Paraguay special report 2014: International strategy: at the centre of things
Once seen as isolated and hostile to foreign investment, Paraguay now portrays itself as being at the centre of Latin America, trading on its strengths as a low-cost location on the fringe of the vast Brazilian market.
One of Paraguay’s main strategic aims, according to Gustavo Leite, minister of industry and commerce, is the “total insertion of Paraguay into the world”. The country used to view its landlocked status as a curse, “but now we have decided that we can become the vibrant centre of Latin America”. Paraguay is one of the four founding members of South American economic bloc Mercosur (along with Argentina, Brazil and Uruguay – Venezuela joined in 2012 during a suspension of Paraguay). Despite the bloc’s limited success in establishing a free market among members, the government sees a future for Paraguay within the organization. More than one government minister points out that the founding treaty is named after the capital, Asunción. However, Paraguay is keen for Mercosur to focus on economic union and keep away from the political and ideological discourse that dominates much of its agenda.
“Despite its limitations, Mercosur is the bloc that has advanced most in the region and it is our neighbourhood and we are committed to making it work,” says Leite. “Mercosur started as an organization to facilitate economic integration and we need more focus on the economics and less of a political debate.” He points out that President Horacio Cartes has met his Brazilian counterpart Dilma Rousseff seven times in the past 11 months.
Forging new ties
The rise of the Pacific Alliance (with founding members of Chile, Colombia, Peru and Mexico) to the north also offers interesting markets as well as, through Chile, a port on the Pacific and a route to markets in Asia. Paraguay is an observing participant in the alliance, has also secured free trade agreements with Chile, Colombia and Peru and is negotiating one with Mexico. President Cartes has stated that full membership – while retaining Mercosur membership – is a strategic economic goal for his administration. Paraguay has also negotiated SGB+ with the European Union, which allows Paraguay’s exporters tax-free entry for 6,000 products into the EU. Many in government and business see this as a precursor to a wider free trade treaty that Mercosur is negotiating with the EU.
Many regional observers predict difficulties ahead for Paraguay if it unilaterally attempts to formalize its relationship with the Pacific Alliance. And despite the lack of functionality within Mercosur, Paraguay is reliant on exports to its neighbours within the bloc. Recent developments such as the growth of Brazilian companies establishing production facilities in the country – such as the autopart factories – are integrating Paraguayan businesses into the supply chain of Brazilian industries. In some industries, independent research has shown that Paraguay’s cost of production is 42% cheaper than in Brazil.
Daniel Correa, deputy finance minister, expects Paraguay’s lower cost base will encourage this trend, which will deepen economic ties between Paraguay and its huge neighbour to the east. “How we negotiate our trade in terms of agreements and integration with other blocs will be critical,” says Correa. “Our participation in Mercosur is an advantage in increasing our production because we can produce cheaply but sell into a large market – especially Brazil. We are getting into Brazil’s production change. Paraguay is developing strategies to attract foreign investment, strengthening the sectors in which we have comparative advantages,like autoparts production. This also diversifies the economy away from the agricultural dependency.”
While Paraguay tries to develop an economic strategy that straddles both Mercosur and the Pacific Alliance it will also be focusing on promoting itself internationally as a low-cost base in the middle of Latin America. It has developed a simple concept, ‘Ten, ten, ten’ (10% VAT, 10% corporation tax and 10% personal income tax), as its marketing proposition to help differentiate Paraguay and attract attention internationally. Beyond this basic rule, the development of maquila areas – zones that offer added tax and investment incentives to foreign businesses – is a central part of this differentiation in a region that is often seen as protective, frustrating foreign direct investment with high bureaucracy and taxes.
“We have seen a lot of foreign investment in the maquila sector,” says Carlos Fernández Valdovinos, president of the central bank. “We now have at least seven different laws that benefit FDI and international companies are taking advantage. They see Paraguay as a cheap production location that offers a large export market – not only through Mercosur but with the SGB+ agreement with the EU you can export 6,000 products tax-free into the EU. We have that agreement secured for 10 years, and that is a big advantage for foreign investors.”