What Brazil can learn from Paraguay’s seduction of foreign investors

an attractive destination for foreign investors, thanks in part to the shyness of the region&#8217;s big dogs after the drop in commodities exports. Instead of enduring vacant global supply and battling to escape recession, Paraguay invested in a strong macroeconomic agenda, diversified its industry and gambled on low taxes and cheap labor costs.&nbsp;</p> <p>Therefore, the modest country is an ideal first location for any entrepreneur interested in entering the South American market. With this in mind, the country’s Ministry of Industry and Commerce has made efforts to show off exactly why Paraguay is a new investment haven.</p> <p>The Investment and Export Network (Rediex) is an online portal which serves as something of a welcome brochure, listing all of the economic benefits of setting up shop in Paraguay. The clear and minimalistic website, translated into English, Portuguese and German, is an excellent advertisement for the country&#8217;s low bureaucracy and operating costs.&nbsp;</p> <div class="flourish-embed" data-src="visualisation/717974"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <h2>Paraguay’s key to success</h2> <p>Former Paraguayan President Horacio Cartes (2013–2018) didn’t have to move a muscle to encounter the recipe for success. The leader of the Colorado Party simply used an already existing measure to attract investors.&nbsp;</p> <p>The <a href="https://www.aduana.gov.py/uploads/archivos/LEY%20N_%201064.pdf">Maquila Law</a>, created in 1997 but “internationally forgotten” by former governments, states that foreign companies established in Paraguay enjoy 1-percent tax on exports. In exchange, the owners must export between 90 and 100 percent of their production.</p> <p>Even though the <a href="https://brazilian.report/power/2019/08/02/brazil-red-tape-altering-labor-regulations/">Brazilian government’s new “Economic Freedom” law</a> comes as its own push to reduce bureaucracy and trace an easier path for future business owners, regulations in Paraguay are still far and away the region&#8217;s most favorable. Until 2017, around 70 percent of maquiladoras came from Brazil, explained by the country&#8217;s slow economic recovery.</p> <p>By simple comparison, Paraguay outstrips regional competitors. According to the world’s most famous credit rating agencies—Moody’s, Fitch and S&amp;P—the country’s risk framework is better than its much richer neighbors. Furthermore, with average public debt in South American surpassing 50 percent of GDP—with Argentina topping the list with 77 percent—Paraguay&#8217;s hovers around just 20 percent, as shown by an Economy Ministry report.&nbsp;</p> <p>The country also claims that its 22 percent return on investment index (ROI) is the best in South America, while inflation is stable, above 4 percent yearly.&nbsp;</p> <p>Even the International Monetary Fund (IMF) <a href="https://www.imf.org/en/Publications/CR/Issues/2019/04/30/Paraguay-2019-Article-IV-Consultation-Press-Release-Staff-Report-and-Statement-by-the-46837">heaped praise</a> on Paraguayan economic perspectives. While Paraguay’s GDP grew 3 percent in 2018 and the local currency has strengthened, the forecast for 2019 hits 3.5 percent. According to IMF Latin America economists Natasha Che and Bas Bakker, the country&#8217;s &#8220;good performance&#8221; is an effect of 15 years of development.</p> <p>The capital city of Asunción has also became a “paperwork-averse” city, helping to attract new foreign investors. It all started in 2013 when the government gave birth to the <a href="http://www.suace.gov.py/">Unified System of Opening and Closing of Companies (Suace)</a>, a simplified one-stop shop integrating government agencies.&nbsp;</p> <p>The system allows for the straightforward opening and closing of businesses and even includes channels for investors who require permanent residence. Suace data shows that in the first quarter of 2018, 63 new companies were established through the new platform.</p> <div class="flourish-embed" data-src="visualisation/717936"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>“Paraguay did its homework before opening its economy to the world,” Paraguayan commercial attaché Sebastián Bogado tells <strong>The Brazilian Report</strong>.&nbsp;</p> <p>“In the early 2000s, Paraguay was in the final chapter of one of its cycles of political crisis, which ended with the election of ex-President Nicanor Duarte Frutos (2003–2008). After he took office, important tax and government reforms were carried out.”</p> <p>At the turn of the millennium, after a decade of coup attempts, riots, and impeachment requests, Paraguay’s GDP growth decreased by more than 20 percent, and poverty rates rose in urban (50 percent) and rural (85 percent) regions.&nbsp;</p> <p>With plummeting numbers, an emergency route emerged. Mr. Bogado says that the main objective of the improvements was to “heal the financial situation” and invest in a “formal and simpler economy.”</p> <p>“The plan was to have a transparent system. The Economy Ministry invested in the professionalization of its employees, in a more digitized system,&#8221; he explains. Mr. Bogado also mentions the implementation of the &#8220;triple ten&#8221; tax: 10 percent for individual and corporate income tax, and a value-added tax.</p> <h2>How does Paraguay shape up in Mercosur?&nbsp;</h2> <p>Industry made up less than 9 percent of Paraguay&#8217;s GDP 15 years ago. Now, it accounts for over 20 percent. But how can the country&#8217;s economy climb the Mercosur ladder further?</p> <p>The answer doesn&#8217;t depend on Paraguay alone, says Arthur Murta, foreign affairs professor at São Paulo’s Pontifical Catholic University (PUC-SP). As the wealthiest nation in the continent, Brazil has often been a thorn in its neighbor side. “Public opinion in Paraguay has always placed Brazil as a sub-imperialist country that has held Paraguay&#8217;s development back,” he told <strong>The Brazilian Report</strong>.&nbsp;&nbsp;</p> <p>Decisions from Brasilia have always caused ripples across the border in Asunción, but the two countries tried to solve this imbalance at the end of the last decade.&nbsp;</p> <p>Mr. Murta explains that ex-President Fernando Lugo’s victory in 2008 was the first real breakthrough in this respect since the 1950s. Even though Alfredo Stroessner’s dictatorship (1954-1989) was quelled, his Colorado Party remained in charge after redemocratization. “It was no longer a dictatorship, but the same political groups had control of politics. With Mr. Lugo&#8217;s victory, his center-left agenda suggested a closer relation to the Brazilian government through the Itaipu dam,&#8221; he explained, referencing the massive hydroelectric complex on the border between the two countries.</p> <script src="https://www.buzzsprout.com/299876/1079105-12-brazil-and-mercosur.js?player=small" type="text/javascript" charset="utf-8"></script> <hr class="wp-block-separator"/> <p>In 2009, as a result of good relations between Mr. Lugo and Brazil&#8217;s ex-president Luiz Inácio Lula da Silva, the countries reached a new agreement on Itaipu. After ten long months, Brazil agreed to pay more for Paraguayan electricity, generating an extra USD 240 million for Asuncíon.&nbsp;</p> <p>“Paraguay will regain its full sovereignty over Itaipu,” said Mr. Lugo at the time. The “historical” bilateral deal, “is what puts Mercosul and Latin America in the same direction,” said Lula. The countries were on good terms, but then the 2010s happened.&nbsp;</p> <p>Lula left power and 2010 and so did his Workers&#8217; Party in 2016, after his successor Dilma Rousseff was controversially impeached. Fernando Lugo was also ousted himself in 2012, in equally questionable circumstances. Flash-forward to the present day and the political situation is dramatically different. Conservative Mario Abdo Benitez was elected in Paraguay last year and months later, Brazil&#8217;s far-right Jair Bolsonaro took power.&nbsp;</p> <p>Mr. Abdo is not nearly as far to the right as Mr. Bolsonaro, but the two leaders have built up a good relationship. In May, two months after the Brazilian president&#8217;s first visit to Asunción—which included an embarrassing tribute to General Stroessner, who Mr. Bolsonaro called a &#8220;statesman&#8221;—the countries agreed to renegotiate the Itaipu dam deal.&nbsp;</p> <p>Since the changes in 2009, the Bolsonaro government claimed the current agreement meant Brazil was subsidizing Paraguay&#8217;s electricity costs. The terms of the upcoming agreement were only made public three months later, <a href="https://brazilian.report/power/2019/08/15/itaipu-paraguay-brazil-tension-mario-benitez-impeachment/">sparking a huge crisis</a> that almost saw Mr. Abdo face his own impeachment for “treason.” He managed to escape, but many of his high-ranking officials quit, including his Foreign Minister and Paraguay&#8217;s ambassador to Brazil.&nbsp;</p> <p>“Itaipu is always at the center of Paraguayan politics and relations with Brazil,” says Mr. Murta. “An alliance with Bolsonaro comes with risk for Mr. Abdo. It has a social cost. With the Itaipu dam, Paraguay has only one interest: to raise more money. But now it has become clear that Mr. Bolsonaro has other plans in mind.”</p> <p>With the survival of Mr. Abdo’s government, which was aided by Brazil&#8217;s retreat from the deal, the two governments will work alongside each other for at least three more years. While Paraguay becomes an exception and attracts investors, Brazil could treat it as an example to be followed. However, despite recent Paraguayan success, the country can’t forget its size. The money that comes from abroad is welcome, but the political costs surrounding Itaipu are fragile, unlike the dam&#8217;s walls.