The fall­out from the Paraguayan pres­i­dent’s trans­parency cam­paign

Paraguay makes pub­lic agen­cies dis­close em­ployee pay “Busi­ness is not govern­ment. He had to learn that the hard way”

Bloomberg Businessweek (Asia) - - CONTENTS - −An­drew Martin and Juan Pablo Spinetto

Ho­ra­cio Cartes, a busi­ness­man who was elected pres­i­dent of Paraguay in 2013, has an un­usual past for a re­former. He spent four years as a fugi­tive from Paraguay to­ward the end of dic­ta­tor Al­fredo Stroess­ner’s regime, over

a cur­rency fraud charge that was even­tu­ally dropped. He was a fo­cus of a U.S. money-laun­der­ing in­ves­ti­ga­tion, ac­cord­ing to a 2010 clas­si­fied memo pub­lished by Wiki Leaks, but was never charged in the probe. The com­pany he co-founded and still partly owns, Taba­calera del Este, makes the pop­u­lar brand of cig­a­rette called Eight. Large quan­ti­ties of Taba­calera cig­a­rettes are smug­gled into Brazil and be­yond, ac­cord­ing to a study com­mis­sioned by Bri­tish Amer­i­can To­bacco.

The com­pany in­sists it sells cig­a­rettes legally and that Brazil’s steep taxes en­tice oth­ers to smug­gle them across the bor­der. Cartes has come un­der fire for ben­e­fit­ing from il­le­gal com­merce. “How is it pos­si­ble that packs of the brand of the pres­i­dent are found in Brazil, in Colom­bia, in Ar­gentina, in Mex­ico, in Aus­tralia, ev­ery­where?” asks Sen­a­tor De­siree Masi of the op­po­si­tion Demo­cratic Pro­gres­sive Party. “The Paraguayan cus­toms code speaks clearly about smug­gling, say­ing that com­pa­nies would be re­spon­si­ble for their ac­tions and omis­sions.” The pres­i­dent has dis­missed such al­le­ga­tions as po­lit­i­cally mo­ti­vated.

Cartes has been try­ing to pull off one of the hemi­sphere’s more re­mark­able trans­for­ma­tions for him­self and his coun­try by promis­ing a govern­ment that’s ef­fi­cient, fis­cally ro­bust, and trans­par­ent. The aim is for the frag­ile democ­racy to over­come decades of despo­tism, poverty, and cor­rup­tion.

His re­forms in­clude a cap on the bud­get deficit of 1.5 per­cent of gross do­mes­tic prod­uct and a pub­lic-pri­vate part­ner­ship to in­vest in in­fra­struc­ture. He passed over loy­al­ists of his Colorado Party to put tech­nocrats in his cab­i­net. Fi­nance Min­is­ter San­ti­ago Peña, who holds a mas­ter’s in eco­nom­ics from Columbia Univer­sity and aligns him­self with the Lib­eral Party, says he de­cided to work for Cartes de­spite the pres­i­dent’s past. “It was clear from the very be­gin­ning that he had a vi­sion,” he says.

Cartes, who de­clined to com­ment for this story, has sup­ported leg­is­la­tion re­quir­ing that salaries of pub­lic em­ploy­ees be made pub­lic. The move un­der­mines the political elite, which has long used pa­tron­age jobs to re­ward sup­port­ers and fam­ily mem­bers. His ef­forts have won Cartes praise from the World Bank and Har­vard man­age­ment pro­fes­sor Michael Porter. On Porter’s So­cial Progress In­dex, Paraguay ranked 56th out of 133 coun­tries in 2015, 16 spots higher than in 2014.

Paraguay’s econ­omy re­mains a stand­out in a re­gion hurt by cor­rup­tion and a com­modi­ties bust. Con­struc­tion cranes loom over Asun­ción, the cap­i­tal. For­eign in­vestors are buy­ing land to raise live­stock or cul­ti­vate crops. GDP should grow more than 3 per­cent this year, se­cond-best in South Amer­ica af­ter Guyana, ac­cord­ing to the World Bank. The In­ter­na­tional Mon­e­tary Fund re­cently said growth should con­tinue at that rate through 2017. Even so, crit­ics say Cartes hasn’t been able to cre­ate enough jobs, build enough new roads, or im­prove mass tran­sit be­cause of an in­ert bu­reau­cracy and the in­abil­ity of his staff to adapt their busi­ness acu­men to the com­pro­mises and coali­tion-build­ing of pol­i­tics. Clau­dia Pompa, an in­de­pen­dent political an­a­lyst, says Cartes mis­tak­enly thought he could push things through with­out the party. “Busi­ness is not govern­ment,” she says. “He had to learn that the hard way.”

Even the new trans­parency laws, which won raves abroad, have boomeranged at home. They re­vealed wide­spread pad­ding of pub­lic pay­rolls that ig­nited stu­dent protests and stoked voter dis­con­tent. In one case, a se­nior of­fi­cial of the Na­tional Univer­sity of Asun­ción al­legedly paid in­flated salaries to him­self, his sec­re­tary, and her fam­ily. Cartes’s “big­gest fail­ure is to not use that in­for­ma­tion to pun­ish some close col­lab­o­ra­tors of the ex­ec­u­tive branch,” says Se­bastián Acha, a for­mer con­gress­man who runs an Asun­ción think tank.

In Jan­uary, Cartes de­manded that pub­lic agen­cies di­vulge data on work­ers’ qual­i­fi­ca­tions and lev­els of train­ing, in an ef­fort to rid state pay­rolls of un­qual­i­fied and no-show em­ploy­ees. Union lead­ers la­beled his plan a ploy to hurt work­ers’ rights.

Soon af­ter, Cartes’s min­is­ter of in­dus­try and com­merce, Gus­tavo Leite, de­fended his boss, telling re­porters it was im­por­tant that Paraguayans learn who abused the pub­lic trust. “I am proud to work for a pres­i­dent who doesn’t steal,” he said.

The bot­tom line Paraguayan Pres­i­dent Ho­ra­cio Cartes has stirred op­po­si­tion with fi­nan­cial re­forms and a crack­down on pa­tron­age.

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