SEC GUTIERREZ LUNCH WITH LUGO'S ECONOMIC TEAM

C O N F I D E N T I A L ASUNCION 000583

SIPDIS

WHA/FO CKELLY, WHA/BSC MDRUCKER, FOR COMMERCE SECRETARY
GUTIERREZ, AMB LGUTIERREZ

E.O. 12958: DECL: 08/21/2028
TAGS: ECIN PREL ECON ETRD PGOV EIND PA
SUBJECT: SEC GUTIERREZ LUNCH WITH LUGO'S ECONOMIC TEAM

Classified By: A/DCM John Beed; reasons 1.4 (b) and (d).


1. (C) SUMMARY: Ambassador Ayalde hosted a lunch for
Secretary Gutierrez and the U.S. delegation to Lugo's
inauguration and Lugo's economic team August 14. Finance
Minster Borda outlined an expansive agenda of economic policy
priorities: pro-growth macro-economic policies; public sector
reform to improve service delivery and the quality of civil
servants; reform of state-owned enterprises; competitiveness
and productivity; agrarian reform; job creation; and poverty
reduction. Describing Paraguay's macro-economic situation as
on-track, Borda said managing short-term, high expectations
related to job creation and poverty reduction will be his
greatest challenge. Borda asserted that dialogue between
civil society, private sector and government is the basis of
sustained economic growth, but did not offer much regarding
how the new government would foster this dialogue.
Formalizing the economy, according to Borda, is a process
that combines administrative efficiency, legal processes, and
structural and human resources to promote integrated
development of small and medium enterprises. Senior Advisor
to Minister Borda Fernando Masi explained that MERCOSUR's
statutes limit Paraguay's capacity to independently seek
Bilateral Trade Agreements, and alluded to growth potential
of non-traditional exports outside MERCOSUR as an opportunity
for Paraguay to expand its markets. The lunch was a
productive exchange, but revealed the huge challenge in
implementing a broad set of reforms and showing results, and
some looming tensions that could confront Lugo's economic
team. END SUMMARY.

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BORDA'S ECONOMIC PLAN - OPPORTUNITIES AND CHALLENGES
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3. (C) Minister of Finance and head of Lugo's Economic Team
Dionisio Borda, Minister of Industry and Commerce Martin
Heisecke, Senior Advisor to Minister Borda Fernando Masi,
Vice Minister of Economic Integration Manuel Caballero, Vice
Minister of Commerce Gladys Bareiro-Modica, and Advisor to
Minister Heisecke Guillermo Alcaraz attended a lunch hosted
by Ambassador Ayalde for Secretary Gutierrez and U.S.
delegation to President Lugo's inauguration August 14. The
U.S. delegation included State PDAS Craig Kelly, NSC Director
Dan Fisk, OPIC President Robert Mosbacher, and Commerce
Advisor Lino Gutierrez. Acting DCM and econ officer
(notetaker) also attended. Following Ambassador Ayalde's
welcome, Secretary Gutierrez described a growing tendency
toward pragmatism in Latin America, where leftist politics
are accompanied by right-center economic policies,
highlighting as an example Chile's 52 Bilateral Trade
Agreements (BTAs). Secretary Gutierrez emphasized that within
this pragmatism, private sector investment is central to
sustained growth and employment.


4. (C) Minister Borda described his economic policy
priorities: pro-growth macro-economic policies; public sector
reform to improve service delivery and the quality of civil
servants; reform of state-owned enterprises; competitiveness
and productivity; agrarian reform; job creation; and poverty
reduction. Borda emphasized the need to reform state
enterprises in key sectors (cement, oil and gas, electricity
distribution, communication, and water). Borda mentioned that
the reform of state-owned enterprises has been slow, and the
International Monetary Fund (IMF),as part of the previous
outstanding IMF stand-by agreement, did not push the former
Paraguayan government for greater reform measures.


5. (C) Borda said a mixed council (private sector and
government) will oversee the performance of state-owned
enterprises, and signaled that private sector involvement
(capitalization and public works concessions) will be key to
the reform process. Borda cited the successful case of Chile
with privatizing its road concessions. Borda linked
Paraguay's lack of competitiveness to the inefficiency of
these enterprises. Citing a USAID study, Borda indicated that
poor infrastructure makes Paraguay's transportation costs
appreciably higher than those of its neighbors.


6. (C) Borda said his greatest challenge will be managing
short-term, high expectations related to job creation and
poverty reduction. Borda explained that there is immense
pressure on the Lugo administration to show results within
its first 100 days. Minister Borda expressed frustration
with the lack of qualified professionals in Paraguay, and
inadequate government salaries to attract the few good
professionals available. He said he would have to finalize
the entire government budget by September 1. Borda also
described the challenges in maintaining high growth rates,
diversifying the economy, and finding markets outside
MERCOSUR. Ambassador Lino Gutierrez asked Borda why he
joined Lugo's team; Borda replied that "he is making a bet on
change and wants to be part of it; he hopes for and is driven
by the possibility of change."


7. (C) Borda said Paraguay's macroeconomic and fiscal
policies have been solid in the past and many will continue,
but mentioned two immediate challenges: the lack of
flexibility in public spending and the rapid appreciation of
the Guarani. With regard to competitiveness, Borda mentioned
that new policies will focus on improving infrastructure and
the pool of trained labor. Borda also asserted that
Paraguay's competitiveness is not a function of its low
taxes; he explained that even with the lowest tax structures
in the region, Paraguay remains one of the least competitive
economies in Latin America. He alluded to the need to raise
the tax base and the tax rates for the new government to have
additional resources to tackle its development agenda.

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THE PRIVATE SECTOR ROLE AND ECONOMIC FORMALIZATION
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8. (C) Ambassador Ayalde asked if the government would seek
private sector input in the formulation of economic policies.
Minister of Industry and Commerce Heisecke explained that in
the past, an Inter American Development Bank program
sponsored private/public sector round tables that they would
continue to use. (NOTE: During an earlier meeting with
members of AmCham, the representatives of U.S. firms
complained about the absence of a space to allow for private
sector input into formulation of economic reforms. END
NOTE.) Heisecke emphasized the need to formalize the economy,
to maintain clear rules for investors, and to promote the
private sector, not penalize it with higher taxes. Heisecke
stated that wealth creation is a private sector driven
process. Calling "globalization not a threat but an
opportunity," Heisecke sees clear growth potential for
Paraguay in international markets. Heisecke described his
agenda as growth with equality. Borda added that his
economic plan envisions a close participative three-way
dialogue with the private sector and civil society on the
development of economic policies.


9. (C) Heisecke said employment in the formal economy is
often less lucrative than informal avenues. Borda
interjected that formalization in Paraguay is a process that
needs to combine administrative efficiency, legal processes,
and structural and human resources issues to promote an
integrated development of small and medium enterprises
(SMEs). Minister Borda used agriculture SMEs as an example.
He stated that 85 percent of Paraguay's informal producers
have less than 50 hectares of land, and the challenges of
formalization include integrating these small producers into
agro-supply value chains. Secretary Gutierrez underscored the
importance of SMEs in U.S. job creation. Borda asserted that
more trained labor and improved infrastructure are priorities
for formalization of the economy.

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MERCOSUR AND BILATERAL TRADE AGREEMENTS
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10. (C) Secretary Gutierrez inquired about Paraguay's trade
interests and the possibilities of BTAs. Senior Advisor to
Minister Borda Fernando Masi explained that MERCOSUR's
statutes limit Paraguay's capacity to independently seek
BTAs. Masi stated that Argentina does not have any BTAs
outside MERCOSUR but has trade agreements with associate
member countries outside MERCOSUR, namely Chile. Masi also
described how MERCOSUR statutes commit full member countries
to negotiate BTAs as a block. Exceptions are possible but
only for trade agreements with associate member countries.
Masi alluded to growth potential of non-traditional exports
outside MERCOSUR as an opportunity for Paraguay to expand its
markets, and used as an example the many trade opportunities
that have not been exploited under the US Generalized System
of Preferences (GSP) program. Borda echoed Masi's words with
an example of a Paraguayan company that started to export
"mate" leaves (cold-tea leaves) to the US.


11. (C) When asked about Paraguay's future in MERCOSUR, Masi
responded that trade among full member countries is growing,
especially with Brazil, and though some bilateral agreements
have been reached, Paraguay's top goal is to reach new
markets outside South America. Masi indicated that Israel is
the only country outside MERCOSUR with which it has a trade
agreement.

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OTHER ISSUES
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12. (C) Vice-Minister of Commerce Gladys Bareiro-Modica
remarked that Paraguay is signatory to the WTO TRIPS
agreement and promised to work to ensure that Paraguay is in
compliance with its obligations. Secretary Gutierrez remarked
that piracy is a challenge for Paraguay; Heisecke agreed, due
to the re-export triangulation in the tri-border. Heisecke
also mentioned the counterfeiting of cigarettes as another
significant challenge. According to Heisecke, an
international cigarette manufacturer estimated that Paraguay
has the largest installed capacity per capita for
counterfeited cigarette production in the world.


13. (C) Secretary Gutierrez closed by encouraging Paraguay to
attend next year's America Competitiveness Forum (ACF) in
Chile, and also suggested the possibility of putting together
a U.S. trade mission to Paraguay in the future. Secretary
Gutierrez thanked participants for the positive and frank
exchange, and expressed his support and willingness to
collaborate, extending an invitation to participants to meet
with him in Washington.

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COMMENT
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14. (C) COMMENT: The lunch was a productive exchange of
ideas. Finance Minister Borda, a well-respected and former
Finance Minister (2003-2005),demonstrated his command of
economic policies and priorities. As Lugo's Economic Team
leader, Borda has Lugo's full support and appears to have a
mandate beyond the economic arena. The exchange, however,
revealed some differences and tensions between Minister
Borda's and Minister Heisecke's approaches on economic
policy. Borda maintained a coherent presentation with
examples to highlight key aspects in his agenda, and his
answers were well organized. Heisecke offered many examples
of individuals and situations to justify the need for reform
and economic growth, but did not discuss policy, and his
answers were disorganized and generally lacked substance. At
certain points during the lunch when Heisecke spoke, Borda
and Masi discretely seemed to roll their eyes. Borda will
lead the implementation of Lugo's economic plan in the next
100 days when the pressure for results is at its peak.
Borda's plan is broad and ambitious, but well-developed. If
the Lugo economic cabinet does not gel into a cohesive team
under Borda, the new administration will be hard-pressed to
meet the challenge of an already daunting array of
challenges. END COMMENT.


15. Secretary Gutierrez did not have an opportunity to clear
this cable before departure.

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AYALDE