PARAGUAY'S PUBLIC ENTERPRISES: DESTROYING ECONOMIC GROWTH

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90T00114R000100470001-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 7
• Document Creation Date: December 27, 2016
• Document Release Date: March 6, 2012
• Sequence Number: 1
• Publication Date: September 15, 1987
• Content Type: MISC

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DATE
DOC NO ~ g7'"ZOOS'C
OIR
Pf PD
Central Intelligence Agency
Washington. D. C. 20505
DIRECTORATE OF IN'IE LLTGENCE
15 September 1997
PARAGUAY'S PUBLIC ENTERPRISES: DESTROYING ECONOMIC GROWTH
Paraguay's large and inefficient state-owned enterprises, which
expanded rapidly in the wake of the economic boom of the 1970s, have
emerged as the country's most significant economic burden and as a
powerful. magnet for massive corruption opportunities. Far from
acknowledging growing criticism from domestic groups and international
financial officials calling for dramatic spending cuts and the
privatization of state firms, government officials are instead using
the state entities to enhance their political control and increase
their personal wealth.. Despite some emerging pressure from the
business sector, we see little prospect for reforms. We believe that
.the regime's continued pursuit of statist economic policies and its
pervasive corruption will boost Paraguay's foreign debt, encourage
capital flight, and nurture the country's growing role as a regional
smuggling and narcotics center. Over the longer term, these factors
will likely contribute to political instability after President
Stroessner's death.-
This typescript was requested by Mr. Robert Gelhard, Deputy Assistant
Secretary of State for South American Affairs. It was prepared by
South America Division, Office of African and Latin American Analysis. Comments
and queries are welcome and may be directed to the Chief, South America Division,
ALA
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The Economic Backdrop Before the Parastatals
Favorable external circumstances throughout the last decade fueled unusually
rapid economic development in Paraguay, where annual growth rates averaged 8
percent in the 1970s. The Br.azi.lian-financed binational Itai.pu dam, the world's
largest hydroelectric project, stimulated domestic demand--providing direct or
indirect employment for more than a fifth of the population--and generated foreign
exchange inflows that, at times, exceeded Paraguay's export revenues, according to
press reports. Simultaneously, increasing world demand and favorable
international prices for agricultural goods--Paraguay's main exports--hastened
development of.modern cotton and soybean farms.
The Stroessner regime, however, took advantage of the booming economic
conditions to postpone structural adjustments and overvalue its currency, which
discouraged export development and eroded the country's trade-based tax revenues.
These policies, in our view, left Paraguay vulnerable -to the economic strains
caused by the sharp reversal of external trends that began early this decade. The
near completion of Itaipu has removed the primary engine of growth: the financial
press reports that revenues from the dam dropped from 13 percent of GDP in 1981 to
less than 2 percent this year. The collapse of world prices for agricultural
goods--combined with flood and drought disasters-- reduced registered export
.
revenues from $753 million in 1981 to less than $250 million last year
The Rise of the Parastatals
With the fall-off of Itaipu revenues, the regime turned to state-owned
companies such as steel and cement firms to provide further economic growth.
Massive investment into these state. enterprises increased markedly beginning in
the late 1970s, boosting, in turn, the public sector role in the economy. For
example, the state now consumes 40 percent of registered imports and employs a
fifth of the workforce--including thousands of phantom workers in the state firms-
-and the public sector's budgeted expenses now equal a quarter of GDP--as opposed
to roughly 12 percent in 1980. The press reports that public sector spending
expanded by an average of 17 percent annually in the 1980s, while revenues
increased by only 3 percent per year, creating a huge fiscal deficit.
While Paraguay has relatively few parastatals, two white elephants alone,
the national steel (ACEPAR) and cement (INC) companies--which Asuncion recently
spent over half a billion dollars to modernize--are key factors in the country's
financial crisis and economic decline. For example, the charcoal-fueled steel
mill--run by the military--has yet to sell any steel commercially but has an
installed capacity that is almost six times as much as the domestic market needs.
Independent economists estimate that even if ACEPAR produced as much steel as
Paraguay uses, its output would-cost 16 times as much as a comparable product from
'
s cement is two to three times more
Brazil or Argentina. Similarly, Paraguay
expensive than cement produced in neighboring countries. While the repayment
terms of the two enterprises are tightly held, press reports estimate that their
obligations amount to 23 percent of Paraguay's total foreign debt.
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In addition to the financial pressures these two large state-owned firms
put on Paraguay'.s limited economic resources, Asuncion is helping a group of
smaller state enterprises against private producers in other industries by
legislating competitive advantages. For example, the. state merchant fleet has
first rights to all export cargo and some private alcoholic beverage producers
must purchase nl.l their raw materials from the state. alcohol administration.
Moreover, parastatals enjoy easy access to long term credit, while the state
development bank cannot make loans to private firms for more than a year, severely
limiting their fixed capital investments. We concur with United Nations
Industrial Development Organization reports that blame these distortions for the
country's shrinking -industrial base. Moreover, while these policies are.
bankrupting private Paraguayan businesses, press reports indicate X4MX_thA au-
not helped the parastatals stop foreign companies from increasing their share of
the focal market.
The Impact of Public Sector Growth .
Supporting the burgeoning public sector enterprises has inhibited the
regimes ability to manage the rest of the economy. While the Central Bank reports
that the public sector deficit is 4 percent of. GTOP, independent financial
assessments conclude that if public sector imports and debt service payments were
recorded at the free market exchange rate, the fiscal deficit would exceed 7
percent of GDP, making it the highest in the region. In addition to limiting the
funds available for private sector investment in the country, we believe that this
deficit is spurring inflation, now running at more than 60 percent annually.
Furthermore, according to the US Embassy, public enterprise savings and time
deposits--which account for more than 40 percent of deposits in commercial banks-- 25X1
increased the money supply at a record clip this year, further aggravating
inflationary pressures until the Central Bank limited their holdings in June.
In addition to encroaching on Paraguay's productive capacity, the
parastatals, in our view, are accelerating foreign debt accumulation at an
unsustainable pace, thereby draining the country's hard currency reserves.
According to Central Bank data, the public sector holds virtually all of
Paraguay's foreign debt, which has almost doubled since 1981 to more than $2
billion. The collective external obligations of the state enterprises represent
nearly two thirds of the country's foreign debt and an even higher portion of its
estimated $260 million annual debt service bill. The government's practices of
allowing featherbedding and corruption within the state firms and granting
subsidies in the form of preferential exchange rates for parastatal debt payments
and import charges have contributed to this trend.
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Business Concern
Paraguay's long quiescent business community, which has gradually become
alarmed by deteriorating economic and financial conditions over the last two
years, has recently focused its attention on Asuncion's support of the state
enterprises. Some businessmen have begun to hint publicly at problem areas by
pointing out that the INC's budget exceeds that of the Ministry of Agriculture and
that the state airline's annual expenditures could fully fund the national
university for 20 years. Speakers at a recent business forum went so far as to
demand that the government channel credit from inefficient parastatals to
productive private firms, even calling for the privatization of some state
entities-an unparalleled example of discontent from a sector previously noted for
its deference to the regime. 25X1
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Business leaders as well as some political. opponents of the regime have also
begun to take aim at the corruption factor, blaming rake-offs from the state-
owned operations by powerful. government officials for much of the sector's
inefficiency. Private entrepeneurs have complained- that the public sector's
expansion over the past six years has been almost: exclusively in response to the
political. and personal financial, appetites of government officials. For example,
they have noted that the national telephone company may devote one fifth of its
payroll to phantom workers.
Poor Prospects for Reform
We judge the probability of public sector--or any economic--reform in
Paraguay over the next year to be remote. In our view, the failure of the economic
'
reactivation plan of last September underscored the depth of the regimes
commitment to maintaining the.parastatal.s, regardless of the long-term costs to
the economy. Paraguayan officials emphasized during consultations with the IMF
last August that, short of closing down the large state enterprises--which they
.
'
deficits
deemed politi.cally.unacceptable--they could not limit the firms
Moreover, far from considering reforms that would require constricting the
public sector, the government has signaled that it plans to encourage and even
expand the range and finances of the parastatals. Stroessner recently praised the
sector's growing role in the economy in his State of the Nation address,
specifically lauding several of the most deficit-ridden operations. Minister
Ugarte announced in June that Asuncion plans to construct a state textile mill and
ferti.l.izer plant, claiming--disingenuously in our view--that the needed investment
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outlays were beyond the financial capacity of the private sector.
Finally, many officials, indifferent to the economic crisis and hoping to
dip into public enterprises' revenues until the next "Itaipu" comes along ?will
almost certainly resist any changes that might cut off their illegal income from
these firms. Indeed, we suspect that the growing anxiety in Asuncion regarding
the composition of any post-Stroessner government will induce the regime's
officials to feather their beds with even greater determination to guard against
any sudden reversal. of political fortune.
We believe that the regime's continued commitment to corruption-ridden,
statist-oriented policies will only deepen the economic malaise begun by the lack-
of attention to structural problems during the 1970s boom. Projected at-their
current pace, debt service payments bills for the public sector entities would
climb to an overwhelming $1 billion in the next 10 years. The overvalued exchange
rate will discourage production for foreign sales, further undermine domestic
confidence in the guarani, spur ever-increasing dollar withdrawals from banks, and
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accelerate capital flight. These developments, in our view, will. only strengthen
the growing smuggling and narcotics trafficking sectors, which according to some
press estimates already generate one and one-half times the revenues of legal.
trade.
Despite rising disgruntlement with the state-owned enterprises, we do not
believe their corrosive impact on the economy can he tapped to generate sufficient
political discontent to threaten the Stroessner regime's grip on power. Over the
longer- term, however, Asuncion's inept economic policies
are likely to put considerable stress on Paraguay's political system--possibly
during the potentially delicate post-Stroessner transition period when the country
may be least be able-to cope with it. In particular., economy m&sab3Ragement'will
almost certainly aggravate the growing stress fractures between the Stroessner
loyalists and moderate factions in the r.uling Colorado art , and ma make the
military leadership
increasingly restive.
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SUBJECT: Paraguay's Public Enterprises: Destroying Economic Growth
15 September 1987
External:
Original - Robert G8lbard, Deputy Assistant Secretary of State
1 - Richard Howard, Director, Office of Southern Cone
Affairs, Department of State
1 - Robert Pastorino, Deputy Assistant of Defense for
Inter-American Affairs International Security Affairs,
Department of Defense
1 - Rick Tropp, Special Assistant to the Director, AID
1 - James Buchanan, Chief, South America. Div., State Dept.
1 - Ciro DeFalco, Director, Office of Developing Nations
Finance, Department of Treasury
1 - Peter Field, Director of South America, Department of
Commerce
1 - Thomas Forbord, Vice President, EXIM Bank
1 - Carlos Montoulieu, Director, Brazil-Southern Cone Div.,
Department of Commerce
1 - Michelle Powers, EXIM Bank
1 - Jacqueline Tillman, Director of Latin American Affairs,
National Security Council
1 - Deborah Bolton, Department of State
1 - Len Kusnitz, Department of State
1 - Angelo Ioffrada, Department of State
1 - nse Intelligence Agency
1 Defense
Defense Intelligence Agency
1 - Frank Nider, Main Treasury
1 - Mark Siegelman, Desk Officer for Argentina, Commerce
Department
Internal:
1 - NIO/LA
1 - NIC/AG
1 - PDB Staff
1 - C/PES
1 - DDI/CPAS/ILS
1 - D/ALA
2 - ALA/PS
1 - ALA Research Director
5 - CPAS/IMC/CB
1 - C/ALA/SAD
1 - C/ALA/SAD/SC
2 - ALA/SAD/SC
1 - ALA/SAD
1 - DDI
1 - O/DDI
1 - D/DCI-DDCI Executive Staff
DDI/ALA/SAD/SC 15Sept87)
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