VZCZCXYZ0000
PP RUEHWEB

DE RUEHAC #0970/01 3241851
ZNR UUUUU ZZH
P 201851Z NOV 07
FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC PRIORITY 6371
INFO RUCNMER/MERCOSUR COLLECTIVE

UNCLAS ASUNCION 000970 
 
SIPDIS 
 
SIPDIS 
 
PASS TO WHA/BSC 
 
E.O. 12958: N/A 
TAGS: PREL PGOV PTER MARR MASS SNAR PA
SUBJECT: SCENE-SETTER FOR CODEL REID 
 
¶1. (SBU) SUMMARY:  Embassy Asuncion warmly welcomes CODEL 
Reid November 25-27.  Your visit provides an opportunity to 
promote U.S. interests in strengthening democratic 
institutions, promoting sound economic policies and good 
governance, disrupting criminal organizations, and combating 
terrorist financing. You come at a particularly important 
time for Paraguay, with much of the body politic focused on 
presidential elections scheduled for April 2008. Many 
Paraguayans, both inside and outside the government, support 
closer political and economic ties to the United States. 
Your visit will help emphasize the USG's interest in 
strengthening ties with Paraguay. END SUMMARY. 
 
------------------- 
The Political Scene 
------------------- 
 
¶2. (SBU) Your visit comes four years into the five-year 
presidency of Nicanor Duarte Frutos.  In that time, President 
Duarte has taken steps to deal with a pressing fiscal crisis, 
to revive the economy, and to fight corruption.  In the last 
year, however, political support for Duarte has sagged, with 
polls indicating Paraguayans are not satisfied his government 
has taken adequate measures to create jobs, improve the 
economy and tackle corruption.  Recent opinion polls placed 
Duarte's popularity rating at 11 percent, the lowest of any 
president in the Western Hemisphere. 
 
¶3. (SBU) Regionally, Paraguay's relations are dominated by 
its larger neighbors, Argentina and Brazil.  Paraguay works 
within the framework of MERCOSUR to secure economic 
concessions from its larger neighbors but has not experienced 
the significant benefits it hoped to extract from MERCOSUR 
membership.  Paraguay has traditionally viewed the United 
States as a regional counter-balance.  However, Duarte has 
increasingly criticized President Bush and stressed greater 
appreciation for Venezuelan President Chavez and Venezuela's 
"commitment" to the region. 
 
¶4. (SBU) Duarte hand-picked former Minister of Education 
Blanca Ovelar to be his successor, and he intends to run for 
a Senate seat in the upcoming election.  Duarte's former vice 
president, Luis Castiglioni, will compete with Ovelar for the 
Colorado Party's nomination (December 16).  Castiglioni and 
Ovelar run neck-and-neck in recent public opinion polls. 
Several political "wild card" candidates have the potential 
to wreak havoc in the elections and end 60 years of Colorado 
Party rule (a world record). The Supreme Court October 30 
overturned former General Lino Oviedo's conviction for his 
1996 coup attempt against then-President Carlos Wasmosy. 
Following his release from prison and reinstatement of his 
full civil and political rights, Oviedo declared his 
intention to run for president.  Resigned Catholic Bishop 
Fernando Lugo is the Liberals' chosen candidate, but he 
appears to be declining in public support.  Lugo -- who had 
been leading all opinion polls until Oviedo's release -- also 
faces a potential legal barrier to office because the 
constitution bars religious "ministers" from seeking the 
presidency. 
 
--------------------------------------------- - 
Reforming the Economy, But Growth Insufficient 
--------------------------------------------- -- 
 
¶5. (U) Paraguay's formal economy, with a gross domestic 
product (GDP) of USD 9.1 billion in 2006, relies heavily on 
agricultural exports, especially beef, soy beans, and sugar 
cane.  (NOTE:  Paraguay supplies 95 percent of the United 
States' organic sugar.  END NOTE.)  Paraguay is also the 
world's largest exporter of electricity.  The country 
generates substantial revenues from the Itaipu Dam for 
electricity used by its partner, Brazil, and from the 
Yacyreta Dam it shares with Argentina.  (NOTE:  Paraguay 
supplies 25 percent of Brazil's total electricity and most of 
the electricity used by Brazil's industrialized southern 
provinces.  END NOTE.)  State-owned monopolies that control 
key public sectors, including electricity, telecommunication, 
water, and sanitation, dominate the public sector.  The 
private sector, which comprises a small percentage of 
Paraguay's GDP, consists of a variety of small-to-medium, 
service-oriented companies.  The informal economy, estimated 
to be as much as one-half the size of the formal economy, 
perpetuates illicit transshipment of laundered money, drugs, 
contraband, and counterfeit products destined for Brazil, 
Argentina, and beyond. 
 
¶6. (U) Paraguay's economic growth reached four percent in 
2006, and inflation was 12.5 percent.  The economy is 
expected to grow by four percent in 2007.  Inflation remains 
high, and the currency (guarani) has surged against the U.S. 
dollar in the past year.  Paraguay has focused on expanding 
agricultural production and finding markets for its products, 
particularly beef and soy beans.  However, the country 
suffers from high unemployment resulting from a lack of 
investment in the private sector, increased farm and ranch 
consolidation, and an over-reliance on commodity exports. 
Despite the strong economy, many Paraguayans have emigrated 
to Argentina, Spain, and the United States seeking 
employment.  As a result, overseas remittances have been 
become an increasingly large part of Paraguay's GDP, reaching 
an estimated eleven percent of GDP in 2007. 
 
¶7. (U) Paraguay needs to sustain annual economic growth of at 
least five percent, and it must undertake deeper structural 
reforms to move from an agrarian economy to a modernized one. 
 Duarte focused on economic reform early in his term, but 
progress over the past three years has slowed.  Conflicts 
between Congress and the Duarte administration have all but 
frozen any reform efforts.  Congress rejected several 
Inter-American Development Bank (IDB), European Union, and 
Japanese development loans (Paraguay maintains a line of 
credit with the IDB) and suspended the implementation of a 
personal income tax for the next year.  Duarte worked to 
expand trade relations through regional trading blocs such as 
MERCOSUR, and actively lobbied to join the Andean Trade 
Promotion and Drug Eradication Agreement (ATPDEA) to receive 
preferential trade treatment.  As the 2008 election 
approaches, inadequate political will exists to take on tough 
economic reform. 
 
--------------------------------------------- --------- 
International Crime, Corruption, and Counter Terrorism 
--------------------------------------------- --------- 
 
¶8. (SBU) The Tri-Border Area (TBA), where Paraguay, Brazil, 
and Argentina meet, is a primary USG concern.  The area, with 
its loose borders and lax controls, is a hub for 
trans-national criminal activity including drug trafficking, 
trafficking in persons, arms trafficking, intellectual 
piracy, document forgery, contraband, and money laundering. 
Brazil has tightened its border controls with positive 
results, but significant money continues to flow out of 
Ciudad del Este (CDE).  Paraguay is widely regarded as the 
weakest link in combating the illicit activities that occur 
in the TBA.  Corruption at multiple levels undercuts law 
enforcement efforts.  Nevertheless, Paraguay has taken 
serious steps to address its institutional deficiencies by 
creating special units, principally in Customs and the 
Ministry of Industry and Commerce (MIC) to investigate 
intellectual property rights (IPR) violations and customs 
fraud.  The MIC's Specialized Technical Unit (UTE) has made 
significant seizures of counterfeit products with USG 
assistance. Paraguay's Anti-Money Laundering Secretariat 
(SEPRELAD) also receives U.S. technical assistance and 
support. 
 
¶8. (SBU) Corruption in Paraguay's political and economic 
system undermines its efforts to modernize.  Transparency 
International rated Paraguay the fourth-most corrupt country 
in Latin America in 2007, not far behind Haiti, Venezuela, 
and Ecuador.  Corruption tends to peak prior to elections, 
and is also rampant in Paraguay's economy, particularly in 
public monopolies.  Recent allegations that the director of 
the Itaipu Binational Enterprise, which oversees the Itaipu 
Dam, siphoned dam revenues for personal use, underscore 
corruption in Paraguay's economy.  The USG has worked closely 
with local law enforcement officials and prosecutors to 
actively combat corruption.  U.S. support for Paraguay's 
Trade Transparency Unit has resulted in the uncovering of USD 
four billion in goods illegally imported into the country. 
 
¶10. (SBU) The Paraguayan Congress is considering a new 
criminal code which includes anti-money laundering 
provisions, and should become law before year's end. 
Although the Chamber of Deputies, or lower house, passed 
counter-terrorism (CT) legislation as part of the criminal 
code, the Senate -- faced with rising public protests fearing 
potential abuses -- removed it from the final version. 
Congress will also consider a new criminal procedures bill in 
the coming year. 
 
¶11. (SBU) Paraguay is a major transshipment point for cocaine 
from Colombia and Bolivia to Brazil.  Paraguay also provides 
most of the marijuana consumed in South America.  The 
Anti-Drug Secretariat (SENAD), perhaps Paraguay's most 
effective law enforcement body, coordinates interdiction 
efforts with significant DEA assistance.  Working closely 
with the United States, SENAD has effectively targeted 
Brazilian trafficking groups based in Pedro Juan Caballero 
(PJC) on Paraguay's northern border with Brazil.  SENAD has 
made a number of significant arms seizures with evidence 
indicating links to Brazil's PCC and Colombia's FARC. 
Presently, SENAD is hard-pressed to meet challenges in CDE 
due to a lack of resources (its national annual budget is 
just $2 million).  SENAD inaugurated a helipad in PJC April 
11, the second phase of a State Department-funded project to 
create a regional SENAD operational base. 
 
¶12. (SBU) A culture of distrust hampers the ability of 
Paraguay's law enforcement community and military to tackle 
rising concerns about public security; Paraguay's National 
Police are widely disparaged by the general population as 
incompetent and corrupt.  Of late, major robberies, including 
the August theft of USD one million at the airport in 
Asuncion, and kidnappings, including the September kidnapping 
of the granddaughter of former vice president Luis Maria 
Argana, are on the rise. 
 
--------------- 
U.S. Activities 
--------------- 
 
¶13. (SBU) USG activities in Paraguay focus on strengthening 
democratic institutions, promoting sound economic policies 
and good governance, disrupting criminal organizations, and 
combating terrorist financing.  Post maintains bilateral 
assistance programs dealing with combating narcotics 
trafficking, money laundering, intellectual property 
violations, and trafficking in persons.  A Department of 
Justice Resident Legal Advisor and advisors from Treasury's 
Office of Technical Assistance have worked behind-the-scenes 
over the last three years to assist the Paraguayan government 
to add money laundering and other major reforms to the new 
criminal code currently pending in Congress.  The 180-member 
Peace Corps contingency in Paraguay represents its 
third-largest group of volunteers and trainees worldwide. 
 
¶14. (U) USAID manages a small but high-impact assistance 
program in Paraguay directed at key development constraints 
in democracy, health, economic growth and the environment. 
USAID's democracy programs are focused on anti-corruption 
activities, greater accountability and transparency in local 
government, and rule of law reform.  USAID is also working to 
reduce poverty through its "Paraguay Vende" ("Paraguay 
Sells") program designed to help small and medium enterprises 
in poor areas of the country access new markets, increase 
sales, and create jobs.  USAID's health programs are working 
to reduce maternal and child mortality and improve other 
critical health systems.  USAID is also helping protect 
bio-diverse areas and promote better natural resources 
management.  USAID also administers Paraguay's USD 35 million 
Millennium Challenge Account (MCA) Threshold Country Program 
(TCP), a two-year effort directed at reducing impunity, 
strengthening key institutions, and business formalization. 
The Threshold Program, which involves 28 Paraguayan 
institutions including the Congress and the Supreme Court, is 
at its midway point.  Paraguay has made solid material 
progress under the program, but control of corruption remains 
an ongoing challenge.  USAID's total non-TCP assistance to 
Paraguay this year totaled USD eight million. 
 
---------------------- 
The Military's Mission 
---------------------- 
 
¶15. (SBU) Paraguay's military is a small force struggling to 
redefine its mission despite insufficient funding and 
intermittent scandals.  The Army is the largest of the three 
services (6,000), followed by the Navy (2,000) and Air Force 
(1,200).  The military's primary missions are to protect 
Paraguay's territorial integrity, defend the government in 
accordance with the constitution, and cooperate in civil 
defense.  It does not play a leading role in counter-drug 
operations, although the military provides a specialized 
tactical unit to support SENAD.  The military's Special 
Forces unit is in the process of organizing a company-size 
counter-terrorism unit, and the Presidential Guard Unit has a 
specialized counter-terrorist platoon.  More recently, 
Paraguay has attempted to increase its presence in 
international peacekeeping operations.  Brazil supports 
Paraguay's deployment of 33 troops to Haiti; Paraguay is also 
training a 132-member engineering company to deploy worldwide 
as part of the Global Peacekeeping Operation Initiative 
(GPOI). 
 
------------------------ 
The Impact of Your Visit 
------------------------ 
 
¶16.  (SBU) When meeting with local interlocutors, Post 
suggests you emphasize the United States' long history of 
friendship with Paraguay and our desire to continue close 
relations with Paraguay's next president, provided that s/he 
E 
is both elected and governs democratically.  You might also 
highlight the importance of free and transparent elections 
and the important role international observers play in 
monitoring such elections.  On trade, you might express 
interest in a continued dialogue to expand Paraguay's access 
to U.S. markets, but lower Paraguay's expectations about 
receiving ATPDEA trade benefits.  It would be useful to 
recognize Paraguay's progress in fighting corruption and 
formalizing its economy via its Milenium Challenge Account 
Threshold Program, and encourage them to take full advantage 
of that program.  Support for final passage of the Senate's 
version of the criminal code -- with strong sanctions against 
intellectual property rights violations and money laundering 
-- would be a clear sign of Parguay's seriousness to improve 
its international image.  You might express gratitude to 
Paraguay for hosting the January 10-11 "3 plus 1" group 
meeting on counter-terrorism, as well as the Joint Council on 
Trade and Investment (JCTI) conference December 4 which will 
touch on trade and intellectual property issues.  Finally, it 
would also be helpful to encourage Paraguay to continue its 
efforts to train and support its contingent of UN 
peacekeepers, and offer continued U.S. military assistance 
via training programs and exchanges. 
 
Please visit us at     http://www.state.sgov.gov/p/wha/asuncion 
CASON