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DE RUEHAC #0072/01 0371259
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FM AMEMBASSY ASUNCION
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7574
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RHMFISS/USSOCOM MACDILL AFB FL PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
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RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
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RUEAWJB/DEPT OF JUSTICE WASHDC PRIORITY

UNCLAS ASUNCION 000072 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC MDASCHBACH 
 
E.O. 12958: N/A 
TAGS: PREL ECON MARR SNAR MASS MCAP PGOV PA
SUBJECT: SCENE-SETTER FOR CAPSTONE FELLOWS 
 
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SUMMARY 
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¶1. (SBU) Embassy Asuncion warmly welcomes CAPSTONE fellows 
February 22-24.  President Fernando Lugo's administration 
represents an historic transition after the Colorado Party's 
61 years of rule.  Lugo's challenges are many:  An 
inexperienced team, exceedingly high expectations for change, 
endemic corruption, weak institutions, and a divided 
Congress.  Lugo must generate jobs and promote economic 
development while downsizing a bloated state and tackling 
social and security issues of key concern to his 
constituents.  Lugo's top goals include fighting corruption, 
strengthening weak institutions, promoting economic growth, 
and improving health and education services.  Your visit 
demonstrates broad U.S. interest in our bilateral 
relationship and support for the Paraguayan government at a 
critical moment in the country's history.  END SUMMARY. 
 
--------------------- 
THE POLITICAL REALITY 
--------------------- 
 
¶2. (SBU) President Lugo's administration represents the first 
interruption in Colorado Party rule in 61 years.  A former 
Catholic bishop, Lugo won 40.8 percent of the vote in April 
2008 national elections, handily beating out competitors in a 
4-way race.  His Patriotic Alliance for Change (APC), a loose 
coalition of political parties, won a large block of seats in 
Congress but does not have a majority.  By voting 
overwhelmingly for change, the Paraguayan people gave Lugo a 
mandate for political, economic, and social reform.  However, 
they also have high short-term expectations.  Since his 
August 15 inauguration, Lugo has assembled a diverse team of 
politicians and technocrats to serve in his cabinet.  Lugo's 
challenges are many, and he will have to overcome endemic 
corruption, weak institutions, and a divided, but 
antagonistic, Congress.  A more in-depth discussion of some 
of Lugo's challenges follows. 
 
-------------------- 
THE ECONOMIC REALITY 
-------------------- 
 
¶3. (SBU) Lugo must promote economic development while 
shrinking the bloated Paraguayan state.  Agriculture 
represents 21.9 percent of gross domestic product (GDP), and 
the economy is heavily dependent on exports of soybeans, 
cotton, grains, cattle, timber, sugar, and electricity.  More 
than 250,000 families (out of a national population of some 6 
million) depend on subsistence farming activities and 
maintain marginal ties to the larger productive sector of the 
economy.  Paraguay boasts vast hydroelectric resources, 
including the massive Itaipu hydroelectric dam built and 
operated jointly with Brazil, but fails to capitalize on 
those resources.  The new government welcomes foreign 
investment, but widespread corruption and a weak judicial 
system are deterrents to investment.  Paraguay's real GDP in 
2007 was USD 12.8 billion (in 2000 dollars), with a 
per-capita GDP (purchasing power parity) of USD 4,000 in 
current U.S. dollar terms; inflation in 2007 was 6.0 percent, 
down from 12.5 percent in 2006.  In addition to retail, 
banking, and professional services, there is significant 
commercial activity involving the import of goods from Asia 
and the United States for re-export to neighboring countries. 
 The underground economy, which is not included in the 
national accounts, probably equals the formal economy in 
size. 
 
¶4. (SBU) Paraguay's plan to weather the global financial 
crisis seeks to create jobs and maintain a GDP growth rate of 
2-3 percent in 2009.  The first phase of the plan aims to 
ensure liquidity in the banking system and manage resources 
with bilateral and multilateral organisms.  The second phase 
will focus on infrastructure priorities: construction, 
roadways, housing and waterworks, as well as expansion of 
conditional-cash transfer mechanisms for low-income families. 
 The third phase seeks to improve credit access for 
production sectors; the fourth phase aims to increase public 
and private spending.  Phases 2 through 4 will require 
congressional approval. 
¶5. (U) Bilateral trade with the United States has increased 
over the last six years even as there remains much untapped 
potential for growth.  More than a dozen U.S. multinational 
firms have subsidiaries in Paraguay, and some 75 U.S. 
businesses have agents or representatives in Paraguay. 
Cargill, ADM, Coca Cola and Exxon-Mobil are the largest U.S. 
companies operating in Paraguay.  The United States was the 
largest foreign investor in Paraguay, with USD 616.50 
million, followed by Brazil with USD 230.85 million. 
 
¶6. (U) Paraguay has inefficient state-owned monopolies in the 
rail, oil and gas, cement, steel, electricity, water, and 
telephone service industries.  Political realities render 
outright privatizations of state-owned enterprises unlikely 
in the short term, although Lugo's economic team is 
discussing public-private partnerships to reform state-owned 
enterprises.  The large state-run companies most attractive 
to foreign buyers (such as the telecom and electricity 
distribution companies) employ thousands and have served as 
outlets for political patronage. 
 
--------------------------------- 
PUBLIC SECURITY AND SOCIAL ISSUES 
--------------------------------- 
 
¶7. (SBU) Security and social issues are top concerns of 
Lugo's constituents.  Violent crime is increasing in urban 
and rural areas, and the public generally believes that 
Paraguayan security forces (particularly the corrupt police) 
do not meet their security needs.  The "landless" farmer 
movement has increasingly taken to protesting and invading, 
or illegally occupying large, privately-held ranches, in 
agitating for agrarian reform.  On some occasions, protests 
and "land invasions" have resulted in deaths or injuries. 
 
¶8. (SBU) The Tri-Border Area (TBA) of Paraguay, Argentina and 
Brazil is a hub for trans-national criminal activity 
including drug trafficking, trafficking in persons (TIP), 
arms trafficking, intellectual piracy, and money laundering. 
Paraguay is a major transshipment point for cocaine from 
Colombia and Bolivia to Brazil; it is the top marijuana 
producer in South America, and Paraguay remains a regional 
haven for money laundering.  Paraguayan authorities 
experience difficulties enforcing the law because of hostile 
geography, corruption, chronic understaffing, and the 
political and judicial power some drug traffickers wield. 
Paraguay took a giant step forward on money laundering, 
intellectual property violations, and trafficking in persons 
by passing a tougher penal code in 2008 that will go into 
effect this June. 
 
-------------------------------------------- 
LUGO'S GOALS AND U.S. ASSISTANCE TO PARAGUAY 
-------------------------------------------- 
 
¶9. (U) Lugo's goals include strengthening democratic 
institutions, fighting corruption, promoting economic growth, 
and improving health and education services.  Police and land 
reform, including a national land survey, are also 
priorities.  Lugo and several key ministers have expressed 
interest in closer commercial ties with the United States, 
which the October 27, 2008 Bush-Lugo White House meeting 
reinforced. 
 
¶10. (U) USG activities in Paraguay support Lugo's goals of 
strengthening democratic institutions, promoting sound 
economic policies and good governance, and disrupting 
criminal organizations.  The USAID-administered USD 30.3 
million Millennium Challenge Corporation's (MCC) Threshold 
Program Phase II (announced January 15) will support Lugo's 
anti-corruption efforts.  (NOTE: Phase I of the MCC's 
Threshold Program provided USD 35 million over the past two 
years in an effort to fight corruption and formalize 
Paraguay's economy. END NOTE.) USAID/Paraguay's FY08 budget 
is USD 7.8 million and focuses on economic growth, health, 
the environment, and democracy.  In October 2008, the USG 
announced an additional USD 10 million in assistance for 
health and economic development.  USAID's Economic Growth 
Program ("Paraguay Vende") has generated over USD 60 million 
in sales and over 30,000 full-time job equivalents since 
2003, thus supporting Lugo's goal to reduce poverty. 
Likewise, USAID's Health Program supports Lugo's interest in 
improving basic health services.  By decentralizing health 
services, improving maternal and child care services, and 
increasing Paraguay's capacity to deliver family planning 
services.  In the environment sector, USAID supports improved 
management of protected areas.  The Democracy Program focuses 
on fighting corruption, giving civil society a voice, and 
promoting decentralization and municipal development. 
 
¶11. (SBU) Post maintains bilateral assistance programs to 
combat 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 work 
behind-the-scenes to assist the Paraguayan government.  The 
Peace Corps has an active program in Paraguay.  One of the 
Embassy's leading public diplomacy efforts is its English 
language scholarship program. 
 
---------------------- 
THE MILITARY'S MISSION 
---------------------- 
 
¶12. (SBU) Paraguay's military is a small force struggling to 
redefine itself.  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 legitimate 
authorities 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 the counternarcotics 
secretariat.  The U.S. military's Special Operations Command 
is in the process of training and equipping a company-size 
Joint Immediate Response Detachment (DCEI), and the 
Presidential Guard Regiment has a specialized 
counter-terrorist platoon. 
 
¶13.  (U) Paraguay's military infrastructure and equipment are 
old, obsolete and in desperate need of repair or replacement. 
 Ninety percent of the budget is used to pay salaries, and 
five percent is used for sustaining conscripts, leaving only 
five percent for operations, maintenance and training. 
Budget problems are not expected to go away in the near 
future due to a lack of Congressional support and lingering 
memories of the Stroessner dictatorship.  Despite these 
challenges and a record number of forced retirements of 
Colonels and Generals in November 2008, the military has 
remained subordinate to civilian authority under the 
leadership of new Military Forces Commander Admiral Cibar 
Benitez and President Lugo's Defense Minister Luis Bareiro 
Spaini (the latter of which is not in the military chain of 
command).  When called, the military has supported law 
enforcement activities and public health campaigns, and 
provided transportation assistance for farmers to bring their 
products to market.  The military is still seen as the first 
line of defense in a crisis, and many Paraguayans feel safer 
when the military is out on the streets. 
 
 
------------------------------------- 
Strong Record of Military Cooperation 
------------------------------------- 
 
¶14.  (U) USG support for the Paraguayan military is second 
only to our support for Colombia in South America.  Our 505 
Assurance Agreement enables us to assist in the deployment of 
a United Nations Global Peace Keeping Operations Unit 
(UNPKO).  Paraguay is currently allocated USD 4.1 million in 
Global Peace Operations Initiative (GPOI) funds.  These funds 
are being used to refurbish the Paraguayan Military Forces' 
Joint Peace Operations Training Center (CECOPAZ) physical 
plant; train a rotation of three company sized Multi-role 
Engineer Companies to deploy on UNPKO missions under 
Paraguayan flag; and increase their overall capacity to train 
officers and soldiers. 
 
¶15.  (U) Through our U.S. Special Forces, we provided 
Paraguay with some USD 3.8 million in 1208 funds allocated 
for weapons and other equipment to assist in developing 
Paraguay's Joint Immediate Response Detachment (DCEI).  This 
effort has been critical to realizing strategic initiatives 
proposed through our Counter Terrorism Fellowship Program 
(CTFP), to deter illicit transnational activity and to 
include the designation and creation of a Paraguayan Tier 1 
unit (equivalent to a National Mission Response Force). 
Despite the unit's successes, the GOP has shown some 
hesitation about how continued U.S. support for the unit 
should manifest itself after June 2008. 
 
¶16.  (U) Other security funding comes from the State 
Department's International Narcotics and Law Enforcement 
(INL), which along with DEA and U.S. Special Forces, assists 
Paraguay's National Anti-Drug Secretariat (SENAD) in 
combating narcotics trafficking.  We also facilitate joint 
exercises relating to humanitarian assistance and disaster 
relief and work with the Military Forces Command and National 
Emergencies Secretariat to strengthen and improve the 
Paraguayan government's emergency response system.  Paraguay 
also has a robust relationship with the Massachusetts 
National Guard (MANG) through the State Partnership Program 
and it has expressed interest in acquiring U.S. technical 
assistance to develop its National Security Strategy and 
National Defense Plan. 
 
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COMMENT 
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¶17.  (SBU) Your interest in Paraguay demonstrates broad U.S. 
interest in the bilateral relationship, and support for 
Paraguay's pragmatic president at a critical moment in the 
country's history.  When meeting with Paraguayan 
interlocutors, you should encourage them to continue working 
with the USG to strengthen our bilateral relationship.  You 
also should encourage Paraguay to continue its efforts to 
train and support its contingent of UN peacekeepers, and 
offer continued U.S. assistance via seminars, conferences, 
orientation visits, advisory and instructional activities for 
both Paraguay's Armed Forces and civilian institutions.  END 
COMMENT. 
 
Please visit us at     http://www.state.sgov.gov/p/wha/asuncion 
 
FITZPATRICK