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”

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.