Paraguay: Political chaos amidst economic crisis Ranja Sengupta

Political confusion and violent protests have recently rocked the small nation of Paraguay. The situation has been steadily growing out of control, rendering increasingly vulnerable the position of the current president, Gonzalez Machhi. Protestors have been demanding his resignation and reversal of the free market policies that the government has been trying to push through. The intensity of the protests in July brought on a declaration of internal emergency. President Machhi has alienated members of his own Colorado Party as well as those of the opposition parties with whom he had formed an alliance of ‘National Unity’ in 1999.

If the protestors have their way, Vice President Julio Cesar Franco may become the next president of Paraguay. Franco, representing the liberal party that sits in opposition to Machhi’s Colorado Party, was democratically elected to this office after former Vice President Luis Mario Argana was assassinated. Franco has expressed his support for the anti-government protests and has denied Machhi’s allegation that General Oviedo, a powerful ex-army chief who is in exile and Machhi’s avowed opponent, is behind them.

General Oviedo, who was accused of masterminding the assassination of former Vice President Argana, is in exile in Brazil. A colourful figure in Paraguayan politics, he has been responsible for many of the armed coups and violent protests that the country has witnessed since 1989, and still commands strong support from sections of the Paraguayan people and the Paraguayan army. He led the 1989 coup that ousted the dictator, General Alfredo Stroessner. Later, power conflicts with President Wasmosy led to his imprisonment in 1998 on charges of an attempted coup in 1996, but he was freed by the next president Raul Cubas, who was his allay. However, the assassination of Vice President Argana roused widespread resentment among the people and violent protests rocked the city of Asuncion, forcing Cubas to resign in 1999. Oviedo and Cubas took exile in Argentina and Brazil, respectively. Subsequently, in a bid to improve diplomatic ties with the Machhi government, the new president of Argentina, Fernando de la Rua, threatened to withdraw his support to Oviedo, following which Oviedo disappeared from Argentina in December 1999. After moving around in Paraguay for months, he was finally apprehended in 2000 in Brazil, close to the Paraguay border. He has stayed there in exile since. He is rumoured to have been behind an attempted coup, though unsuccessful, in May this year.

Whether or not Gonzalez Macchi is forced out of office, fresh presidential elections are due in Paraguay next year, and General Oviedo’s UNACE Party is likely to make a strong showing at the polls. Franco, too, remains a strong candidate.

Machhi has become increasingly unpopular in the wake of an illegal investment scandal that he had an alleged role in. He has also been embroiled in several other controversies, and charges of corruption and unfair treatment to former President Cubas have been widespread. But it is his economic policies that have been the protestors’ main target. An informal alliance of rural workers, trade unions, left-wing groups and other organizations staged repeated demonstrations throughout the country, calling for the free-market policies to be scrapped. As a result, an earlier statement declaring the policies ‘non-negotiable’ because the government needs to meet IMF targets in order to access up to $400 million in loans from the World Bank, Gonzalez Macchi has now agreed to backtrack on various measures, including the privatization of the telecommunications company Copaco.

Meanwhile, the economic crisis in Paraguay which has lasted seven years shows no concrete signs of receding. Paraguay’s economy is chiefly dependent on agriculture which, despite slow but steady growth since the early 1990s, remains fragile. About 40 per cent of the population is dependent on agriculture and 24 per cent of the GDP comes from this sector (2000 figures). More than 200,000 families depend on subsistence farming activities and maintain marginal ties with the larger productive sectors of the economy. However, weather-related effects due to El Niño and declining demand have led to a fall in agricultural output, while commercialization of agriculture, the vagaries of weather, high population growth and clearing of forests have triggered off a dramatic increase in the number of landless families. This, in turn, has boosted migration to urban areas, causing a rapid growth of shanty towns. Thus, the already large income inequality has widened, with an estimated 60 per cent of urban and 80 per cent of rural dwellers living below the poverty line.

Paraguayan industry, on the other hand, has been traditionally backward. The country possesses hydroelectric potential, including the world’s largest hydroelectric generation facility built and operated jointly with Brazil (Itaipú Dam), but it lacks significant mineral or petroleum resources. Despite its advantages in energy production, transmission and distribution facilities remain highly underdeveloped.

The economy has a large informal commercial sector which depends on re-export of goods that are imported from Asia and the US, and sold to the neighbouring countries. Almost half of the population is employed by this sector. The recorded activities of this sector have declined significantly in recent years due to the trouble in Mercosur countries, thus placing a strain on government finances which depend heavily on tariffs from this trade. In general, Paraguayans prefer imported goods and local industry relies on imported capital goods. A large part of this sector is involved in underground activities, which centres around the unregistered sale of imported goods—including cars, computers, sound equipment, cameras, liquor, and cigarettes—to Argentina and Brazil. More than half the cars driven in the country, especially luxury cars, are brought in illegally. But rising consciousness has put pressure on this sector. Even the president was involved in a controversy in March 2001, when he was seen to be driving in a stolen car. Drug trafficking is another underground activity that has been reduced by the recent US efforts to bring down such trade in the Latin American region.

Neoliberal economic reforms began in 1989 in Paraguay and gathered impetus under the Wasmosy government during 1993-98, but the pace has been relatively slow compared to many of its neighbours. Price stability was attempted through fiscal and monetary discipline, involving the introduction of a value-added tax in 1993, cuts in capital spending and a turnaround in the finances of public enterprises. Attempts at the redirection of expenditure towards education and health have not met with much success. Privatization of state-owned enterprises by domestic and foreign capital is another major IMF proposal that has been attempted in recent times. The sale of public enterprises began with LAPSA ( the state-owned airline) in 1994, and continued with CAPASA (sugar and alchohol company), FLOMERPASA (merchant shipping fleet), and ACEPAR (the steel mill), among others. The government recently declared plans to privatize the last of the big public enterprises, the telephone company COPACO, (formerly ANTELCO), which has been postponed after the protests, the health system ESSAP, ANDE and CORPOSANA (in the electricity and water sector), the post office and social security. This will throw open all areas of society to the direct dictatorship of ‘capital’. Trade liberalization and increasing integration with neighbouring countries in the form of the ‘Mercosur’ trade bloc was also undertaken during the 1990s.

As part of the financial reforms, the multiple exchange rate system of the 1980s was replaced by a unified exchange rate, interest rates were freed, and restrictions on foreign currency-denominated local loans were eased. From 1998, the central bank adopted a fully floating exchange rate in place of the managed float. Strengthening democratic institutions was another feature on the IMF list, perhaps one among the few really necessary ones, but Paraguay has not been very successful at it. A chaotic political situation and widespread corruption have been its persistent weaknesses.

Since the introduction of the structural adjustment programme, economic growth has been slow. The country has no personal income tax and tax generation has been poor. Also, the fact that most tariffs on trade with its Mercosur partners have to be eliminated by 2005 has added to its troubles. Since 1995, the economy has been plagued by repeated banking crises that have affected industry and the construction sector, poor harvests induced by the vagaries of nature, and the Asian crisis that has adversely affected agricultural exports, which comprise 80 per cent of total registered exports. More recently, problems in major Mercosur countries like Brazil and Argentina, that were brought about by blindly following US-led policies, have affected Paraguay, which depends heavily on them for trade and other forms of economic co-operation. At the same time, despite following IMF policies, private investment has not picked up enough, but the political environment and the uncertainty it projects are partly to blame for that.

Urban unemployment, not surprisingly, increased steadily over the 1990s, reaching 16 per cent by mid-2000, and underemployment is estimated at more than 20 per cent of the labour force. Since 1985, with the exception of one year, Paraguay has registered current account deficits of 3 per cent or more of GDP, which are increasingly being plugged by ‘hot money’ and contraband flows in place of direct foreign investment, unlike the case in neighbouring Argentina and Brazil. GDP growth in 2001 was a dismal 1.5 per cent, though slightly higher than the negative 0.6 per cent of 2000. Paraguay’s GDP of $7.7 billion makes it the fourth poorest economy in Latin America and it ranks among the lowest in the region also in terms of GDP per capita, which stands at $ 1,400.

Privatization moves by the government, which have resulted in major job losses, have added to the woes of the already poor people. The shrinking economy has been unable to absorb workers thrown out of previously government-owned sectors. Simultaneously, the move towards free trade means that local industries, which are not very efficient at the moment, will be denied the protection from international competition that they badly need. A growing anti-US feeling is manifested in, an increasing number of people objecting to the adoption of the international agenda of free trade when it seems to be doing so little to counter the rising poverty on the street.

In addition to privatization, the Machhi government plans to increase the value-added tax on fishing, to ‘reform’ the national bank and to adopt an ‘anti-terrorism law’. Rising corruption in the political top-rung in the face of increasing poverty and unemployment has added to the people’s anger. The recent weakening of Argentina’s economy and Brazil’s currency have only compounded the problem. Paraguay was forced to devalue its currency early this year, and fears of contagion from Argentina and Brazil also triggered off a bank run in the country. The IMF’s response to the deepening recession and rising unemployment has been to demand more reforms, claiming that ‘less’ reforms are the cause for Paraguay’s problems.

It is against this background that the recent upsurge in protests has taken place, leading to the formation of the Democratic Congress of the People (CDP)—a broad coalition of social movements, farmer’s organizations and left forces. The CDP comprises among others, of the Movement for a Free Fatherland (Movimiento Patria Libre), the Front against the Abuse of Public Property, the National Coordination of Farmers’ Organizations and the National Farmers’ Federation. The regime thus finds itself between a rock and a hard place. The farmers’ leader Belarmino Balbuena, whose trade union did not participate in the major day of protests in June, has announced new protest actions; likewise Luis Villamayor, a leader of the UNACE a party aligned to the ex-general Lino Oviedo.

If the distress among Paraguay’s people is not mitigated soon, it is but natural that the country will see more of violence and protests in the days ahead. For the US, Paraguay is heading towards being another embarrassing blot on their map of neo-liberal policies, although their claim is that the slow pace of reforms is the real cause of Paraguay’s economic chaos. While some streamlining may be necessary, Paraguay has to start afresh and look elsewhere for an end to its miseries. It will do better to learn a lesson from its beleaguered neighbours in the rest of Latin America where such policies have been tried and found wanting. A regional support system coupled with a stable political regime, which is only possible with people’s support for and satisfaction with government policies, would seem to be the right answer at the moment.