SCENE-SETTER FOR BUSH-LUGO MEETING: PARAGUAY

C O N F I D E N T I A L ASUNCION 000696

SIPDIS

PASS TO NSC DFISK, STATE FOR WHA/BSC MDRUCKER, BFRIEDMAN
AND MDASCHBACH

E.O. 12958: DECL: 10/08/2028
TAGS: PREL ECON PGOV SNAR PA
SUBJECT: SCENE-SETTER FOR BUSH-LUGO MEETING: PARAGUAY
CHARTS ITS OWN COURSE

REF: ASUNCION 665

Classified By: DCM Michael J. Fitzpatrick for reasons 1.4 (b) and (d).

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


1. (C) President Fernando Lugo's administration represents
the first break in Colorado Party's 61-year stranglehold on
power; as such, it is shaking the foundations of Paraguayan
society. President Bush's October 27 meeting with President
Lugo offers the United States an opportunity to reaffirm its
long-time friendship with Paraguay, convey strong support for
the fledging Lugo administration, build up a moderate
democratic partner and counter Venezuelan President Chavez'
influence in the Southern Cone. Lugo's challenges are many:
An inexperienced team, exceedingly high expectations for
change, endemic corruption, weak institutions, a divided
Congress, and continued interference by Chavez. Lugo must
generate jobs and promote economic development while
downsizing the bloated state and tackling social and security
issues - of key concern to his constituents. Lugo's top goals
are fighting corruption and the underground economy,
strengthening weak institutions and the rule of law, creation
of a professional civil service, and economic growth/poverty
reduction. Lugo continues to resist domestic and
international pressures not to visit the United States at
this time. Even efforts by the new GOP to reverse Paraguay's
long-standing objections to U.S. positions in the WTO are now
hampered by pro-Chavez elements here seeking to block closer
ties with the U.S. If we are to continue to make in-roads
with Lugo, we must make the most of his Washington visit, so
that he returns to Paraguay convinced and able to demonstrate
publicly that he can count on the United States. President
Bush's interest in Paraguay, coupled with some firm offers of
U.S. assistance, will go a long way with Lugo given his
pragmatism and stated intention to steer his own "neutral" --
though democratic -- course. END SUMMARY.

--------------
LOCAL AND REGIONAL POLITICS
--------------


2. (C) Fernando Lugo's administration represents the first
interruption in Colorado Party rule in 61 years, and as such,
it is shaking the foundations of Paraguayan society. Former
Catholic bishop Fernando Lugo won 40.8 percent of the vote in
April national elections, 10.2 percent more than the Colorado
Party presidential candidate. Lugo's Patriotic Alliance for
Change (APC),a loose coalition of political parties, won a
large block of seats in Congress but does not have a
majority. By voting overwhelmingly for change, the
Paraguayan people gave Lugo a mandate for political,
economic, and social reform. However, they also have high
short-term expectations. Since his August 15 inauguration,
Lugo has assembled a diverse team of politicians and
technocrats to serve in his cabinet; he has encouraged each
of his ministers to implement a 100-day plan to show the
Paraguayan people that his government is making progress.


3. (C) President Bush's October 27 meeting with Lugo offers
the United States an opportunity to reaffirm its long-time
friendship with Paraguay, convey strong support for the
fledging Lugo administration, build up a moderate, democratic
partner in the region, and blunt Venezuelan President Chavez'
efforts to exert regional influence. Chavez, along with
Bolivian President Evo Morales, is actively courting Lugo
with his petro-dollars. When Chavez visited Paraguay for
Lugo's inauguration, the two presidents signed 13 agreements,
the texts of which have only recently been released and which
bear little substance (septel).


4. (C) We believe Lugo is a leftist at heart, but a
pragmatist of mind. He may already be growing tired of
Chavez' aggressive and flamboyant style. Lugo has
acknowledged the Washington-Caracas tug-of-war, and has said
he is not Chavez, and will not blindly follow Chavez'
Bolivarian plans. Lugo told Ambassador October 9 that
international relations are between countries, not specific
individuals, and are based on mutual respect and
independence. (NOTE: Lugo specifically mentioned Chavez in
this context, signaling that he is not enamored with Chavez

but values relations with Venezuela. He may have also been
subtly telling his advisors that Paraguay's relations are not
with the Bush administration but the United States. END
NOTE). While Lugo appears resistant to some of Chavez'
pressures, he is likely to be sensitive to attempts to
strong-arm Paraguay or to undermine its independence or
sovereignty, whether by Venezuela or the United States. Lugo
appears to have played a helpful role in Unasur talks on
Bolivia, and is developing constructive relationships with
Uruguay, Chile and Colombia. He visited Washington for the
first time in May 2007, and recently traveled to New York for
the United National General Assembly. Lugo has traveled
extensively since his April election.

--------------
AN UPHILL BATTLE
--------------


5. (C) Lugo's challenges are many: His inexperienced team
needs to meet Paraguayans' high expectations for change, but
will have to overcome endemic corruption, weak institutions,
and a divided Congress to do so. He faces continued
criticism related to President Chavez' attempts to interfere
in domestic politics. Lugo does not have his own political
party, and has distant (at best) relations with his Liberal
Party vice president. His own inner circle continues to
jockey for power and ideological influence. So far, Lugo has
weathered the minor storms he has faced, but he has yet to
develop a clear national agenda, or to engage in the
political brokering which will be critical to his
administration's success. A more in-depth discussion of some
of Lugo's challenges follows.

--------------
THE ECONOMIC REALITY
--------------


6. (SBU) Lugo must promote economic development while cutting
the size of the bloated Paraguayan state. Paraguay has
inefficient state-owned monopolies in the rail, oil and gas,
cement, steel, electricity, water, and telephone service
industries. The economy is predominantly agricultural;
agriculture represents about 21.9 percent of gross domestic
product (GDP),and the economy is heavily dependent on
exports of soybeans, cotton, grains, cattle, timber, sugar,
and electricity. Paraguay boasts vast hydroelectric
resources, including the Itaipu hydroelectric dam built and
operated jointly with Brazil, but fails to capitalize on
those resources. The new government welcomes foreign
investment, but widespread corruption and a weak judicial
system are major deterrents to investment. Paraguay's real
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. The
underground economy, which is not included in the national
accounts, probably equals the formal economy in size.


7. (SBU) U.S.-Paraguayan bilateral trade increased over the
last six years, with the U.S. having a significant account
surplus. U.S. imports from Paraguay were only USD 68 million
in 2007; U.S. exports to Paraguay in 2007 were USD 1.2
billion. More than a dozen U.S. multinational firms have
subsidiaries in Paraguay, and some 75 U.S. businesses have
agents or representatives in Paraguay. As of March 2007, the
total foreign direct investment in Paraguay stood at USD
1,602.52 million, and the United States was the largest
foreign investor with USD 616.50 million. Paraguay and the
United States annually discuss trade issues via the Joint
Council on Trade and Investment (JCTI) such as U.S.
certification of Paraguayan beef; technical assistance and
investment in biofuels; FDA approval of Paraguay's natural
sweetener stevia, and Paraguay's request for U.S. trade
preferences. As the Commerce Minister likes to say, "we seeks
trade, not aid."

--------------
PUBLIC SECURITY AND SOCIAL ISSUES
--------------


8. (SBU) Security and social issues are top concerns of
Lugo's constituents. Violent crime is increasing in both
urban and rural areas, and the public generally believes that
Paraguayan security forces (particularly the notoriously
corrupt police) do not meet their security needs. The

"landless" peasant movement has increasingly taken to
protesting and "land invasions" -- illegally occupying large,
privately-held ranches -- in agitating for agrarian reform.
On some occasions, protests and "land invasions" have
resulted in deaths or injuries.


9. (C) The Tri-Border Area (TBA) of Paraguay, Argentina and
Brazil is 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, and Paraguay remains a major
haven for money laundering. Paraguayan authorities often
experience difficulties enforcing the law because of hostile
geography, corruption, chronic understaffing, and the
political and judicial power some drug traffickers wield.
Paraguay took a giant step forward on money laundering,
intellectual property violations, and trafficking in persons
by passing a tougher penal code in June that will go into
effect next year. Like his predecessors, Lugo is sensitive
to "satanizing" the TBA, but has sent some promising signals
by mentioning the need to eradicate terrorism during his
speech at the United Nations General Assembly, and by signing
agreements with Colombian President Uribe to promote
collaboration in that area.


10. (SBU) Inefficient, state-run institutions dominate
Paraguayan social services, and Lugo pledged to improve
social services spending and make health care and education
reform government priorities. Social services spending
increased since 2003; however, most spending augmented
employees' salaries. Many Paraguayans lack basic access to
health care facilities, particularly in rural areas, and many
more are uninsured. Government agencies and state-owned
enterprises provide basic public services, but access is
limited and services have deteriorated in quality.

--------------
LUGO'S GOALS AND U.S. ASSISTANCE TO PARAGUAY
--------------


11. (U) Lugo told the Ambassador in August his five-year goal
was to leave behind strengthened democratic institutions
better able to govern and resist corruption. In an October 8
IADB meeting, Lugo stated his goals as fighting corruption
and informality, strengthening weak institutions and the rule
of law, creation of a professional civil service, and
economic growth/ poverty reduction. Reforming the National
Police and land reform, including a national land survey,
will be priorities. He has also promised improved social
services and to promote a "social justice" agenda. Lugo and
several key ministers told Ambassador October 9 that they are
interested in discussing commercial issues (particularly beef
and stevia),economic development and counternarcotics during
Lugo's Washington visit. They promised to provide the
Embassy with a draft agenda in coming days.


12. (U) U.S. assistance in Paraguay supports many of Lugo's
goals, albeit at modest funding levels. USAID/Paraguay's FY08
budget is USD 7.8 million and focuses on Economic Growth;
Improved Health Care; Sustainable Management of Natural
Resources and Protected Areas; and Democratic Strengthening.
USAID's Economic Growth Program ("Paraguay Vende") has
generated over USD 60 million in additional sales and over
30,000 full-time job equivalents since 2003, thus supporting
Lugo's goal to reduce poverty. Likewise, our Health Program
supports Lugo's stated interest in improving basic health
services. Specifically, it targets decentralizing health
services, improving maternal and child care services, and
increasing Paraguay's capacity to deliver family planning
services. In the environment sector, USAID continues to
support improved management of protected areas. Our
Democracy Program focuses on fighting corruption, giving
civil society a voice, and promoting decentralization and
municipal development. Additionally, Paraguay's Millennium
Challenge Account Threshold Program has provided USD 35
million over the past two years in an effort to fight
corruption and formalize Paraguay's economy. Paraguay
submitted its Stage Two Threshold proposal September 30, with
great interest and support from Lugo and his economic
cabinet. Post hopes the review process can be expedited so
that President Bush can formally announce this assistance on
or about October 27.



13. (U) The Embassy's Justice and Treasury Department
advisors play critical roles in legal and financial reforms,
including the new penal code, a new criminal procedures bill,
customs enforcement, and budgetary and monetary policy. The
Peace Corps has 180 volunteers -- its third largest mission
worldwide -- serving throughout Paraguay. The Embassy's
leading public diplomacy effort is its English language
scholarship program, which identifies academically
outstanding young Paraguayans from families with limited
resources. Since the program's inception in 2006, the
Embassy has awarded over 500 scholarships that enable
Paraguayans to compete in the worldwide marketplace and
qualify for other U.S. scholarship programs.


14. (C) USG support for the Paraguay Military Forces is
second only to our support for Colombia in South America.
U.S. Armed Forces provided the Military Forces' Joint
Immediate Response Unit (DCEI) with more than USD 4.0 million
in funding for weapons, equipment, and training in the past
two years. The U.S. Armed Forces committed USD 4.1 million in
Global Peace Operations Initiative (GPOI) funds and technical
assistance to Paraguay's United Nations Global Peace Keeping
Operations Program (UNPKO). In the absence of a formal
Status of Forces Agreement (SOFA),U.S.-Paraguayan military
cooperation continues, albeit scaled back and under a lower
profile 505 Assurance Agreement signed in April 2007. Other
security funding includes State's International Narcotics and
Law Enforcement (INL) money, which 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.

--------------
COMMENTS
--------------


15. (C) COMMENT: President Lugo continues to resist domestic
and international pressures urging him not to visit the
United States at this time. The president's chief of staff
rebuffed Venezuelan attempts to convince Lugo to decline
President Bush's invitation (reftel). Other ministers have
recounted bitter internal battles to reverse Paraguay's
three-year-old objections to the U.S. position at the WTO, as
pro-Chavez elements (and Venezuela itself) seek to keep the
objection in place -- if only to scuttle any closer
commercial, trade, or political ties with the United States.
In an October 9 discussion with the Ambassador about his U.S.
visit, the former bishop "confessed" to the "almost original
sin" of having been a bull-headed, anti-American leftist in
his youth, a stance he now says he regrets. Lugo's
commitment to meet with President Bush sends a strong signal
regarding his desire for close relations with us - and to
place a limit on Venezuelan interference.


16. (C) COMMENT (CONTINUED): If we are to continue to make
in-roads with President Lugo, we must make the most of his
Washington visit so that he can return convinced and able to
demonstrate publicly that he can count on the United States.
More so than any other president in modern Paraguayan
history, Lugo has an opportunity to affect real change.
However, the deck is stacked against him. We have an
opportunity to forge a close relationship with Paraguay at a
moment when there is growing anti-American sentiment in much
of South America. Lugo's team has not yet articulated its
goals for the presidential meeting itself, but is eager to
work on an agenda. Lugo told Ambassador October 9 that the
United States has a breadth of experience that Paraguay could
learn from, in spite of the U.S.'s "own shadows." Lugo also
expressed to the Ambassador great respect for "any U.S.
president who wins re-election," and pointedly drew the
distinction between U.S.-style democracy from the
pseudo-democracy of autocrats like Chavez. President Bush's
interest in Paraguay, coupled with some firm offers of U.S.
assistance, will go a long way with Lugo given his pragmatism
and stated intention to steer his own "neutral" -- though
decidely democratic -- course. END COMMENT.

Please visit us at http://www.state.sgov.gov/p/wha/asuncion

AYALDE