80 in the Lower House). Lugo's decisive victory gave his government a mandate for political, economic, and judicial reform. He assembled a diverse team of politicians and 
technocrats to serve in his cabinet. Lugo, a former Catholic bishop, pledged to make corruption and de-politicization of public institutions centerpieces of his new administration, and expectations are high that Lugo will successfully reform the government. ¶4. (C) Embassy officers have had regular contact with Lugo for the past several years, and have cordial relations with him and many of his ministers and advisors. Lugo has expressed interest in U.S. assistance programs, including the MCC Threshold Program, and has privately assured the Embassy that he wants close ties. However, his public rhetoric (including at Venezuelan President Chavez' side on a July trip to Nicaragua) and his decision to name Foreign Minister Alejandro Hamed Franco as Foreign Minister over U.S. objections, send mixed signals. -------------- THE ECONOMIC REALITY -------------- ¶5. (U) Paraguay has a predominantly agricultural economy, with a struggling commercial sector. The country has vast hydroelectric resources, including the Itaipu hydroelectric dam built and operated jointly with Brazil. The government welcomes foreign investment in principle, but widespread corruption and a weak judicial system are major deterrents to investment. The economy is heavily dependent on exports of soybeans, cotton, grains, cattle, timber, sugar, and electricity. ¶6. (U) Paraguay's real gross domestic product (GDP) in 2007 of USD 12.8 billion (in 2000 dollars) represented an increase of 30.6 percent from USD 9.8 billion in 2006. Per-capita GDP rose to USD 1,928 in current U.S. dollar terms in 2007, up from USD 1,546 in 2006. In 2007, Paraguay had a current account deficit of USD 73 million, derived from a small deficit in the trade of goods, but accompanied by a significant increase in agriculture exports and services (electricity). In 2007, official foreign exchange reserves rose to USD 2.4 billion, an increase of 41 percent over 2006. Inflation in 2007 was 6.0 percent, down from 12.5 percent in ¶2006. Agricultural activities represent about 21.9 percent of GDP and employ just under half of the workforce. More than 250,000 families depend on subsistence farming activities and maintain marginal ties to the larger productive sector of the economy. In addition to the commercial sector with retail, banking, and professional services, there is significant activity involving the import of goods from Asia and the United States for re-export to neighboring countries. The underground economy, which is not included in the national accounts, may equal the formal economy in size, although enforcement efforts by the tax administration and customs are having an impact on the informal sector. ¶7. (U) The domestic labor force included an estimated 2.73 million workers in 2006. Total unemployment for 2006 officially stood at 11.4 percent, up from 9.4 percent in ¶2005. Total underemployment for 2006 stood at 24.0 percent, down from 25.1 percent in 2005. With a population growth rate above two percent annually, a key challenge is the creation of enough jobs to meet increasing demand. While the supply of workers is relatively large and growing, experts cite the lack of a skilled work force as a major obstacle to economic growth. ¶8. (U) Bilateral trade with the United States has increased over the last six years. Although U.S. imports from Paraguay were only USD 68 million in 2007, up from USD 58 million in 2006, U.S. exports to Paraguay in 2007 were USD 1.2 billion, up from USD 910 million in 2006. More than a dozen U.S. multinational firms have subsidiaries in Paraguay, and some 75 U.S. businesses have agents or representatives in Paraguay. Cargill, ADM, Coca Cola and Exxon Mobile are the largest U.S. companies operating in Paraguay. As of March 2007, the total foreign direct investment in Paraguay stood at USD 1,602.52 million. The United States was the largest foreign investor in Paraguay, with USD 616.50 million, followed by Brazil with USD 230.85 million. Foreigners invested a total of USD 110.98 million in Paraguay in 2006, up from USD 34.79 million in 2005. The largest foreign investors in 2006 were the United States with USD 67.37 million, followed by Brazil with USD 31.10 million. ¶9. (U) Political realities render outright privatizations of state-owned enterprises unlikely in the short term, although Lugo's economic team is discussing public-private partnerships to reform state-owned enterprises. The large state-run companies most attractive to foreign buyers (such as the telecom and electricity distribution companies) employ thousands of potential voters and are outlets for political patronage. The telephone and electricity companies were in the process of being privatized when the government suspended privatization in June 2002, bowing to political pressure. The following are presently state-owned monopolies: rail, oil and gas, cement, steel, electricity, water, and basic and long distance land-line telephone services. ¶10. (SBU) Paraguay and the United States annually discuss investment and commercial issues via the Joint Council on Trade and Investment (JCTI). Key trade and investment issues in the last JCTI, held in December 2007, included U.S. certification of Paraguayan beef; technical assistance and investment in biofuels; FDA approval of Paraguay's natural sweetener stevia, and Paraguay's request to be given preferential U.S. treatment such as under the Andean Trade Preference and Drug Eradication Act (ATPDEA) or the African Growth Opportunity Act (AGOA). In 2006, Paraguay entertained the idea of a Bilateral Trade Agreement (BTA),but efforts stalled because Paraguayans felt they were not ready. Post has not receive any further formal expressions of interest in a BTA. -------------- SOCIAL SERVICES NEEDS -------------- ¶11. (SBU) Inefficient, state-run institutions dominate Paraguayan social services and public works programs, including education, health care insurance, and pension systems. Social services spending increased during the Duarte administration; however, most spending augmented employees' salaries. Public schools run two daily shifts of classes; students typically receive 20 hours of schooling each week. Student absenteeism and illiteracy are chronic problems. In addition, many Paraguayans lack basic access to health care facilities, particularly in rural areas, and many more are uninsured. The Social Welfare Institute (IPS), Paraguay's largest insurance and pension provider, disburses inadequate social security payments and substandard health care. The Ministry of Health and Social Welfare, Ministry of Public Works and Communications, and state-owned enterprises provide basic public services, but access is limited and services have deteriorated in quality. Lugo has pledged to improve social services spending and make health care and education a priority. -------------- PUBLIC SECURITY CHALLENGES -------------- ¶12. (SBU) Crime, especially violent crime, is increasing in Paraguay, and the public generally believes that security is weak and that Paraguayan security forces do not meet their security needs. A culture of corruption and distrust hampers security forces' ability to tackle rising concerns about public security. Paraguay's National Police are disparaged by the general population as incompetent and corrupt. ¶13. (SBU) The "landless" peasant movement has increasingly taken to protesting and "land invasions" -- illegally occupying large farms owned in some cases by Brazilians or Paraguayans of Brazilian descent -- in agitating for agrarian reform. On some occasions, protests and "land invasions" have turned violent and resulted in injuries. These movements are gaining momentum, and Lugo has said land reform will be a priority, including a national land survey. -------------- INTERNATIONAL CRIME AND ILLICIT TRADE -------------- ¶14. (C) Disrupting criminal organizations in the Tri-Border Area (TBA) of Paraguay, Argentina and Brazil is a primary USG concern. Lax border controls make the TBA a hub for trans-national criminal activity including drug trafficking, trafficking in persons (TIP),arms trafficking, intellectual piracy, and money laundering. Paraguay is a major transshipment point for cocaine from Colombia and Bolivia to Brazil. Much of the northwestern part of the country is barren and uninhabited, and authorities experience difficulties enforcing the law because of hostile geography, corruption, chronic understaffing, and the political and judicial power some drug traffickers wield. Paraguay is also a major source of money laundering run by organizations that frequently have ties to the Middle East. The United States has had limited success in convincing Paraguay to take a firm stand on law enforcement issues such as terrorist finance. While Paraguay has demonstrated political will to expand law enforcement cooperation with the United States on drugs and pirated goods, such political will is limited, and is often hampered by judicial corruption. Echoing Brazil, Paraguay is highly sensitive to "satanizing" the TBA, and Lugo has spoken about the "myth of terrorist finance in the TBA," indicating that cooperation on these issues may be more difficult under his administration. ¶15. (U) Paraguay is recognized as a regional distribution and manufacturing center for counterfeit merchandise. The re-export trade to Brazil is rife with piracy. Based on the seriousness of industry concerns, Paraguay was designated as a Priority Foreign Country in January 1998 by the U.S. Trade Representative and is subject to Section 306 Monitoring. In November 2007, the USG and Paraguay signed a two-year Memorandum of Understanding (MOU) detailing Paraguay's plans to protect intellectual property rights (IPR) and combat IPR violations. Paraguay enacted trademark and copyright laws in October 1998, and the Senate passed a patent law in April 2000, which was again modified in June 2005. Paraguay ratified all the Uruguay Round accords, including TRIPS, in late 1994, and has ratified two WIPO copyright treaties. In the last three years, the Paraguayan government's seizures and destruction of counterfeit and pirated goods have increased, and the government has cooperated closely with industry groups to help fight piracy and counterfeiting. In addition, Brazilian measures to control the trafficking of pirated goods coming in from Paraguay are having a significant positive effect. Nevertheless, IPR crime remains a major source of illicit income in Paraguay. ¶16. (SBU) The Paraguayan government approved a revised penal code June 23 that includes anti-money laundering, IPR and TIP statutes, and will go into effect in mid-2009. Although the Chamber of Deputies passed counter-terrorism (CT) legislation as part of the criminal code, the Senate -- faced with rising public protests fearing potential abuses -- removed it from the final version. Without terrorism finance legislation, the Egmont Group could suspend Paraguay next year. -------------- CORRUPTION AND WEAK INSTITUTIONS -------------- ¶17. (U) One of the most serious problems facing Paraguay is corruption. Weak state institutions, the lack of a rational civil service system, and uneven political will impede efforts to fight corruption. Bribery is a crime, but is rarely prosecuted. Paraguay has signed the UN Convention Against Corruption, but is not a party to the OECD Convention on Combating Bribery. The USD 35 million Millennium Challenge Threshold Program (Plan Umbral),administered by USAID and slated to end this year, has focused on improving Paraguay's corruption indicators and formalizing its economy. The program provides financial assistance and technical support to Congress, the Finance Ministry, Customs, the Comptroller, local governments, justice sector institutions, and civil society organizations. Although Paraguay did not qualify in 2007 for full participation in the MCC Millennium Challenge Account because of its corruption indicators, the Lugo administration is preparing its proposal for Phase II of the Threshold Program, which will begin later this year. ¶18. (U) The judicial sector is weak, inefficient, and corrupt. The slow pace of judicial reform and continued impunity are barriers to development. Historically, Paraguay's judicial system has been characterized by a lack of independence. While efforts are underway to strengthen the rule of law and make the judicial process more transparent, unbiased and fair, prominent features of the current judicial system are patronage and bias. -------------- BILATERAL MILITARY RELATIONS -------------- ¶19. (SBU) Paraguay's military is a small force struggling to redefine its mission. The Army is the largest of the three services (6,000),followed by the Navy (2,000) and Air Force (1,200). The military's primary missions are to protect Paraguay's territorial integrity, defend the constitutional authorities, and cooperate in civil defense. When called, the military supports law enforcement activities and public health campaigns. However, the military's infrastructure and equipment are obsolete and in desperate need of repair or replacement. Despite these challenges, the military has stepped up efforts to professionalize under the guidance of Military Forces Commander General Bernardino Soto. ¶20. (C) President Duarte declined to extend Status of Forces Agreement (SOFA) protections to U.S. military personnel in October 2006. U.S. military cooperation with Paraguay has continued, albeit scaled back and under a lower profile. As a stop-gap measure, the USG concluded a 505 Assurance Agreement in April 2007 with the government. USG financial and manpower support for the Paraguay Military Forces is second to only that of Colombia in South America. U.S. Armed Forces provided the military's Joint Immediate Response Unit (DCEI) with more than USD 4.0 million in funding for weapons, equipment, and training in fiscal years 2007 and 2008. The U.S. Armed Forces provides financial and technical assistance to Paraguay's United Nations Global Peace Keeping Operations Program (UNPKO). The USG committed USD 4.1 million in Global Peace Operations Initiative (GPOI) funds to help Paraguay refurbish its Joint Peace Operations Training Center; train three company sized Multi-role Engineer Companies to deploy on UNPKO missions under Paraguayan flag; and increase its capacity to train officers and soldiers. We also facilitate joint humanitarian assistance and disaster relief exercises in conjunction with the military and National Emergencies Secretariat (SEN). The Embassy will seek to negotiate a new defense cooperation agreement with the Lugo government. -------------- OTHER U.S. ASSISTANCE TO PARAGUAY -------------- ¶21. (U) USAID/Paraguay's FY08 budget is USD 7.8 million. USAID's current strategy focuses on four broad areas: Economic Growth, Sustainable Management of Natural Resources and Protected Areas, Democratic Strengthening, and Improved Health Care. USAID's Economic Growth program works with 30 local firms in the poorest regions of the country to help them sell their products. The program, called Paraguay Vende, has generated over USD 60 million in additional sales and over 30,000 full-time job equivalents in the past four and a half years. The Economic Growth program is also negotiating with two local banks to establish US Treasury loan guarantees to encourage them to make loans in development sectors where they would otherwise not be active. Via CIPE, a U.S. NGO which supports private sector initiatives around the world, USAID is also encouraging dialog between the private sector and the government-elect on economic growth. In the environment sector, USAID continues to support improved management of protected areas. This program, which was scheduled to end in FY2009, will continue as Latin American earmarks for biodiversity continue. The Democracy program accounts for almost one-third of USAID/Paraguay,s budget, and focuses on national reforms to fight corruption, giving civil society a voice at the local and national level, and promoting decentralization and municipal development. Finally, USAID's health program supports decentralization of health services, improved maternal and child care services, and a greater capacity to deliver family planning services. ¶22. (U) Through its global agreement with Citibank, the Overseas Private Investment Corporation (OPIC) committed USD 95 million in credit guarantees to local banks. Banco Regional (USD 15 million),Interbanco (USD 45 million),and BBVA (USD 45 million) each received an OPIC credit guarantee to increase lending to small and medium-sized enterprises. ¶23. (U) The Justice Department's Resident Legal Advisor (RLA) was instrumental in working with Congress to pass Paraguay's new penal code legislation. The RLA is now working with Congress to develop a new criminal procedures bill to accompany the revised penal code. Advisors from the Treasury Department's Office of Technical Assistance (OTA) work behind-the-scenes to assist the Finance Ministry and Central Bank with customs enforcement, budgeting, and monetary policy. The Peace Corps also operates in country and has 180 volunteers serving throughout Paraguay. They play a key role in promoting local institution building. ¶24. (C) State's International Narcotics and Law Enforcement (INL) bureau, along with DEA and U.S. Special Forces, assists Paraguay's Anti-Drug Secretariat (SENAD) in combating narcotics trafficking, money laundering, IPR violations, and trafficking in persons. Working closely with the USG, SENAD has effectively targeted major drug trafficking organizations and continues to break its own record seizures of marijuana and cocaine each year. SENAD has made a number of significant arms seizures with evidence signaling links to Brazil's Capital First Command (PCC) narco-organization and Colombia's FARC in PJC and Asuncion. Presently, SENAD is hard-pressed to meet challenges due to a lack of resources (its national annual budget is just USD 2 million). SENAD inaugurated a new operating base and helipad in PJC with USG assistance in April 2007 and USG assistance has been critical to SENAD's K-9 (canine) inspection unit at ports of entry in Asuncion, Pedro Juan Caballero, and Ciudad del Este. ¶25. (SBU) The Embassy's leading public diplomacy effort is its English language scholarship program, started in 2006, which aims to identify academically outstanding young Paraguayans from families with limited resources. Since the program's inception, the Embassy has awarded over 500 scholarships, enabling Paraguayans to compete in the worldwide marketplace and qualify for other U.S. government programs that require English language skills. Other public diplomacy programs include Youth Ambassadors, the Ambassador's Fund for Cultural Preservation, book donations, and the International Visitors Leadership Program. -------------- COMMENT -------------- ¶26. (C) The USG supports President-elect Lugo's stated goals to fight corruption and improve health and education services. More so than any other president in modern Paraguayan history, Lugo has an opportunity to affect real change. However, he will have many challenges. Lugo does not have political or governmental experience, or even his own political party. His diverse alliance represents a wide spectrum of political persuasions, and Lugo will have a difficult time navigating the constant political pressures and infighting to find his own neutral course. Lugo has stated that both Chile and Uruguay will serve as his models; we would like to encourage him in that vein, and to assure him of U.S. support. When meeting with Paraguayan interlocutors, you should emphasize the USG's long history of friendship with Paraguay, and that we will work with the Lugo government to further our mutual interests. END COMMENT. Please visit us at http://www.state.sgov.gov/p/wha/asuncion Cason