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Some Advice for Paraguay’s Lugo

Paraguay needs to follow Chile's - not Venezuela's - example as a way to reduce the country's poverty and corruption.


Fernando Lugo has won Paraguay's presidential election. But before he assumes office, he should take a moment or two to reflect on how he can avoid making the same mistakes as fellow-leftists like Hugo Chavez in Venezuela, Evo Morales in Bolivia, Daniel Ortega in Nicaragua and Rafael Correa in Ecuador.

First and foremost, Lugo should realize that Paraguay's status as the poorest nation in South America is not due to Capitalism, but rather the lack of true free markets. Even after Paraguay became a democracy nearly 20 years ago, the country continued to be dominated by corruption and the rule of influence instead of transparency and the rule of law.

Paraguay has the least competitive economy in all of Latin America, according to the 2007 Global Competitiveness Index from the World Economic Forum. It ranks 121 worldwide among the 131 nations the survey looked at.  Its low rank was due to such factors as weak institutions, inefficient infrastructure, insufficient macro economic stability, little innovation and low technology readiness.  Paraguay is among the countries with the lowest Internet and fixed telephony penetration in Latin America, according to the 2007 Latin Technology Index published by Latin Business Chronicle, which ranked its overall technology level at 15th out of 20 nations in the region.

Meanwhile, the Milken Institute says that Paraguay ranks as the second-worst in Latin America when it comes to access to capital for entrepreneurs. Only Haiti ranks worse, according to the Capital Access Index released in February. Paraguay ranked in 94h place out of 122 nations worldwide.

Heritage Foundation says Paraguay's economy is 60.5 percent free and thus "Mostly Unfree" in its 2008 survey on economic freedom (with 100 percent being best). That means Paraguay has the fourth-most repressed economy in South America. Its economy is freer than countries like Dominican Republic, Ecuador and Venezuela, but less free than Argentina, Brazil and Uruguay.

"Paraguay's business freedom, labor freedom, property rights, and freedom from corruption are weak," Heritage says. "Opening a business is difficult, and regulations are enforced by an opaque bureaucracy. The labor system is one of the world's 20 most restricted. The government significantly influences the rule of law, and corruption is widespread."

Because of widespread judicial corruption, protection of property is extremely weak, while restrictive labor regulations hinder employment opportunities and overall productivity growth, according to Heritage. Meanwhile, reform and privatization of state-owned enterprises has been slow and uneven and Paraguay still has state companies in the electricity, telecommunications, transportation, and water sectors.

Transparency International gave the country a score of 2.4 (with 10 being best) on its 2007 survey of corruption perception. That makes Paraguay the fourth-most corrupt nation in Latin America.

And despite the return to democracy, Paraguay still isn't a model when it comes to political rights, either. Paraguay is classified as "Partly Free" by Freedom House as a result of getting 3 in political rights and civil liberties (1 is best and 7 is worst).

As a result of its low scores on these and other rankings, Paraguay ended up as the fifth-worst place to do business in Latin America, according to the latest Latin Business Index from Latin Business Chronicle. With a score of 19.53 (with Chile at 41.19 best), Paraguay ended in 15th place out of 19 countries. Only Bolivia was worse in South America. The Latin Business Index looks at five key factors in 19 countries in Latin America, including macro environment, globalization & competitiveness, business environment, technology level and political environment.

The unfavorable business environment has been a major deterrent for foreign investors and placed Paraguay among the countries in Latin America with the lowest rates of foreign direct investment. As China has shown, a combination of economic liberalization and foreign investment can in a very short period dramatically reduce poverty. Closer to home, the biggest poverty reduction has taken place in Chile, a country that has followed free market policies and is the region's freest economy (as well as its most transparent).

In contrast, the radical-populist policies implemented in Venezuela, Bolivia, Nicaragua and Ecuador have increasingly deterred foreign investment and in most cases spurred even more poverty. Corruption has also been growing. Venezuela's international ranking has fallen from 71st place (out of 90 nations) in 2000 - when Chavez became president - to 162nd place this year (out of 179 nations), according to Transparency International. Only Haiti is more corrupt in Latin America.

Lugo based his campaign on fighting for Paraguay's poor.  He should therefore follow the Chilean model of opening markets (including through transparent privatizations) rather than the Chavez model of closing them through nationalizations and reduced economic freedom.  That would truly help reduce Paraguay's poverty while making the country a winner rather than a loser on international rankings.

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