paraguay: country strategy with the idb (2004-2008)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

PARAGUAY

THE BANK’S COUNTRY STRATEGY WITH PARAGUAY (2004-2008)

This document was prepared by the project team consisting of Pablo Molina and Marilia Mirza (RE1/OD1). The following persons collaborated in its preparation: Héctor Malarín (RE1/EN1); Paolo Giordano (INT/ITD); Dino Caprirolo (RE1/SC1); Ernesto Castagnino and Fernando Straface (SDS/SGC); Mónica Rubio y Silvia Raw (RE1/SO1); Gabriel Casaburi and Mario Durán (RE1/FI1); Eduardo Feliciangeli (COF/CPR); Claudia Piras (SDS); José Daniel Reyes, Nicole Fragano and María Victoria Cabo (RE1/OD1).

CONTENTS

EXECUTIVE SUMMARY I.

THE ECONOMIC AND SOCIAL CONTEXT ................................................................................... 1 A. Recent trends .................................................................................................................... 1 B. The context ....................................................................................................................... 3 1. The opportunities ..................................................................................................... 3 2. Constraints................................................................................................................ 5 C. The government’s program ............................................................................................. 8 D. Medium-term economic prospects.................................................................................. 9

II. THE MAIN DEVELOPMENT CHALLENGES ............................................................................... 11 A. Restoring the credibility of State institutions so that the State can lead the way towards economic development and support the consolidation of democratic institutions: the challenge of governance...................................................................... 11 B. Laying the foundations for sustainable economic growth based on the market economy: the challenge of competitiveness. ................................................................ 14 C. Reducing poverty and inequality: The challenge of promoting human development. .................................................................................................................. 20 III. LESSONS LEARNED FROM PREVIOUS STRATEGIES AND PORTFOLIO PERFORMANCE ............ 24 A. Review of the previous strategy and major achievements ........................................... 24 B. Status of the portfolio..................................................................................................... 28 C. Conclusions and lessons learned ................................................................................... 30 IV. THE BANK’S OBJECTIVES, ITS STRATEGY, AND THE AGENDA FOR DIALOGUE .................... 31 A. Objectives ....................................................................................................................... 31 B. Core areas of the strategy............................................................................................... 31 1. Strengthening governance ..................................................................................... 32 2. Strengthening the foundations for sustainable growth by deepening the market economy and achieving greater regional and global integration............. 35 3. Reducing poverty and improving the quality of life of low-income sectors of the population......................................................................................................... 40 C. Implementation of the strategy...................................................................................... 42 D. Participation and coordination with other donors......................................................... 44 E. Lending scenarios and the country’s debt position ...................................................... 46 F. Possible sector and country studies............................................................................... 48 G. Risks associated with the strategy’s implementation ................................................... 48 H. Monitoring of the strategy and indicators ..................................................................... 50 I. Agenda for dialogue with the country........................................................................... 50

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ANNEXES

Annex 1 Annex 1-A Annex 2 Annex 3 Annex 4 Annex 5 Annex 6

Operations program Linkages with objectives for sustainable economic growth and poverty reduction and with the Bank’s sector strategies Classification of the current loan portfolio and sums to be disbursed, by strategy area Possible sector and country studies Selected bibliography Consultations conducted in connection with the preparation of the Bank’s country strategy with Paraguay Indicators of exposure in Paraguay

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ABBREVIATIONS

AECI AFS CAS CFAA CIPE ConACYT CPRA CREMA CSOS EAP EC ECLAC FTAA GTZ IIC IIRSA JBIC JICA KFW KOICA MERCOSUR MIF OECD PBL PPP PRI PROPAIS PROPEF SEP SIAF UCIP UNDP WTO

Agencia Española de Cooperación Internacional [Spanish Agency for International Cooperation] Audited financial statements Country Assistance Strategy (World Bank) Country Financial Accountability Assessment Country Institutional and Policy Evaluation Consejo Nacional de Ciencia y Tecnología (National Council on Science and Technology) Country Procurement Review Assessment Contratos de Rehabilitación y Mantenimiento [contracts for road rehabilitation and maintenance] Civil society organizations Economically active population European Commission Economic Commission for Latin America and the Caribbean Free Trade Area of the Americas German Technical Cooperation Agency Inter-American Investment Corporation Initiative for the Integration of Regional Infrastructure in South America Japan Bank for International Cooperation Japan International Cooperation Agency Kreditanstalt für Wiederaufbau [Reconstruction Loan Corporation) Korea International Cooperation Agency Mercado Común del Cono Sur [Southern Cone Common Market] Multilateral Investment Fund Organization for Economic Co-operation and Development Policy Based Loan Public-private partnership Private Sector Department Programa de Inversiones Sociales [Social Investment Program] Project Preparation and Execution Facility Social Entrepreneurship Program Sistema Integrado de Administración Financiera [Integrated Financial Management System] Unidad Central de Inversión Pública del Ministerio de Hacienda [Central Public Investment Unit of the Ministry of Finance] United Nations Development Programme World Trade Organization

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EXECUTIVE SUMMARY Introduction:

This strategy will coincide with a turning point in Paraguay’s history, since the political conditions now in evidence hold out the possibility of reversing the institutional and economic deterioration and the rising poverty levels seen in the country in recent years. The Bank has an important role to play in Paraguay, and this is reflected in the common thread running throughout the new strategy: the provision of support for steps that the government can take, based on the legitimacy it has acquired and in the context of an enabling environment, to set in motion a sustained growth cycle that will provide relief from poverty and lead to greater equity.

The government program:

The government has set four strategic objectives: (i) restoring trust in the institutions of the State and its representatives; (ii) promoting the active citizen participation in building democratic institutions; (iii) reactivating the economy and creating jobs within the framework of a sustainable development model; and (iv) combating poverty, corruption, and problems of public safety.

Development challenges:

Paraguay will have to overcome challenges in three main areas in order to attain sustainable economic growth and reduce poverty: •

Restoring the credibility of State institutions so that the State can lead the way toward economic development and support the consolidation of democratic institutions: the challenge of governance.

•

Laying the foundations for sustainable economic growth based on the market economy: the challenge of competitiveness.

•

Reducing poverty and inequality: the challenge of promoting human development.

Objectives of the The objective of the Bank’s work in Paraguay is to collaborate with the Bank’s strategy: country as it strives to overcome major development challenges as a means of attaining sustainable growth and reducing poverty.

Main strategy components:

The strategy agreed upon for 2004-2008 calls upon the Bank to focus its work in the following spheres of action: •

Strengthening governance by restoring the credibility of State institutions. The aim of this component will be to enable the State to coordinate the economic development process by heightening the efficiency and transparency of public administration, promoting greater citizen participation, and consolidating democratic institutions;

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Implementation of the strategy:

•

Laying the foundations for sustainable growth through the consolidation of the market economy and greater regional and global integration by creating conditions conducive to increased private-sector participation, greater competitiveness, and deeper integration; and

•

Reducing poverty and improving the quality of life of low-income sectors of the population through the development of human capital and the provision of greater access to quality basic services.

The new strategy has been designed to take the pivotal role of the portfolio into account. Consideration has been given both to the volume of funds to be disbursed and to their concentration in areas which are critical to the government program’s success and which address the challenges to be met. Initially, the main thrust of the strategy will concern portfolio performance and support for institutional consolidation and economic reactivation. Fresh resources will be devoted primarily to helping to boost the country’s competitiveness and to complementary measures in the human development and social sector.

The strategy takes the actions of other international cooperation agencies into consideration and seeks to help pave the way for the diversification of funding sources. One of the strategy’s cross-cutting themes is the strengthening of the public sector’s management capacity as it relates to policy and project implementation, coordination, and evaluation.

Two loan scenarios have been formulated. The baseline scenario posits US$350 million in approvals over the life of the strategy (thus maintaining the annual average of US$70 million recorded in 1998-2003) and assumes a marginal improvement in portfolio execution. The high scenario of US$450 million is identical to the baseline scenario for the first year but would entail increased lending volumes in the following years. It is based on the assumption that actions already in progress are being built on, creating conditions for new reforms, which will also require financing. It further assumes that the investment climate improves, thus attracting more private capital, and that the pace of project execution speeds up.

Risks:

The possibility that events may occur that could generate political instability poses a risk. This risk is reduced, however, by the government’s notable legitimacy and by the Executive and Legislative Branches’ interagency agenda, which was signed in September 2003 and is based on a multi-party agreement regarding major areas of reform (taxation, customs, the public banking and financial systems, fiscally responsible budgeting, and the pension system).

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The Paraguayan economy is highly vulnerable to external shocks, particularly from downturns in soybean and cotton prices or production and from economic instability in the region. Because the economy is so small, such shocks may be magnified by minor macroeconomic disequilibria. Recent measures and the IMF agreement have done a great deal to reduce this risk in the short term.

Paraguay is also vulnerable to the reaction of domestic groups that are adversely affected by government measures. The effort being made to combat corruption, informal economic dealings, and the illegal triangulation of trade activities affects powerful groups that wield influence in various spheres of political and economic affairs in Paraguay and could trigger a reaction against the government’s reform program.

International backing and greater citizen participation in the workings of government would mitigate this risk.

One of the risks associated with this strategy is that, during the transition, the volume of external resources coming into the country may fall short of the desired level for any of a variety of reasons, even if no crisis erupts. If this occurs, difficulties may arise that have not been provided for in the country’s financial programming. Conversely, there is also a risk that the confluence of favorable conditions at the outset and the reforms’ success could fuel high expectations that would lead to a relaxation of fiscal discipline and, if suitable coordination is lacking, a duplication of effort.

In order to mitigate this risk, the new unit within the Ministry of Finance responsible for coordinating loans and donor activity will be strengthened and multilateral agencies will continue to monitor events.

Agenda for dialogue with the country:

In monitoring the strategy’s implementation and relations between Paraguay and the Bank, the following core areas of dialogue are proposed: •

The progress made in carrying out the most urgent reforms and in portfolio performance. As headway is made in these areas, the Bank will proceed with the proposed loan operations and the definition of new operations in the areas identified by the strategy.

•

Measures for improving public administration, with emphasis on those having the greatest impact in terms of fiscal sustainability, increased transparency, and the participation of society in monitoring State management.

•

Efforts to backstop a steady improvement in the business climate. This would include steps to enhance Paraguay’s competitive profile and its position in the international arena, in general, and to promote the development of competitive small and medium-sized enterprises (SMEs), in particular.

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•

Efforts designed to attract the private sector and encourage it to take part in the operation and expansion of infrastructure and basic service delivery in a way that will complement public-sector investment.

•

The possible role of the Bank in helping to deepen regional integration (in particular, prioritization of the investment plans of the Initiative for the Integration of Regional Infrastructure in South America (IIRSA)).

•

Steps to speed progress in social sectors and in the development of the country’s human capital, with emphasis on interventions related to the Millennium Development Goals and the monitoring of relevant indicators.

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MATRIX OF THE BANK’S COUNTRY STRATEGY WITH PARAGUAY FOR 2004-2008 Government strategy 1.

IDB action IDB strategy In progress

Proposed

Action by other agencies

Monitoring indicators Strategy

Country

Strengthening governance. Country goal: Doubling Paraguay’s government effectiveness indicator, from 7 in 2004 to 14 in 2008 (World Bank, “Governance Matters III”)

Fiscal sustainability

Fiscal sustainability

Restoration of trust in State institutions and their representatives

Fiscal Management Strengthening and Modernization Program (1253/OC)

TC: Strengthening of Office of the Under Secretary for Economic Affairs and Integration/Ministry of Finance Strengthening of the Central Public Investment Unit / Ministry of Finance

ATN/SF-7216 Integrated Accounting and Administrative Systems Projects

Promotion of active citizen participation in building democratic institutions Combating corruption and lack of public safety

Preinvestment Program (1143/OC)

Consensus-building mechanisms for the branches of government

Strengthening of technicalcooperation coordination mechanisms for the Legislative and Executive Branches

TC: Strengthening of Office of the Attorney General TC: Strengthening of Auditing Office, Executive Branch TC: Strengthening of Legislative Branch

IMF: Stand-by arrangement

World Bank: Economic recovery loan, pension system reform

OAS: TA elections, 2003

Reform and modernization of the customs and tax administrations, implementation by 2007, with operating costs of no more than 4.5% of tax receipts (5.5% in 2002) Evaluation findings indicate that coordination of international cooperation and public investment has been implemented and strengthened by 2007 Evaluation findings indicate that monitoring agencies have been strengthened by 2007

Phase-in of increased tax collections, rising from 10% of GDP in 2003 to 13% by 2008, with a 2% primary surplus in 2008 (IMF) Improvement in Transparency International’s corruption index, rising from fifth quintile in 2002 to fourth quintile by 2008 (World Bank, “Governance Matters III”)

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Government strategy

IDB action IDB strategy In progress

Proposed

Action by other agencies

Monitoring indicators Strategy

Rule of law and administration of justice

State Modernization Program – Civil Registry (Strengthening of the Judicial Branch and the Public Prosecutor’s Office) (934/OC)

PR-0146. Strengthening of justice system and streamlining of legal procedures

Criminal Code: AECI, GTZ, KfW

Program evaluation indicates that administrative reform of the judicial system has been implemented by 2008, the general procedural code has been approved and the judicial service system has been implemented

Participation by civil society

TC in support of the National AntiCorruption Plan, Defensoría del Pueblo (the People’s Ombudsman), Comptroller-General, Central Bank economic statistics, civil education

TC: Development of an e-government strategy

Decentralization and citizen participation: GTZ, KfW, AECI, USAID, JICA

45 public-sector agencies are using the national procurement system

ATN/7244-PR. Increased transparency and efficiency in government procurement

TC: Prevention of violence and promotion of civil coexistence in Asunción TC: Combating trafficking in human beings TC: Support of the National Integrity Plan (Promotional Council for the National Integrity System [CISNI]) TC: Citizens’ Comptroller-General for Governance TC: Transparency International/ Paraguay

Public expenditure incorporated into the SIAF by 2008 Mechanism for monitoring CSOs’ participation in policy design, monitoring and evaluation has been set up by 2007

Country

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Government strategy

IDB action IDB strategy In progress Quality and efficiency in the workings of government

Proposed

2002 National Population and Housing Census (1301/OC)

PR-L1008. Professionalization of the Civil Service

ATN/MT-7244-PR. Design of new public procurement system

PR-L1004. Restructuring of the Central Bank

CFAA

PR-L1005. Strengthening of the External Trade Sector’s Bargaining Power

Operational management of the Social Security Institute TC operations: Management capacity of the Office of the Vice President

PR-L1001.Modernization of Public Administration in Agriculture in Support of the Campesino Sector TC: Strengthening the Ministry of Finance

Action by other agencies Ref. civil service: World Bank, OAS, UNDP, UNICEF

Monitoring indicators Strategy Professionalization of the civil service in three government ministries by 2008

More than 75% of central government units to be operating under a management-by-results model that includes a social accountability mechanism by 2008

Country

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Government strategy 2.

IDB action IDB strategy In progress

Proposed

Action by other agencies

Monitoring indicators Strategy

Country

Laying the foundations for sustainable economic growth by consolidating the market economy and promoting greater regional and global integration.

Country goal: Raising competitiveness indicators to levels approaching those of countries with comparable per capita incomes, moving up from a Growth Competitiveness Index ranking of 95 in 2004 to 85 by 2008 (World Economic Forum)

Economic reactivation and job creation within the framework of a sustainable development model based on agriculture and agroindustry in conjunction with a diversification and increase in exports

Improving the business climate, developing a services market to support SMEs and boosting agricultural productivity while diversifying exports

MIF: Strengthening the consumer protection system, reform of the insurance industry Enterprise development (1349/OC)

PR-126. Science, technology and innovation program Paraguay Sector Program on the Competitiveness and Diversification of Production

Program to Support Small-Scale Cotton Producers (1109/OC)

IIC: Lines of credit for agroindustry.

Modernization and Diversification of Small-Scale Farming (1255/OC)

TC: International auditing and accounting standards.

Census and Property Registration Program (1448/OC)

TC: Strengthening institutions responsible for standards and quality control

Global Microenterprise Credit Program (1016/OC) TCs and MIF: SMEs and microenterprises and small businesses, credit, entrepreneurial networking, training of young entrepreneurs

MIF: Clean technology in production chains Corporate social responsibility Quality management of SMEs Development of rural microenterprises (SEP)

SMEs: GTZ, KfW, AECI (Spain), JBIC, JICA, USAID, Taipei China, EC

Double the number of firms adhering to ISO 9000 by 2008 (starting from 69 firms in 2004).

European Union:

Legal framework for census records, including mechanisms for regularizing title and proceeding to final issuance of land deeds, to be approved by 2008

Three programming levels (regional, MERCOSUR and Paraguay)

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Government strategy

IDB action IDB strategy In progress Strengthen the financial system and upgrade financial intermediation

Proposed

MIF: Strengthening transparency and promoting the growth of the formal sector of the economy; financial system

PBL-0137. Ref. Public Banking

IIC: Credit for hotels and agricultural exporters

Reimbursable TC - PR0145. Ref. Public Banking

PR-127 Global Credit Program for SMEs

Action by other agencies World Bank: Strengthening the financial sector

Monitoring indicators Strategy Completion of consolidation and restructuring of public banking system by mid-2007

Payments system, Central Bank of Paraguay

TC: Societies for Reciprocal Guarantees MIF: Strengthening of regulatory system for cooperatives Office of the superintendent for nonfinancial banking activities Deepening the rural financial system YacyretĂĄ Transmission System Project (918/OC)

PR-L1007 National Roads Rehabilitation and Maintenance Program

Program to Improve Highway Corridors in Paraguay (933/OC)

PR- National Rural Roads Program II

National Rural Roads Program II (1230/OC)

PR-L1009 Rural Electrification Program

Emergency and Infrastructure Rehabilitation Program. El NiĂąo (1117/OC) Western Integration Corridors Program (1278/OC)

Infrastructure: KfW, JICA, JBIC, Taipei China, World Bank, CAF, BNDES/ FINAME, FONPLATA

Increase in credit to the private sector from 5% of GDP in 2004 to 20% by 2008 (Central Bank of Paraguay) Increase exports of nontraditional products from US$200 million in 2004 to US$300 million by 2008

TC: Best practices in mortgaging

Expand, upgrade, and maintain basic infrastructure

Country

20% reduction in vehicle operation costs between 2004 and 2008 on roads rehabilitated or maintained by the Bank

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Government strategy

IDB action IDB strategy In progress Deepen global and regional integration

Proposed

TC: State/Civil Society Forum (ATN/SF-7541-PR)

PR-L1005 Strengthening of External Trade Negotiating Capacity

Spain (AECI) Trade management

F-Streamlining of Export Procedures (MIF/AT-508)

Study on the impacts of trade agreements that have been signed or are being negotiated

FTAA Hemispheric Cooperation Program

F-Business Integration Program (MIF/AT-236)

Export promotion: TC. Training negotiators in the evaluation of integration strategies PR- Economic Retooling Plan for border areas

3.

Action by other agencies

EC, USAID, Taipei China, FINAME, JICA, CAF, UNESCO, MERCOSUR

Monitoring indicators Strategy

Country

20% increase per year between 2004 and 2008 in number of trained trade negotiators (as of 2004, there are 45 negotiators with varying degrees of training) Increase in the number of agencies with international quality certification from 1 in 2004 to 4 by 2008

Laying the foundations for sustainable economic growth by consolidating the market economy and promoting greater regional and global integration. Country goal: Raising competitiveness indicators to levels approaching those of countries with comparable per capita incomes, moving up from a Growth Competitiveness Index ranking of 95 in 2004 to 85 by 2008 (World Economic Forum)

Combating poverty Universal coverage of basic education, increase in secondary school enrollment, and development of a vocational and higher education policy that is aligned with conditions in the country Broader and better health coverage, to include health care for prevalent illnesses, maternal and infant health care, and reproductive health services

1. Reduction of poverty through provision of access for the poorest sectors of the population to new production opportunities and the development of human capital

Program to Strengthen Basic Education Reform (1254/OC)

Multiphase loan

Initial and Preschool Education Program (1467/OC)

PR-L1003: Design and Implementation of a Technical and Vocational Education System

Vocational Training Program (851/OC-PR)

TC: Support for preparations for L1003

Cadastre and Property Registry Program (1448/OC)

World Bank: Secondary education and sector management

Efficiency of expenditure (goals: 2000-2008) Student/teacher ratio:

Spain: Basic adult education, professionalization.

Faculty, university facilities.

EC: Basic distance education OAS, JICA, UN Poverty reduction: GTZ, United Kingdom, World Bank, UNDP

Early education: 20-25 Basic education: 18-25 (1st and 2nd cycles) and 29-30 (3rd cycle) Improve performance on language-arts and mathematics tests in 10% of the schools in the program between 2000 and 2008

Progress toward the MDG of achieving universal primary education by 2015 by expanding coverage from 90% as of 2001 to 95% by 2008 Progress toward the MDGs of reducing the child mortality rate by 2/3 and the maternal mortality rate by 3/4 by 2015, achieving a 10% reduction by 2007 Progress toward the MDG of halving the proportion of people without sustainable access to safe drinking water by 2015 by lowering this percentage from the 2001 figure of 47.5% to 45% by 2008

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Government strategy

Targeted programs to combat poverty; health and education programs in poor rural areas; agrarian reform and support for family farms; jobcreation and income-generation programs for poor sectors, etc.

IDB action IDB strategy In progress

2. Access to quality health and basic sanitation services

Proposed

Primary Health Reform Program (1006/OC)

PR-0143 Asunción Riverside Development Program

Water Supply and Sanitation in Small Communities (1312/OC)

PR -L1006 Neighborhood Improvement Program

Social Protection Program for Paraguay (1520/OC)

TC- Preparations for operation to modernize public transportation in Asunción

Action by other agencies

World Bank, USAID, UN: Mother and child health GTZ, AECI: Basic health services PAHO, WHO

Social Investment Program PROPAIS II (1422/OC)

World Bank: Community development

PROPEF PR-L1002: Support for the execution of PROPAIS II

Water and sanitation: EC, World Bank, JBIC, Korea (KOICA)

TC: Youth, civil society, studies on policies and management of aquifers in Asunción Design of the Social Safety Net (ATN/SF-8167) Inclusion of Youth through Music (ATN/FC-8299) Strengthening the Instituto Nacional del Indígena [National Indigenous Peoples Institute] (ATN/SF-8015)

Monitoring indicators Strategy

Evaluation findings indicate that by 2008: The social safety net has been formed and is in operation Social service and community development models have been implemented that provide better job opportunities for people living in extreme poverty Suitable public policies for the development of indigenous communities have been designed and are being coordinated by the Instituto Nacional del Indígena (INDI) with other public and private institutions

Country

INTRODUCTION This strategy will coincide with a turning point in Paraguay’s history, since the political conditions now in evidence hold out the possibility of reversing the institutional and economic deterioration and the rising poverty levels seen in the country in recent years.

The Bank has an important role to play in Paraguay, and this is reflected in the common thread running throughout the new strategy: the provision of support for steps that the government can take, based on the legitimacy it has acquired and in the context of an enabling environment, to set in motion a sustained growth cycle that will provide relief from poverty and lead to greater equity.

The priority placed on these strategic areas reflects Paraguay’s need to find its way back to an economic growth path in per capita terms, following the significant deterioration in the growth rate seen since 1995. This downturn has had a considerable impact on poverty levels (three fourths of the increase in the poverty rate is accounted for by the country’s low growth rate). State action is vital in order to make any substantial gain in competitiveness and to capitalize upon the economic reactivation that has been sparked by the improvement in external conditions, as well as to ensure that programs aimed at reducing inequality are truly effective.

This country strategy paper sets forth the Bank’s strategy with Paraguay for 2004-2008 and replaces the country paper (document GN-2118-1) approved in October 2000. The preparation of this country strategy paper has been based on an analysis of the relevant factors,* an extensive dialogue with the authorities, and consultations with political parties and the main stakeholders in society at large, as well as with other financial institutions and donors active in the country (see Annex 5).

These consultations were begun at a difficult juncture in the political affairs of the country, following the end of the Administration of González Macchi, who, as President of Congress, had taken office as President of Paraguay after the assassination of the Vice President and the resignation of the country’s elected President. The presidential candidates thus embarked upon the electoral process in the midst of a power vacuum and a deterioration in governance. Fewer than 10% of Paraguayans were satisfied with the state of their democracy (the lowest rating in Latin America), and the level of confidence in the country’s political parties was 7%, according to a Latinobarómetro survey. The Bank met with all the presidential candidates and their economic teams to familiarize them with its activities in the country and to learn about their various governmental platforms. Meetings were also held with a number of business associations and civil society organizations.

Both the party primaries and the general elections in April were transparent and thus gave President Nicanor Duarte Frutos and the elected congressional representatives the necessary legitimacy to build the public’s confidence in the country’s democratic *

The studies and notes prepared in connection with the formulation of the Bank’s country strategy with Paraguay are cited throughout the text, and the corresponding bibliographical information is provided in Annex 4. All the documents listed in that annex can also be accessed at the webpage for the country strategy.

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institutions. The President is a member of the traditional Partido Colorado (the “red party�, or National Republican Association), but his party does not have a majority in Congress. His Administration has, however, managed to put together a legislative agenda based on a consensus with the various political forces in Paraguay. In addition, political representatives have engaged in ongoing consultations with the private sector, and this process is giving private stakeholders an increasing role in decision-making in public policy decision-making.

The Bank held a working meeting with the transition team which was attended by the President-elect and his designated ministers. The chief objective was to exchange ideas regarding the situation in the country and the main challenges facing Paraguay. Later on, based on diagnostic assessments and recommendations developed for use in the country strategy paper, seminars were organized for national officials in the Executive and Legislative Branches, union leaders, analysts, and representatives of various schools of political thought, as well as experts on the subjects being discussed. These seminars focused on possible approaches for meeting the challenges that had been identified and building consensus around the reforms to be undertaken. A large number of Bank personnel working in areas relating to Paraguay were involved in the preparation of the country strategy paper.

This process drew upon the lessons learned from the evaluation of the program with Paraguay (1991-2002) compiled by the Office of Evaluation and Oversight (OVE).

I.

THE ECONOMIC AND SOCIAL CONTEXT

Paraguay has made headway during the past two decades in arriving at long-term decisions that are of vital importance in structuring its integration into the international arena. First, it is returning to the path of democracy. It is still in a transitional phase in this respect, and the consolidation of its democratic institutions is therefore of crucial importance. Second, by joining MERCOSUR Paraguay has voluntarily become party to institutional arrangements and disciplines that are essential to the modernization of its society and economy, while at the same time gaining access to a market far larger than its own.

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However, the lack of positive results on the economic and social fronts since the mid-1990s has prompted the population to question the strategy being used to pursue this long-term vision. The new Administration has acknowledged these concerns in its program and has proposed structural solutions for consolidating the basic pillars of a democratic institutional framework and market economy. government action in this regard, based on the Administration’s legitimacy and growing credibility, together with the currently favorable external environment, could mark a turning point in Paraguay’s economic development process.

A.

Recent trends

1.3

Economic growth. During Figure I-1. GDP trends in Paraguay the period 1997-2002, the 115 15,0% economy grew at an average rate of 0.5%, as compared to 110 an annual average of 3% 10,0% during the first half of the 105 1990s. When measured in 5,0% terms of per capita GDP, this 100 means that the economy 0,0% shrank by 14.6%. Paraguay’s 95 growth pattern was in line with the average trend for -5,0% 90 Latin America as a whole until the early 1990s, but Paraguay Latin America and the Caribbean since then has been diverging Source: World Development Indicators, World Bank. from that trend more and more. The fact that this gap has been steadily widening is due less to a lack of investment, although it has decreased steeply, than to a continuing decline in productivity and a relative lack of improvement in the educational level of the labor force.1

1

2001

1998

1995

1992

1989

1986

1983

1980

Per capita GDP (index: 1980=100)

Real GDP growth Paraguay

1.1

Economic Growth in Paraguay (2002), by Carlos G. Fernández Valdovinos and Alexander Monge Naranjo, mimeo, IDB.

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1.4

1.5

Poverty. Between 1995 and 2001, the percentage of the total population that was below the poverty line rose from 30.3% to 33.8% (see Table I-1).3 The percentage of the population living in extreme poverty climbed from 13.9% to 15.4%, and almost the whole of this increase occurred in rural areas.

Preliminary data suggest that the upward trend in poverty steepened in 2002, with the poverty rate reaching 49% and extreme poverty 25%.

Based on disaggregated figures for this rise in poverty, it is estimated that over three fourths of the total increase occurring between 1995 and 2001 is attributable to the growth effect, with income distribution remaining constant.4,5 Governance. According to the governance indicators developed

by Kaufmann et al.,6 the situation with respect to corruption control, government effectiveness, the rule of law, and political stability in Paraguay was quite serious in 2002. As may be seen from Figure I-2, the situation, which was

Table I-1 Poverty levels, by region, 1995 and 2000/12 (% of total) 1995 2000/1 Poverty (total) 30.3 33.8 Urban 23.7 27.6 Rural 37.2 41.2 Extreme poverty (total) 13.9 15.4 Urban 6.8 7.1 Rural 21.4 25.1 Source: Encuesta Integrada de Hogares (EIH), 2000/01, Dirección General de Estadísticas, Encuestas y Censos (DGEEC).

Figure I-2 Governance indicators 1998 and 2002 Voice and accountability 70 60

LAC

50 Control of corruption

40 30 20

Political stability

PY

10 0

Government efffectiveness

Rule of law

Regulatory quality

2

The data for 2000/2001 were taken from the integrated household survey conducted over the 12-month period starting in September 2000 and ending in August 2001.

3

These measurements are based on a poverty-line method whereby the poor population is defined as those persons whose level of well-being is lower than the cost of a basic shopping basket that meets the minimum requirements for subsistence. Not enough information is available to arrive at internationally comparable measurements, which define the percentage of the population living on less than US$2 per day as poor and those living on less than US$1 per day as extremely poor.

4

Redistribution had a slight effect in the case of the total poverty rate, while, nationwide, the growth effect accounts for over 70% of the increase in extreme poverty. For the Asunción metropolitan area, redistribution has been of even less importance in accounting for the upswing in total poverty, and even in the case of extreme poverty, its contribution in helping to hold these rates down has been slight.

5

M. Robles has undertaken a similar analysis for the period 1995 and 1997-1998. His study demonstrates that the low GDP growth rate for this period was also the main cause of the relative increase in poverty in the Asunción metropolitan area (M. Robles, “Crecimiento, Desigualdad y Pobreza,” November 2000).

6

Governance Matters III: Governance Indicators for 1996-2002 by D. Kaufmann, A. Kraay, and M. Mastruzzi (2003), World Bank Policy Research Working Paper 3106.

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already critical in 1998 (dotted line) in each of these areas as compared to the Latin American average, had grown worse by 2002 (solid line). For Latin America, on average, these indicators are all situated around 50, while for the OECD countries they are about 90. In the specific cases of corruption (4) and government effectiveness (7), there is a substantial gap between the levels of these indicators for Paraguay and for the other countries of the region in both years.

1.6

Macroeconomic stability. The weakness of Paraguay’s economy in 2002 magnified the effects of the regional crisis. The situation was further exacerbated by the political void that had existed previously. The guaraní depreciated by 54%, the financial system had to come to grips with the failure of the country’s third largest bank and the loss of 20% of its dollar-denominated deposits, and the public sector was buffeted by a liquidity crisis that paralyzed it for a time. The country’s debt profile deteriorated. Public-sector debt reached 33.9% of GDP, and the service on the external debt was equivalent to 10.4% of the value of its exports in 2000. The lack of growth and the depreciation of the guaraní drove the debt up to 49% of GDP in 2002, although the external debt service did not rise proportionately (11.6% of the value of exports). Paraguay managed to avert the collapse of its economy, however, and the situation has brightened substantially since then, thanks to the advent of more favorable external conditions, decisive action on the part of the new authorities, and the political support forthcoming from the various parties. In 2003, the economy began to grow again (by 2.6% according to the central bank) as a result of higher soybean and cotton prices and the economic recovery seen in Paraguay’s partners in MERCOSUR. The central government posted a deficit of 0.4% of GDP (consolidated public-sector accounts were balanced), and the tight liquidity situation is being resolved with the help of the stand-by arrangement reached with the International Monetary Fund. As is also true of the currencies of the other countries in the region, the guaraní has appreciated against the dollar (14%). Credit remains tight, however, even though interest rates, after having soared to over 40% in real terms, have been moving downward.

B.

The context

1.7

These trends reflect the difficult situation facing the incoming authorities and the turnabout that is beginning to occur as a result of external factors, the dynamics of the Paraguayan economy, and the action being taken by the government.

Opportunities to turn the Paraguayan economy around exist, but are subject to a series of structural constraints whose modification calls for efforts that will extend far beyond the scope of any single Administration’s agenda.

1. The opportunities

1.8

A reformist policy approach. The chaos and anarchy that erupted following the assassination of the Vice President of Paraguay in March 1999 bore witness to the hazards entailed in the effort to consolidate a democratic form of government in the

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wake of over 50 years of authoritarian regimes.7 Nevertheless, the subsequent reaction to the events in March contributed to the country’s democratization, both in terms of building the initial consensus that emerged in the aftermath of the crisis and in relation to the formation of new political parties and movements. These developments set the stage for the appearance of new leadership styles and for the initiation of a dialogue oriented toward the search for participatory approaches for resolving the country’s most pressing needs. This revitalization has permitted the parties concerned to build a fundamental consensus that is now producing visible results. The possibility of maintaining this interaction constitutes Paraguay’s most valuable opportunity for setting in motion a virtuous cycle of institutional consolidation and economic development.

1.9

Macroeconomic stability. The absence of any sizeable macroeconomic disequilibria opens the way for a consolidation of the economy’s reactivation, which is being driven by the agricultural sector’s strong performance. The liquidity crunch that troubled public finances in 2002 and 2003 is now easing, thanks to increased tax revenues, the renegotiation of the domestic debt, and the support being provided by multilateral institutions within the framework of the IMF arrangement. The tax reforms being advanced by the government and the expected upswing in royalty income from Paraguay’s share in the Itaipú and Yacyretá binational hydroelectric facilities will be used to underpin the country’s fiscal accounts in the medium term, while the financial-sector reforms are designed to create a stable framework for the sector’s reinforcement and for resolving the credit squeeze.

1.10

Positive external shocks. The recovery being made by the MERCOSUR economies, the return of capital flows to the region, and rebounding soybean and cotton prices would appear to be generating a positive external shock that will pave the way for more rapid economic growth in the near future. On the other hand, the steady expansion of the amount of farmland being used to grow soybeans, which is not a labor-intensive crop, could stimulate migration to the cities. The challenge here is to turn these circumstances to advantage in order to lay the foundations for sustained growth.

1.11

A turnaround in reexport activities. As trade liberalization programs within MERCOSUR continue to expand, reexports have been gradually waning. This, in turn, has had a palpably negative impact on commerce.8 This trend can be expected to continue as the MERCOSUR partners harmonize their legislation and macroeconomic policies as they work toward convergence in a common external tariff. Where resources, infrastructure, and a spirit of enterprise exist, a leadership role should be taken in reengineering the commercial activities of the regions that

7

Paraguay returned to a democratic system in 1989 with the election of General Rodríguez as President.

8

In 1995, reexports accounted for 71.2% of total registered exports, but by 2002 the contribution of this variable had declined to 52.7%.

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have been adversely affected (Ciudad del Este, Pedro Juan Caballero, and Encarnación) in order to cushion them from the economic impact of the discontinuation of reexports and to take advantage of the broadened MERCOSUR market.

1.12

The development of social capital. In total, there are around 10,000 civil society organizations (CSOs) in the country. These groups include grassroots organizations, trade unions, neighborhood councils, women’s groups, school volunteers, campesino organizations, indigenous communities, and cooperatives. Almost all of these organizations have been founded after the fall of the dictatorship. Among these CSOs, cooperatives are one of the most common associative models in Paraguay (10% of the population belongs to at least one cooperative). The work of these organizations provides an opportunity to build up social capital, monitor government affairs more closely, build leadership capacity, and deliver services that have significant externalities.

1.13

Opportunities associated with the country’s demographic profile. Paraguay has a high population growth rate (2.3%) and its population is quite young: 26% of the population is under 10 years of age, and 15.4% is between 0 and 5 years of age. The average age is 23, which is one of the lowest in Latin America. This means that a huge number of young people are poised to enter the labor force in the near future, which will create an opportunity to boost production and thus speed up the growth rate. The unique challenge that this poses for the country is to help these new entrants to boost productivity. The avenue for accomplishing this is to ensure that the system provides these young people with an education good enough to enable them to function successfully in the integrated markets that are emerging as part of the globalization process. A failure to take action on this front would, in the best of cases, mean that access would be restricted to low-productivity jobs and, hence, slow economic growth. In the worst-case scenario, existing problems of underemployment and unemployment would grow even worse.

2. Constraints

1.14

9

The country’s landlocked status. Paraguay lacks an outlet to the sea and has a topography that divides the country into two different regions: the eastern portion, which has a plentiful water supply, and the western region, known as the Chaco, which is arid. These characteristics make the construction and maintenance of road infrastructure much more expensive and make the integration of these regions and integration with other countries much more difficult. A recent ECLAC study9 indicates that Paraguay’s transportation costs for foreign trade activities are 43% higher than the average cost for the other South American countries.

“Estudio Preliminar del Transporte de los Productos de Comercio Exterior de los Países sin Litoral de Sudamérica” [Preliminary study on the transportation of exports from landlocked countries in South America], Thomason, Ian, Ricardo Sanchez, and Alberto Bull, March 2003.

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1.15

Corruption, informal-sector activity, and triangulation are critical problems.

The general impression is that corruption abounds and that there is an extensive informal sector and a high degree of what has come to be known as triangulation.

Although these are separate issues, in Paraguay they are clearly interrelated.

Transparency International’s perceived corruption index for 2003 ranks Paraguay as the country with the fourth worst rating for perceived corruption out of a total of 133 countries. At the same time, the informal sector is large and is growing larger.

Whereas the informal sector accounted for 42.5% of the economically active population (EAP) in 1997-1998, in 1999/2000 the figure had risen to 48.1%.10 Meanwhile, the problem of triangulation is fueled by the other two phenomena, since foreign products are reexported with no regard for intellectual property rights and without paying customs duties.

1.16

Paraguay’s business cycle is linked to its neighbors’ cycles. The Paraguayan economy has been integrated with Brazil’s through the agricultural development of the border area and the construction of the Itaipú hydroelectric facility and of a highway that links the two countries. Increasingly, its business cycle is a reflection of events in Brazil and in its other partners in MERCOSUR, which account for half of its total trade flows (53% of its exports and 52% of its imports). This makes Paraguay vulnerable to adverse shocks in those countries. The 1999 devaluation in Brazil and Argentina’s financial crash in 2002 have had a decisive impact on Paraguay’s economic performance in recent years.

1.17

The economy is highly vulnerable to changes in international prices. The structure of the economy—in which the farm sector accounts for 30% of GDP, provides 45% of the jobs, and generates 80% of all exports—is such that variations in agricultural commodity prices have a highly disproportionate effect on the economy. A substantial part of the economy’s stagnation is attributable to the fact that soybean and cotton prices plunged by around 50% between 1995 and 2001, while oil prices climbed (Paraguay is a Table I-2: Composition of exports net oil importer).

1.18

10

Exportable supply is concentrated in agroindustrial products. Paraguay’s external revenues come mainly from energy and agroindustrial products. Its income from energy resources takes the form of royalty payments from the

$ to the world 1 % Agriculture % Foodstuffs % Fuels % Manufactures % Metals

89-92 93-95 96-98 99-01 3.362 2.461 3.198 2.602 38.3 30.2 16.6 14.7 50.8 50.2 67.5 67.8 0.1 0.2 0.2 0.1 10.7 19.2 15.3 17.0 0.1 0.2 0.4 0.4

1.Billions of US dollars.

Source: Paraguay. Nota Técnica sobre Comercio e Integración, IDB, 2003

The findings of an industrial survey conducted by the Dirección General de Estadísticas, Encuestas y Censos [Bureau of Statistics, Surveys and the Census] (DGEEC) in 2001 indicate that there are approximately 15,000 formally-constituted industrial firms in Paraguay and a like number of small, informal enterprises.

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binational hydroelectric facilities,11 while its export earnings come primarily from agroindustrial products (mainly soybeans and soy products). Paraguay exhibits very little dynamism in the production of nonagroindustrial exports. It therefore needs to make an effort to maintain and improve the competitiveness of firms in these sectors in order to promote products in key markets and, above all, to improve the quality of these products and meet higher sanitation standards.

1.19

The economy’s level of competitiveness is low. According to the 2003-2004 Global Competitiveness Report of the World Economic Forum, Paraguay was ranked 95th out of 102 countries on the Growth Competitiveness Index (GCI) and 91st out of 95 countries on the Business Competitiveness Index (BCI). In terms of the quality of its public institutions, it ranked above just two countries, and its total factor productivity has been dwindling at an average annual rate of 1% over the past decade, which means that it has been steadily losing competitiveness.

1.20

Income distribution is highly unequal in Paraguay. The country’s Gini coefficient is 0.576, according to the 2001/2002 household survey. This measurement needs to be disaggregated, however, because income inequality in Asunción is relatively low (a Gini coefficient of 0.499), but is considerably higher in rural areas (0.582). In all, the poorest 40% of the population receives about 10% of total income in the country, while the wealthiest 10% obtains 42.3% of the total. Per capita income is, overall, half as much in rural areas as it is in urban areas.

This gap is generally in line with the situation in other Latin American countries with a similar distribution of income. However, although the size of this differential remains constant for the higher-income deciles, in the case of the lowest deciles the difference in personal income comes to nearly one third.

1.21

The skill level of Paraguay’s human capital hinders the absorption of new technologies. Figure I-3 shows the percentages of the population that have no formal education and that have a primary, secondary, and higher education. Only 35% of Paraguay’s population has more than a primary education. According to ECLAC (1999), only 9% of the labor force has technical skills, and only 7.6% possesses professional qualifications. These shortcomings are exacerbated by the absence of a system for certifying technical skills, which would permit the labor market to function more effectively. The low level of training possessed by the population interferes with people’s ability to assimilate new technologies and organizational models, diminishes the mobility of labor and, as a result, dampens productivity.12

11

Royalties from Itaipú and Yacyretá amounted to US$233 million in 2002 and US$255 million in 2003, which was the equivalent of 24.5% and 20.5% of the value of registered exports, respectively. Once two new turbines with a capacity of 14,000 MW come on line at Itaipú, royalty proceeds are expected to rise.

12

See “Closing the Gap in Education and Technology,” by David De Ferranti. World Bank Latin American and Caribbean Series, (2003).

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FIGURE I-3: STOCK OF HUMAN CAPITAL (In percent) United States

Taiwan Thailand

Latin America high stock

Peru Argentina Panama Chile Uruguay

Latin America intermediate stock

Jamaica

Mexico Bolivia Ecuador Costa Rica Venezuela Colombia Brazil

Latin America low stock

Dominican Republic El Salvador Paraguay Nicaragua Honduras Guatemala

0

10

20

30

40

50

60

70

80

90

100

Population No Schooling

Primary Education

Secondary Education

Source: “Competitiveness: The Business of Growth. Economic and Social Progress in Latin America, 2001 Report”, IDB.

C.

The government’s program

1.22

The new Administration’s aims, as set forth in its program, are to foster a new sustainable development model and lead the way toward the reform and modernization of public administration. The new development model it is proposing is based on the concept of a socially, fiscally, and environmentally responsible market economy. The program’s supporting pillars are: the restoration of clear, predictable rules emanating from the State and the modernization of government administration; environmentally-friendly agricultural and agroindustrial production; increased exports, with emphasis on diversification and an increase in value added; empowerment of the different productive regions; increased investment in physical and human capital, especially in the area of road infrastructure; and the use of energy as an engine of private investment.

1.23

The reform and modernization of public administration is aimed at building a strong, socially aware State and an efficient, policy-neutral, transparent, participatory government that is committed to improving the people’s quality of life. The idea is to restore the confidence of economic stakeholders by enforcing the law, implementing clear, simple rules, producing visible administrative outputs and mounting coordinated programs focusing on specific goals.

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1.24

The government has set itself four strategic objectives: (i) restoring trust in the institutions of the State and its representatives; (ii) promoting active citizen participation in building democratic institutions; (iii) reactivating the economy and creating jobs within the framework of a sustainable development model; and (iv) combating poverty, corruption, and the lack of public safety.

Box I-1 Government of Paraguay Main program components • • • • • •

Modernization of public administration; Reliable, predictable economic environment for investment; Sustainable economic growth; A revolution in education to improve human capital; Prioritization of health care; Advancement of public works and housing construction; Utilization of energy potential; Environmental protection; External outreach and a new approach to international relations; Development of new nexuses between the government and society; The human rights agenda; Efforts to combat poverty and social exclusion; Efforts to combat corruption.

1.25

In order to attain these strategic • objectives, 14 main program • components have been defined, each • of which falls into one of two categories: (i) the first nine • components address the first two • program objectives, which focus on • restoring public confidence and • reactivating the economy; and (ii) the other five focus on the next two program objectives, which relate to citizen participation and the effort to combat poverty, corruption, and the lack of public safety.

1.26

The Administration has initially focused its efforts on dealing with the liquidity squeeze affecting the central government and on providing a stable macroeconomic framework. To this end, it has built the necessary alliances and agreements to underpin the work of attaining these objectives. The most notable initiatives in this regard are the political agreement reached with the major parties, the arrangement made with the private sector to back the Fiscal Organization and Adjustment Act, and the country’s agreement with the IMF.

D.

Medium-term economic prospects

1.27

The IMF program. For the first time since 1957, in December 2003 the government signed a 15-month stand-by arrangement with the IMF. The agreement is based on the government’s program. Its main objectives are to stabilize the country’s fiscal accounts and its financial system, provide the necessary framework for launching the reform process, restore the government’s credibility, and engender the necessary confidence among economic stakeholders. On the fiscal front, the aim is to eliminate the fiscal shortfall, pay up arrears, ensure the sustainability of the debt, and set the stage for increased investment and a more active social policy. The administrative measures provided for in the agreement are expected to improve the fiscal balance by the equivalent of 1.5% of GDP, while the

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planned legislative measures should contribute between 2% and 2.5% of GDP, which would mean that the country ought to be able to post a fiscal surplus amounting to 0.3% of GDP in 2004. In the realm of monetary policy, the objective is to keep inflation under control with a floating exchange rate, enhance the central bank’s ability to guide monetary policy, and ensure the financial system’s stability, which will entail reforming the public-sector banking system and improving its regulation and supervision.

1.28

The medium-term outlook. The IMF projections on which the agreement was based are predicated on the implementation of the government program. Economic growth is expected to rebound and then level off at an annual rate of 3.4% within a context of single-digit inflation (6%), assuming a stable real effective exchange rate. The fiscal balance (consolidated public sector) will trend toward equilibrium (a surplus of 0.3%). This will set the stage, in the long run, for a primary surplus of about 2.3% of GDP, which would be enough not only to service the debt, but also to reduce it to 35.7% of GDP by 2008. In the course of this period of time, Paraguay is expected to balance its current account and to gradually build up its international reserves to US$1.162 billion by 2008. (see Table I-3).

GDP Consumer prices Nominal GDP (US$ millions) Revenues Tax revenues Corporate surplus Primary current expenditure Interest payments Investment Primary balance General balance Public-sector debt Public-sector debt balance (US$ millions) Exports Imports Current account Capital account International reserves Source: IMF.

Table I-3 Medium-term Prospects 1999 2000 2001 2002e 2003p 2004p Production Sector (Annual growth, percentages) 0.5 -0.4 2.7 -2.3 2.0 2.4 5.4 8.6 8.4 14.6 8.8 6.0 7,756 7,734 6,858 5,633 5,741 6,116 Public Finances (% of GDP) 21.1 20.1 21.3 19.3 19.6 20.4 9.9 10.0 10.2 9.2 9.9 10.8 5.2 2.7 2.5 1.4 1.1 1.7 16.9 18.3 17.7 16.1 14.8 14.3 1.3 1.5 1.7 1.9 1.9 1.9 11.2 7.0 5.1 5.9 4.8 5.5 -1.8 -2.6 1.0 -1.3 1.2 2.2 -3,1 -4,0 -0,7 -3,2 -0,6 0,3 31.9 33.9 38.4 49.7 49.1 45.8 2,478 2,618 2,630 2,801 2,818 2,798

2,307 2,750 -165 509 988

Balance of payments (millions of US$) 2,322 1,876 1,878 2,102 2,111 2,864 2,495 2,159 2,339 2,398 -163 -278 92 83 26 157 152 5 -232 116 772 723 641 818 855

2005p

2006p

2007p

2008p

3.2 6.0 6,461

3.4 6.0 6,818

3.4 6.0 7,178

3.4 6.0 7,554

21.5 11.9 1.7 14.3 2.1 6.2 2.7 0,6 42.7 2,760

21.4 11.9 1.8 14.3 2.0 6.5 2.3 0,3 40.2 2,739

21.2 11.9 1.9 14.3 2.0 6.5 2.3 0,3 37.8 2,717

21.1 11.9 2.0 14.3 2.0 6.5 2.2 0,3 35.7 2,697

2,212 2,551 16 20 892

2,334 2,693 9 41 942

2,462 2,842 -5 73 1,009

2,586 3,000 -31 114 1,092

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II. THE MAIN DEVELOPMENT CHALLENGES 2.1

The main challenges that Paraguay must overcome in order to attain sustainable economic growth and reduce poverty refer to three specific areas: •

Restoring the credibility of State institutions so that the State can lead the way toward economic development and support the consolidation of democratic institutions: the challenge of governance.

•

Laying the foundations for sustainable economic growth based on the market economy: the challenge of competitiveness.

•

Reducing poverty and inequality: the challenge of human development.

A.

Restoring the credibility of State institutions so that the State can lead the way towards economic development and support the consolidation of democratic institutions: the challenge of governance13

2.2

Paraguay is a relatively young democracy; its institutional structure is weak and needs to be strengthened to permit the defense of basic rights and the further development of a market economy. When the preceding Administration left office, the country’s population had little confidence in State institutions, and there was little support for democracy as a system of government. The indices of perceived corruption and weakness in the judicial system made it difficult for the rule of law to prevail. This translated into an unsuitable business climate for foreign investment or large-scale investment projects. This situation was compounded by significant shortcomings in infrastructure and basic services, the large size of the informal sector of the economy, and the fact that civil society was, on the whole, uninvolved in public policy debates and oversight. All of this undermined the competitiveness of businesses. What is more, the public sector was being poorly managed, and this led to unsatisfactory budget execution, low rates of public utility coverage, rentseeking, and significant market distortions.

2.3

The new Administration that has taken office in Paraguay will have to grapple with serious failings in virtually all dimensions of State activity and operations. The challenges it faces can be grouped into five main areas of State operations based on the institutional and political factors that lie at the root of these problems: (i) fiscal

13

The contents of this section summarize the diagnostic assessment presented in the briefing paper on governance that was prepared as an input for this country strategy. This paper included the findings of the technical papers that were prepared on fiscal sustainability, budget, civil service, and the political/institutional situation. The institutional assessment of the Republic of Paraguay, prepared by UNDP and the International Governance Institute, provides a detailed description of existing institutional weaknesses.

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sustainability; (ii) political/institutional governance of the country (democratic governance); (iii) upholding of the rule of law; (iv) the relationship among the State, the market, and civil society; and (v) the quality, effectiveness, and efficiency of government policy, organizations, and operations. a. Ensuring fiscal sustainability 2.4

The administrative measures adopted by the government have had an impact on tax revenues. In the last five months of 2003, revenues were up by 40%, thereby enabling the central government to post a 0.2% fiscal surplus for the year. Having restored fiscal equilibrium in the short run, and with the outlook for 2004 having been defined by both the budget and the targets agreed upon with the IMF, a surplus equivalent to 0.3% of GDP is expected for 2004.

2.5

The main challenge is to keep fiscal accounts balanced over the medium term. In order to accomplish this, action needs to be taken in the following areas: (i) implementing a new tax structure, improving tax administration, and reducing tax evasion; (ii) rationalizing expenditure and contingent liabilities, which will mainly entail reforming the civil service pension system; (iii) generating sufficient revenues to lower the country’s debt and permit implementation of a social policy that will reduce poverty and inequality; and (iv) coping with the fiscal implications of trade liberalization, given the State’s strong reliance on tariffs as a source of fiscal revenue. b. Democratic governance: Promoting mechanisms for consensusbuilding by the Legislative and Executive Branches and for coordinating their working agendas

2.6

One of the main obstacles hindering the Paraguayan government’s efforts to move forward with reforms that will enable it to meet the development challenges facing the country has been the difficulty of arriving at a consensus among the different branches of government regarding policies, agendas, and program priorities. Hence, the absence of consensus-building and partnering mechanisms has blocked the progress of the country’s structural reform agenda. As part of the changeover in the Executive and Legislative Branches occurring in the wake of the April 2003 elections, the Administration that took office in August 2003 signed an agreement with legislative authorities and leaders of the political parties with seats in Congress to carry forward an interagency agenda consisting of major reforms in the State banking system, the social security system, the civil service, and the tax system, together with reforms to increase the sustainability of fiscal accounts The challenge here is to consolidate this new framework for consensus-building.

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c. Strengthening the rule of law and the administration of justice 2.7

Despite the efforts made in terms of the design of the State’s institutional structure (separation of powers) via the Constitutional reform of 1992, various shortcomings remain in terms of the separation of the different branches of government and the system of checks and balances. Although changes have been made in order to provide the Judicial Branch with greater political and financial autonomy, in Paraguay the rule of law continues to be influenced and, at times, co-opted by groups within the political and economic elite. Government corruption, a lack of transparency and of societal oversight of public affairs, and the high transaction costs existing in the private sector are the clearest signs of the weakness of the rule of law in Paraguay.

2.8

From an organizational perspective focusing on the institutional capabilities of the justice system, a series of shortcomings exist in terms of the professionalization of personnel in the Judicial Branch and in the development of technological capabilities and infrastructure. In consequence, opinion polls show that the Paraguayan public has little confidence in the justice system. Steps therefore need to be taken to continue supporting efforts to create a reliable, independent, effective, predictable, efficient legal system that is accessible for all Paraguayan citizens.14 d. Strengthening the relationship among the State, the market, and civil society

2.9

The challenge taken up by Paraguay in 1989, with the restoration of democracy, remains. This challenge concerns the creation of the basic economic institutions needed to foster entrepreneurship, promote international investment, integrate a stronger Paraguayan market into MERCOSUR and the global economy, and devise mechanisms for social consensus-building as a basis for the design of public policies to boost growth and competitiveness.

2.10

In order to meet a challenge of this magnitude, the struggle against corruption being waged by the new Administration must continue, substantial improvements in the State’s institutional capacity will be needed, and steps must be taken to enforce the existing regulations that provide a stable environment for investment. The development of the business sector can be successful only if the State removes the obstacles standing in its way and firmly supports the development of a market economy and the participation of civil society in public policy discussions and

14

According to Latinobarómetro, in 2003 only 20% of the Paraguayan population (along with the figure for Argentina, the lowest percentage in the region) believes that “the judicial system punishes the guilty, no matter who they are”. Furthermore, fewer than 5% of Paraguayans think that their peers and the rest of the citizenry obey the law, and fewer than 20% trust the judiciary as an institution (the lowest percentage in the region).

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oversight.15 The administration of government affairs also has to be transparent. To this end, channels for conveying public opinion regarding the definition, implementation, and assessment of public policies have to be strengthened. The participation of civil society in this sphere should also, however, be expanded to encompass the analysis of national issues, the definition and formulation of public policy, and the monitoring of its implementation. The government, for its part, needs to increase the transparency of its actions by providing the public with greater access to the relevant information, as well as setting up an institutional process for ensuring accountability in all areas of government affairs. These measures will lay the groundwork for a participatory democracy and the development of sound political governance. e. Enhance the quality and efficiency of public administration 2.11

The structural lack of institutional capacity for the design and implementation of public policy involves more than simply the administrative efficiency of the State.

The combination of a lack of technology and transparency results in high degrees of discretionality, instability, and inefficiency in administrative processes. This situation leads the public to conclude that the State hampers growth rather than promoting it. The main challenges to be dealt with in this connection are: (i) to improve the management of fiscal resources and the social security system; (ii) to strengthen budgetary management; (iii) to backstop measures designed to strengthen the civil service; (iv) to increase the efficiency of public spending, especially expenditure on social service delivery and the promotion of production; (v) to implement the government procurement system; and (vi) to promote the use of e-government as a channel for social oversight.

B.

Laying the foundations for sustainable economic growth based on the market economy: the challenge of competitiveness.16

2.12

Based on the Paraguayan economy’s structural characteristics, five crucial areas can be identified in which obstacles hinder Paraguayan firms from improving their performance and generating a sustainable economic growth process. The following measures are called for in order to overcome these barriers: (i) build up the necessary institutional capacity to safeguard the operation of the market and participation in it; (ii) strengthen the financial system; (iii) upgrade infrastructure; (iv) enhance the country’s international profile; and (v) turn economic development into an environmentally sustainable process.

15

Support for fundamental components of the market economy are discussed in the section on support for competitiveness.

16

The contents of this section summarize the diagnostic assessment presented in the briefing papers on competitiveness and on trade and integration that were prepared as inputs for this country strategy. The first of these papers includes the findings of the technical papers prepared on the financial sector, transportation, the farm sector, regional development, and education.

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a. Improving the business climate 2.13

The first step in increasing Paraguay’s competitiveness is to remedy the flaws that exist in its investment climate. Both the private sector and the current Administration have characterized this weakness as a problem of the first order in terms of the country’s competitiveness. The challenge of governance deals with issues relating to the rule of law, the ground rules and the need to build capacity to streamline administrative processes and public-agency enforcement capacity. This section deals with the specific types of measures that are needed.

2.14

Supporting small and medium-sized enterprises.17 Small and medium-sized enterprises (SMEs) have received some degree of support from macroeconomic policies that help foster competitiveness under adverse circumstances. The establishment of maquilas, regulations that promote cleaner production methods, quality programs, and multi-level training programs have yielded positive results.

Now those results need to be built upon in order to address the wide range of needs that exist in terms of institutional improvements for SMEs. These enterprises play a vital role in the domestic market because of their productive and job-creation potential and their ability to serve as a vehicle for an expansion of the formal sector of the economy. Another part of this challenge is to backstop SME exporters by bolstering their ability to have a say in international trade negotiations. This can be done by encouraging the formation of linkages, networks, and partnerships through which they can heighten their competitiveness and capitalize upon opportunities to gain access to international markets.

2.15

Assisting firms to incorporate technology. The globalization process has clearly generated a greater demand for technological advances in countries involved in international trade. Firms have to be competitive in order to participate in the market, and the main way for them to do this is by using technology to make existing resources more productive. Paraguay can build on its existing institutional structure. The Consejo Nacional de Ciencia y Tecnología [National Council on Science and Technology] (CONACYT) can serve as a platform for the development of a policy on technology that addresses the country’s needs.

2.16

Upgrading the exportable supply to conform to regional and world demand.

The export base can be expanded and diversified in terms of both the available supply and destination markets so long as improvements in exportable supply are supported and geared toward satisfying regional and world demand. This entails meeting the quality standards demanded by the international market and having the necessary technical and health certification (for plant and animal products) to secure a lasting position in new markets. In the case of health and sanitation

17

The importance of SMEs is obvious. For example, 99% of Paraguay’s industrial sector, which accounts for 14% of GDP and employs 13% of the EAP, is made up of microenterprises and small and medium-sized businesses.

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services, the country lacks the type of modern legal and institutional framework needed to achieve a comprehensive and efficient reduction in the risk of exotic pests and diseases entering the country, ensure an efficient, prompt assessment of sanitary conditions, or control and eradicate existing pests and diseases. The absence of a technically and financially autonomous agency of this sort has resulted in the entry of devastating pests and diseases, such as the boll weevil invasion of 1992, or the periodic outbreaks of hoof-and-mouth disease seen in the country. The economic costs of these epidemics have been quite high, since they have had a direct impact on the competitiveness of Paraguay’s principal export products, as well as triggering disputes with neighboring countries and tarnishing the country’s image as a reliable supplier of quality agricultural products.

2.17

Strengthening the business sector’s leadership role in economic development.

Most firms in Paraguay cater to the domestic market and especially its services sector. This situation reflects the lack of an international orientation on the part of Paraguayan entrepreneurs and the weakness of their position in terms of the promotion of a better investment climate that would permit market expansion. The challenge here is to turn the business sector into a dynamic partner that will drive the development process forward. To this end, trade unions will need to be strengthened, and opportunities should be created for greater collaboration and consensus-building between the public and private sectors.

2.18

Improving the quality of education as a means of boosting productivity. The relationship between increased education and higher productivity is well established.18 The challenge is to build upon the great strides made in primary education during the 1990s by increasing the coverage and quality of secondary and higher education. At the secondary level, even though enrollment has risen by an annual rate of 11% over the last 11 years, the net enrollment rate is still low (31%). The main tasks at this level are: (i) to expand coverage, especially in rural areas; (ii) to improve teaching quality; (iii) to create secondary educational opportunities that can be attended on a part-time basis by young people who work in urban areas and by rural youths in remote areas where no schools exist; and (iv) to design new initial and on-the-job teacher training systems.

2.19

The coverage of higher education (universities, teacher training institutions, advanced vocational education) is less than 20% and is of poor quality.19 The private sector has helped to expand the educational opportunities at the university level, and between 1990 and 2000, university enrollment jumped from 25,989 to

18

See, for example, part III of “Competitiveness: The Business of Growth.” Report on Economic and Social Progress in Latin America, 2001, IDB.

19

On the importance of higher education, see the World Bank report, “Constructing Knowledge Societies: New Challenges for Tertiary Education.”

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59,836.20 The tasks to be done in this connection focus on: (i) creating and implementing an evaluation and accreditation system for universities that will uphold certain basic standards of educational quality and inform the public about the findings; (ii) linking the system of higher education with the rest of the educational system; (iii) promoting the establishment of a special fund for scientific and technological research; and (iv) designing new ways of financing public universities and creating an educational loan mechanism to assist low-income students.21 2.20

The existing system focuses more on vocational training than on the development of skills that will produce workers who are capable of performing effectively in a variety of areas and who are competent in problem-solving, decision-making, and teamwork. One of the main aims of Paraguay’s educational reforms is therefore to devise a policy that will galvanize and overhaul technical and vocational instruction. b. Strengthening the financial system

2.21

In recent years the banking system22 has been quite vulnerable, in large measure due to the country’s slow economic growth and, since 1995, to three banking crises during which 15 banks and 11 other financial institutions failed. In consequence, (i) a series of administrations have taken steps to put the financial system on a more solid footing and tighten up its supervision, and (ii) private financial institutions in the country have become so much less active in inland areas that, in practice, the public banking system has come to be the only major player in the rural sector.

2.22

The financial system suffers from a number of structural problems that dull its competitiveness. These problems fall into three categories: (i) issues relating to the general workings of the sector, ranging from the need to ensure the central bank’s autonomy, improve the authorities’ monetary policy tools, and tighten up the regulation and supervision of the banking system, to dealing with the effects of the country’s highly dollarized system on deposits and lending activity; (ii) the traits and performance of the public-sector banking system; and (iii) the regulation and supervision of savings and loan cooperatives.

20

Rivarola, M. (June 2002): “Informe Nacional sobre Educación Superior en Paraguay” (National report on higher education in Paraguay). Asunción. CREASAL/UNESCO; op cit.: CONEC. (2002): “Estrategias de transformación de la educación superior” (Strategies for transforming higher education). Asunción; CONEC (Consejo Nacional de Educación y Cultura), page 20.

21

The capacity of teacher training institutes has been growing rapidly, and there is now an oversupply for teachers at the basic education level. Very few offer training for teachers at the early education and secondary levels, however. The problems faced by technical institutes providing instruction for teachers in higher education (5 public and 9 private institutions) are similar.

22

Paraguay’s financial system is composed of 40 private, formally constituted institutions (18 banks and 22 other finance companies), 8 public institutions, and nearly 250 savings and loan cooperatives.

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c. Upgrading the country’s infrastructure 2.23

For Paraguay, given its position as a small, landlocked economy that is far away from world consumption centers and that exports natural-resource-based products, the availability, quality, and cost of infrastructure is a highly important factor in overcoming its disadvantages in relation to other countries of the region and boosting its competitiveness.

2.24

Improving the road network and its maintenance. Paraguay’s transportation infrastructure, which is almost completely publicly-owned, is generally poor.23 It stands in serious need of integration, both internally and externally, and road maintenance is insufficient. In addition, the institutional structures of the public agencies that bear the main responsibility for these areas are very weak.

2.25

Creating suitable frameworks for attracting private-sector participation to complement public investment. Given its unstable institutional and economic conditions, Paraguay has not managed to achieve continuity in its policies and measures aimed at attracting private operators and investors in key sectors. Because of its situation as a landlocked country, the highway network and the availability of efficient ports and river transportation along the Paraná-Paraguay river corridor is extremely important.24 Port infrastructure needs to be developed to permit the efficient handling of containers and to hold down port costs, as well as to keep dredging operations functioning properly so that ports are consistently of a sufficient depth.25 Another crucial task is the modernization of the Silvio Pettirossi International Airport. This is the primary port of entry and departure from the country for international passengers, and its present level of service and maintenance are unsatisfactory.

2.26

Expanding electricity and telecommunications services and ICTs. Paraguay has an ample supply of electrical energy and does not need to made additional investments to expand its generation capacity. It should capitalize upon this situation to increase coverage and efficiency in the delivery of this service and to ensure its financial sustainability. It is also vital for Paraguay to take advantage of the low cost of technology and the private sector’s willingness to provide telecommunications infrastructure and ICT in order to help its telecommunications

23

In 2001 the country had 15,100 km of roadways, of which 23% were paved and approximately 43% were in good condition.

24

The technical, economic, and environmental viability of the Paraná-Paraguay waterway between Puerto Cáceres in Brazil (3,442 km upriver from Buenos Aires) and Nueva Palmira, in Uruguay, is under study.

25

The feasibility of converting the Port of Asunción to serve as the site of a large-scale commercial, cultural, and tourism project is currently being studied. The idea would be to transfer port activities, which mainly involve container traffic, to another port to the south of Asunción. In the short run, this port would be Villeta, but in the longer run, use would be made of a deep-water port further to the south.

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and ICT sectors catch up and to boost competitiveness, mitigating the costs associated with the country’s landlocked status. d. Improving the country’s international profile 2.27

Making an aggressive effort to seek out new markets. The small size of Paraguay’s domestic market is one of the obstacles hindering the development of its production sector. Access to international markets is essential for the achievement of greater economic growth. Given the export structure and geographic pattern of Paraguay’s trade activity, access to MERCOSUR is of particular importance for its development. Even more importantly, Paraguay’s membership in MERCOSUR and its relations with other countries on the basis of international agreements act as a stimulus for the consolidation of governance in Paraguay by providing a gateway to a set of consensus-based rules founded upon such principles as respect for the law, contract performance, and the availability of specific dispute settlement mechanisms.

2.28

During the 1990s, MERCOSUR consolidated its position as the principal destination for Paraguay’s exports, accounting for 37% of the total at the start of the decade and 53% by its end. MERCOSUR gained in importance as an export destination by virtue of a sizeable reduction in the proportion of exports going to the European Community, whose share shrank from 30% at the start of the 1990s to 19%. MERCOSUR’s imports also rose (from 33% to 52%), while the shares of all other sources declined. Paraguay needs to expand its foreign trade activity with countries other than those belonging to MERCOSUR.

2.29

Improving the country’s bargaining power in order to strengthen its position in the international economy. Access to international markets is being negotiated with Paraguay’s partners in MERCOSUR in various regional and multilateral forums (MERCOSUR, the Andean Community, FTAA, the European Union, WTO, etc.). Paraguay needs to identify and promote its interests, particularly in the agricultural sector, and to take the necessary steps to raise the quality of its exportable supply and implement second-generation trade disciplines.

2.30

Reaping the benefits of open access to MERCOSUR. MERCOSUR’s shortcomings stemming from intraregional trade restrictions generate costs and prevent Paraguayan producers and exporters from taking full advantage of the benefits of regional integration. Paraguay’s marked interdependence with its regional partners magnifies the contagion of macroeconomic instability within the subregion, as occurred in the case of Brazil’s and Argentina’s recent devaluations.

In addition, since Paraguay is a less developed, landlocked country, it stands to benefit the most from regional initiatives for promoting the development of infrastructure and from mechanisms designed to offset the asymmetries that invariably arise in regional integration processes. The recent changeover of Administrations in three of the four countries in this integration bloc have created a

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favorable setting for the reformulation of an integration strategy that would meet Paraguay’s needs. The country should seize this opportunity to participate fully in the work of defining MERCOSUR’s strategic objectives and to implement domestic policies that will magnify the benefits of its integration in this region’s economy. e. Achieving an environmentally sustainable form of economic development 2.31

Since its economy relies on natural resources (especially land), Paraguay needs to use those resources appropriately if it is to achieve sustainable growth rates over the long run. Yet the environmental costs of three decades of development efforts based on an expansion of the agricultural frontier have been significant. Erosion, deforestation, and the indiscriminate use of agricultural chemicals are already impairing the country’s ability to generate wealth and its population’s quality of life, particularly in rural areas. The steps to be taken in order to ease the pressure on the country’s natural resources are: (i) elimination of misguided incentives for intensive agricultural production; (ii) issuance of clear title to land holdings; and (iii) strengthening the institutional and legal framework for sound environmental management.

C.

Reducing poverty and inequality: The challenge of promoting human development.26

2.32

In order to reduce poverty, the country needs to achieve a sustainable form of economic growth. If GDP growth rates remain as low as there were between 1995 and 2001, 18% of the total population will be living in extreme poverty in 2015, rather than the target figure of 7% that would signal the achievement of the corresponding Millennium Development Goal.27 The effort required to achieve the necessary economic growth rate to attain the Millennium Development Goal for the reduction of extreme poverty may be considerable unless there is a concurrent reduction in the inequality of income distribution. If the existing distribution remains unchanged, it is estimated that Paraguay will have to post an average annual growth rate in household income of 3.2% in order to reach that target.

26

This section summarizes the diagnostic analysis presented in “Retos en la Lucha Contra la Pobreza” (Challenges in combating poverty), which was drafted in the course of the country strategy’s formulation. It also includes the assessments presented in the papers on social safety nets, education, and health.

27

The Millennium Development Goals take 1990 as their baseline, but 1995 is used as the point of reference here because the coverage of Paraguay’s household surveys was confined to Asunción until 1994.

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Box II.1 Progress toward attainment of the Millennium Development Goals Goals and indicators Eradicate extreme poverty and hunger • Halving extreme poverty • Halving under-five child malnutrition Achieve universal primary education • Achieve universal primary education • Ensure scholastic survival rate up to grade 5 Gender equity and empowerment of women • Equality in education (female/male ratio) • Economic and political participation (% of labor force) Reduce child mortality rate • Reduce the under-five mortality rate by two thirds (per 1,000 live births) Improve maternal health • Reduce the maternal mortality rate by three quarters (per 100,000 live births) Combat HIV/AIDS, malaria, and other diseases • Reverse the spread of AIDS • Reverse the incidence of other diseases (tuberculosis per 100,000) Ensure environmental sustainability • Reverse deforestation (% with forests) • Halve the proportion of people lacking access to safe drinking water • Halve the proportion of people lacking access to basic sanitation Notes:

Sources:

2.33

Likelihood of achieving target, World Bank

Likelihood of achieving goal, UNDP2

Unlikely Possible

Unlikely

Likely On track

Potentially likely

Improved

Potentially likely

1990

2001

Goal for 20153

13.9%* 3.7%

15.6% 4.6%

7.0% 1.9%

93.0% 70.0%

90.0% 78.3%

100% 100%

0.95 41.7%*

0.96 42.0%

1.0 50%

40.0

25.0

13.3

Unlikely

Potentially likely

150.1

159.7

37.5

Off track but possible

Unlikely

n.d.

51.4

n.d 35.2

n.d.

35.2

n.d.

Possible

Potentially likely

74.6%** 92.8%

7% (1997) 47.5% 91.2%

37.3% 46.4%

Highly unlikely Likely Unlikely

Unlikely

3

3

*1995 **1992 The scarcity of information for the base year (1990) makes it difficult to set targets for 2015 and to arrive at an objective evaluation of the country’s performance.

The reliability of these data is questionable due to problems of underreporting and availability.

1 and 3: World Bank, “Country Assistance Strategy,” Report No. 27341-PA, 26 November 2003.

2: “Objetivos de desarrollo del milenio: Informe de Paraguay,” United Nations, Asunción, 2003.

In order to enhance the benefits of economic growth, income distribution will have to improve. Actions called for in this area include measures for providing greater access to a quality education, the expansion of the formal sector in the labor and land markets, and improved access to health care, public services, and social safety nets. In addition, gender mainstreaming in public policies will make it possible to increase the equity and coverage of basic social services. a. Improving the educational level of the poorest segments of the population

2.34

Increasing the years of schooling completed by members of the population and improving the quality of education constitute a formidable task whose successful completion is essential for the reduction of poverty. In Paraguay it is estimated that completion of elementary school raises a person’s income by between 12% and 45% and completion of secondary school raises it by between 25% and 70%

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compared with people without schooling. The educational system continues to face a variety of challenges, however. Only 43% of children enrolling in first grade graduate in six years, without repeating a grade, and only 70% of them eventually graduate. Repeater rates in the first two grades (14.6% in rural areas and 12.3% in urban areas) are particularly worrisome. On average, it takes nine years for a child to graduate from sixth grade. As a result, the rate of transition to the third basic education cycle (grades 7-9) and to secondary education is low. The educational reform process that has been launched in Paraguay needs to be consolidated in order to boost the efficiency of resource use, improve its outcomes, and increase the level of equity attained by the Paraguayan educational system. b. Formalizing the labor and land markets 2.35

The labor market. High unemployment and underemployment and the informal nature of the urban labor market hinder the entry of the poorer sectors of the population, and especially of poor women. The labor market is subject to regulations and levies that distort it and curtail firms’ competitiveness. Despite its low labor productivity, for years Paraguay’s minimum wage was the highest in MERCOSUR, and the minimum wage/average wage ratio stands above 60, as opposed to slightly more than 20 in Argentina and Brazil and around 50 in the OECD countries. Although Paraguay’s labor market includes a large informal sector in which labor regulations do not exert a direct influence, they do have an indirect effect because they are conducive to the formation of a highly distortionary dual labor market and because of the “lighthouse effect” that the minimum wage has on pay levels in the informal sector.28

2.36

The land market. Some poor people do have land, but in general the situation in terms of the title to that property is unclear. This is especially the case in rural areas.

In striking contrast to the general belief that the lack of land ownership is a synonym of poverty, rural households that have between 2 and 20 hectares (45% of the total) make up 76% of the poor population and 71% of the population living in extreme poverty.29 A solution for this lack of clearly defined property rights would provide many poor families with immediate access to the benefits of the market.

The poorer segments of the Paraguayan population’s lack of clear title to their land can be rectified by means of concurrent State action in four areas: (i) the elimination of barriers to property registration services; (ii) an increase in the legal certainty of land deeds; (iii) the phasing out of the State’s role in administering colonial settlements; and (iv) the legalization of title to land holdings. The issue of gender equity should be incorporated into all these initiatives.

28

Competitiveness: The Business of Growth, IDB, 2001.

29

The problem in the housing sector is quite similar. The percentage of the poorest 40% of households that have a dwelling of their own is higher than the national average (80%), though three out of every five do not hold title to their property.

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c. Improving access to health care 2.37

An estimated 30% of the population does not have regular access to any sort of health care, whether because health-care centers are far away, because people lack the necessary financial resources, or because of other access barriers. One of the main challenges facing the health-care system is to expand its coverage, especially in the area of maternal and child health care, which is the most extensive public health problem in the country. The country’s high infant and maternal mortality rates are attributable to factors that could be reduced by proven, cost-effective measures. d. Improving access to basic services

2.38

Coverage indicators for such services as drinking water, electricity, telephony, and solid waste collection were improving during the second half of the 1990s. This progress notwithstanding, the lower-income segments of the population have limited access to these basic services. Approximately 50% of the population has access to piped water, but 6 out of every 10 members of the poorest 40% of the population obtains their water from wells. The situation is much the same in the case of sanitation facilities. Nationwide, half the population has sanitary facilities in the home, but the rate among the poorest segment of the population is only 14%. Three out of every four people in the poorest stratum have electrical hook-ups, whereas this service’s coverage among the richest fifth of the population is virtually 100%.

2.39

The factors that make it is so important to expand public utility coverage (chiefly drinking water and sewerage systems) substantially are as follows: (i) the greater prevalence of low coverage rates among lower-income sectors, with all the implications this has in terms of the effort to combat poverty; (ii) the direct impact that increased coverage would have in improving the population’s health indicators; and (iii) the need to work toward the Millennium Development Goals and, in particular, the target of halving the proportion of people who lack access to safe drinking water by 2015.30 e. Setting up social safety nets

2.40

30

Despite its high poverty rate, Paraguay lacks a social safety net. The country has a large number of small-scale social programs, run by a variety of agencies, whose impact on poor and vulnerable groups is very limited. The scarcity of resources, the lack of targeting systems, the fact that beneficiaries play very little part in determining the types of action to be taken, institutional and technical weaknesses,

The Pan American Health Organization estimates that around US$852 million (or US$12 million per year) will need to be invested in order to attain coverage rates of 80% for drinking water and 60% for sewerage services in urban areas and 60% and 45%, respectively, in rural areas by 2010.

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and the political vulnerability of the agencies responsible make it all the more difficult for them to meet the needs of poor and disadvantaged sectors of the population effectively. Yet another factor is that, owing to the absence (until very recently) of a political/institutional framework that could ensure the coherence and integration of the work being done in this area, programs have been executed by agencies that occupy weak positions vis-à-vis the central government. This makes it difficult for them reach the groups that need those programs the most.

III. LESSONS LEARNED FROM PREVIOUS STRATEGIES AND PORTFOLIO

PERFORMANCE A.

Review of the previous strategy and major achievements

3.1

The last two country papers prepared with Paraguay were approved in April 1998 (document GN-1990-1) and October 2000 (document GN-2118-1). These papers recommended that the Bank focus its efforts on the sectors of competitiveness, modernization of the State, social sector reform, and the diversification and modernization of agriculture.31 The strategy to be employed in seeking these objectives was to be broad, flexible, and designed to underpin the work involved in laying solid foundations for sustainable growth.

3.2

The 1998 country strategy places priority on economic growth as its overarching objective and provides for direct and indirect actions to achieve that objective. The 2000 country strategy was designed during a time of political crisis (the assassination of Vice President Argaña and the renunciation of President Cubas), a troubled economic situation and the exertion of strong pressure by the short-term external debt. That four-year (2000-2003) strategy proposed a baseline scenario involving nearly US$350 million in financing and a high scenario of US$650 million, subject to the progress of the reform process. Ultimately, a total of US$287 million was authorized. It should be noted that during the life of this strategy, no changes in priorities or operational substitutions were made, although deadlines were moved back when sufficient progress in the implementation of reforms was not achieved. This program reflected the Bank’s willingness to provide Paraguay with support on a countercyclical basis, despite the institutional shortcomings that were detected,32 at a time when international donors were scaling back their involvement in the country. The aim was to maintain the continuity of long-term efforts and to help avert the loss of any of the ground that the country had gained in terms of the democratic process and its development process.

31

Document GN-1990-1 also identifies the financial sector as a priority area.

32

In these cases, the programs included components devoted to institution-strengthening.

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3.3

The political crisis, aggravated by the fiscal crisis and compounded by the weakness of the country’s institutional capacity, has hampered efforts to implement the Bank’s agenda in the country. This has been especially true over the past three years, which is why progress toward the targets set forth in document GN-2118-1 has, with some exceptions, been limited. An analysis of the policy matrix indicates that the projected results were achieved for the coverage of the electrical power grid in rural areas, approval of a new procurement system, and educational reform. The target levels for indicators directly linked to economic growth were not attained, however, while the rest were partially met.33 Nevertheless, the financial and technical support provided by the Bank over the past decade34 has helped the country to make major strides in some sectors. The advances made in these areas are summarized below, by strategy area.

3.4

Reform and modernization of the State. The Sector Investment Program approved in 1992 helped to launch the country’s institutional modernization process. Although Paraguay’s institutional structure still needs to be consolidated, the program objectives relating to the policy framework for the country’s economic and financial systems were met. In addition, the transparency of government affairs has gradually improved with the help of the Sistema Integrado de Administración Financiera [Integrated Financial Management System] (SIAF) and the increased involvement of civil society in those affairs, including the new public-sector procurement system. Reforms in areas relating to commerce, investment, and the financial system have been implemented the most swiftly. Areas in which progress has been more halting have included privatization and reform of the pension and health-care systems, which are socially sensitive processes requiring longer lead times. Headway has also been made in modernizing the Judicial and Executive Branches; this has had very positive impacts, although there is still some way to go.

In the tax and customs administrations, the Bank’s work has helped to strengthen institutional aspects of the units responsible for collection. The 2002 Population and Housing Census generated valuable social and demographic information in this connection.

3.5

Social sector reform. In the social sector, support has been provided for the overhaul of the educational system initiated by the Government of Paraguay in the 1990s. Approval of an operation targeting early and primary education in 1992 allowed the Bank to assist the country to lay the groundwork for the current educational reform effort aimed at enhancing the system’s internal efficiency and strengthening the sector’s institutions. Despite these inroads, however, scholastic performance in the basic education cycle continues to be poor. The country is

33

See the policy matrix for information on the progress made toward achieving the projected results as described in document GN-2118-1and the March 2004 update.

34

See “Lecciones Aprendidas de la Acción del Banco en Paraguay en la Última Década” (Lessons learned from the Bank’s work in Paraguay over the past decade), by Francisco Domínguez and Álvaro Navarro, September 2003.

- 26 -

seeking to address this problem through measures targeting at-risk urban and rural schools. In conjunction with the advances being made in primary education, operations in the areas of early education and technical or vocational instruction are taking advantage of the outcomes of the Bank’s sustained effort to strengthen the educational sector. In the health sector, the Bank is supporting the effort to modernize the sector and boost its efficiency as a means of reducing maternal and perinatal mortality. The execution of this operation has proceeded slowly, despite its importance from the standpoint of the country’s sector objectives. Lastly, in the area of social and community development, the PROPAIS Social Investment Program has employed new types of models for the delivery of infrastructure and social services to poor sectors of the population. This operation has had a positive impact on civil society organizations, which have seen their project design and execution capabilities grow stronger, on the Secretariat for Social Action, and on a group of approximately 325,000 members of the population, many of whom are at-risk boys and girls or adolescents. Its successful implementation has prompted the approval of a second phase. This phase, which is now underway, broadens the operation’s scope to encompass rural and indigenous communities.

3.6

Gains in competitiveness. In the area of physical infrastructure, particularly in the transportation sector, the Bank has financed infrastructure works to upgrade and consolidate major highways and integration corridors linking Paraguay with its MERCOSUR partners, along with rural roads that will play a direct role in cutting transportation costs and in diversifying and reengineering traditional farm production units. Maintenance of the road network has been deferred as a consequence of the fiscal constraints of recent years and should receive greater attention in the future. The financing furnished for rural electrification works has helped to boost productive potential (production of perishables), stimulate job creation, and raise income levels in the corresponding service areas, as well as providing rural inhabitants with the opportunity to go to night school and making the streets safer in these locations. These works have also helped to lower production costs by providing a substitute for more expensive energy sources (gasoline, gasoil). The coverage of the electrical power grid has been expanded from 48% to 79% of the country’s households. In addition, the regulatory framework for the promotion of competition has been reinforced by new trademark, patent, and copyright laws, and support has been provided for the expansion of agricultural production. The backing provided for the creation and implementation of a modern institutional structure for environmental management in the country will help to ensure that the economic growth spurred by increased competitiveness will be sustainable in terms of both natural resources and the environment.

3.7

The areas in which limited progress has been made are discussed below: (i)

Rural development. The Bank has sought to contribute to the economic sustainability of small-scale campesino producers through

- 27 -

operations aimed at helping the country to consolidate rural settlements, promote the cotton industry, and encourage the diversification of production. The target figures set for the reduction of poverty in rural areas and for an increase in the income of campesino households were not reached during the decade, despite the volume of resources invested in this sector. This was primarily attributable to the ineffectiveness of production promotion services and the inefficiency of public utilities, although the slide in producers’ prices was also a factor. This outcome has prompted the Bank to rethink its strategy for the development of rural areas in Paraguay and to conclude that any support for campesino family farms aimed at helping to combat rural poverty should be predicated on an effort to heighten the efficiency and effectiveness of public expenditure on behalf of this segment of the population. (ii)

Financial sector: The Bank has contributed to the development of selfsustaining market mechanisms to help microenterprises gain greater access to credit, to enhance the financial sector’s solvency and efficiency and to strengthen banking regulation and supervision. The financial crisis and insufficient enforcement of existing regulations have curbed the impact of many of these actions, however.

(iii)

Housing sector: The Bank has worked to help improve the living conditions of the lower-income members of the population by providing them with the means to buy their own homes using marketbased mechanisms. The objectives of the housing system reform effort have not been achieved, however, owing to institutional factors. The Bank is in the process of evaluating the operation and will apply the lessons learned in future activities.

3.8

Non-financial outputs. Non-financial outputs have helped to enhance the government’s policy-making capacity. In the last two years, diagnostic assessments have been prepared of the State’s financial management, procurement system, and social security system.35 Other activities and studies carried out since 2000 include a seminar for members of Congress in Paraguay, a workshop on social security reform, workshops on transparency and civil society engagement in public affairs, and baseline studies and workshops dealing with the formulation of this strategy (see Annex 5).

3.9

Paraguayan society’s perceptions. Polls36 indicate that Paraguayan society’s perception of the Bank’s work in the country is generally favorable. The Bank’s

35

The first two diagnostic assessments—the Country Financial Accountability Assessment (CFAA) and the Country Procurement Review Assessment (CPRA)—were prepared in cooperation with the World Bank.

36

See “The IDB’s Paraguay Strategy: An Evaluation,” by Werner Baer and Melissa Birch, 2003.

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contribution to the implementation of the country’s social agenda is seen as being particularly valuable, especially in terms of its support for educational reform. (This reform initiative encouraged parents and society as a whole to become involved and benefited from the guidance of a “council of elders”.)

3.10

There is a perception that implementation of these projects is proceeding very slowly in some sectors, however, and that the Bank’s relationship with subnational agencies and civil society is weak. Indeed, the delay between the time of approval and eligibility for disbursements averages 16 months. Furthermore, nearly half of the available portfolio resources are earmarked for transportation infrastructure works, which were paralyzed by fiscal constraints and the country’s limited institutional capacity for fulfilling contracts on schedule. Initial steps have been taken to work with subnational governments on road maintenance and sanitation projects, but present conditions do not yet permit a closer working relationship between the Bank and subnational governments owing to the lack of clearly defined responsibilities and the necessary resources. One encouraging development is that the Bank’s agenda with civil society has been expanding at an exponential rate.

Some of the highlights of this relationship have been the organization of workshops on the question of how to mainstream civil society participation in the Bank’s activities, guidance for nongovernmental organizations in seeking collective solutions, and an international seminar on mobilizing social capital in Paraguay and the rest of Latin America. The Bank has provided support for Paraguay’s National Integrity and Transparency Plan and, in conjunction with the World Bank and the United Nations Development Programme (UNDP), has furnished financing for government consultations with civil society concerning the strategy for combating poverty and furthering social development.

B.

Status of the portfolio

3.11

As of 30 April 2004, the portfolio for Paraguay included 22 loans for a total of US$652.7 million, with a balance of US$364.3 million remaining to be disbursed.

In all, 67% of this available balance involves road projects (46%), education and health (21%), and other sectors (33%), not including PROPEFs. Figure III-1

3.12

The average age of the portfolio at the end of 2003 was 4.5 years, which is similar to the portfolios for the other countries in the region.

Nearly 44% of the sum provided in the form of investment loans was approved in 2000 or thereafter. In the last 10 years, the average disbursement period has been seven years, eight months. Average annual disbursements over the last five years have amounted to US$82.5 million (see Figure III-1).

111.6

88.4

2001

2000

1999

61.9

52.0

2003

98.4

2002

87.4

1998

Millions of US$

Loan Disbursements 120 100 80 60 40 20 0

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3.13

In the last 10 years, 43 loans totaling US$758.2 million have been approved. In addition, approval has been given for 120 concessional operations (technical cooperation, MIF and SEP) totaling US$57 million, of which US$17 million correspond to 18 MIF operations aimed primarily at improving the business climate. Most of these concessional operations have helped to complement and/or lay the groundwork for activities undertaken in connection with the operations program. The SEP programs carried out in the country since 1978 have involved the use of US$12.4 million for 24 different operations. These projects, which are designed to help improve living conditions and income-generation capacity, have served a population of over 50,000 people, of whom 14% belong to indigenous groups, 37% are rural inhabitants whose basic needs have not been wholly met, 22% are artisans, and 26% are urban microentrepreneurs.

3.14

The political and fiscal crisis in the country began to grow noticeably worse in 2001. The situation led to temporary defaults on debt service payments to the Bank, which in turn led to the intermittent suspension of disbursements in 2002 and 2003.

These factors, coupled with unsatisfactory project management by some executing agencies and problems with major bidding operations, had an adverse impact on portfolio performance and disbursement levels. The outcome was a net negative cash flow for the country for the third year in a row. Net flows of loan funds have remained positive, however.

3.15

The Private Sector Department has not yet undertaken loan operations in Paraguay, but it is tracking the government’s efforts to begin increasing the private sector’s involvement in the telecommunications, water and sanitation, and transportation sectors. The Inter-American Investment Corporation (IIC) financed six operations in Paraguay during the decade for a total of US$22.9 million. Two of these operations, totaling US$4.6 million, were still underway in late 2003.

3.16

In recent years the loan portfolio’s performance has been mixed. Education and social investment projects have been fairly efficient and successful, but projects in the other sectors, particularly road, electrical, and basic sanitation infrastructure, have progressed slowly, albeit with some positive results. The factors that most frequently contributed to projects’ success have been the following: simplicity of design, an experienced executing agency, a quality institutional analysis, a sense of ownership on the part of the executing agency, and strong political support. The main causes of missed deadlines have been shortcomings in terms of the executing agencies’ institutional capacity, delays in project start-up37 (although the situation in this respect has been improving in recent years), the unavailability of budget allocations, and delays in the disbursement of local counterpart funds.

37

The law does not permit budgetary resources to be allocated for related activities until the loan contract is ratified by Congress.

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3.17

Increased project monitoring and close coordination with the authorities have helped to mitigate the adverse effects of the crisis on portfolio performance. In order to improve project execution and resolve problems, the Bank promotes special and sector-specific missions focusing on portfolio operations, holds semiannual portfolio coordination meetings with the channel of communication, funds specific technical cooperation activities for Group C and D countries, conducts training courses on Bank procurement procedures and other subjects for executing units, and, recently, financed a new government procurement system, among other things. The quality of audited financial statements and the promptness of their submission have been improved substantially by such measures as the distribution of model formats, the organization of seminars for auditors and executing agencies, and ongoing monitoring by the Bank.

3.18

The recent creation of the Unidad Central de Inversión Pública [Central Public Investment Unit] (UCIP) in the Ministry of Finance, which has been given responsibility for evaluation and for qualitative and quantitative control functions relating to government financial and technical assistance projects, is expected to make project processing and monitoring more efficient.

C.

Conclusions and lessons learned

3.19

The conclusions reached from an analysis of the Bank’s actions and the lessons learned from these experiences are set out below. a. Considerations in the strategy’s preparation

3.20

Formulation of scenarios. Given the risks associated with high degrees of volatility and external vulnerability, prudence and flexibility are called for in the determination of possible scenarios, and timetables need to be adapted to the country’s borrowing and institutional capacities.

3.21

Targeting. Operations need to be targeted at the sectors in which they will have the greatest impact and where the best possible use can be made of the Bank’s comparative advantages. High-priority programs need to be selected as the focal points for the Bank’s efforts (e.g., educational reform).

3.22

Diversification of financing sources. The Bank should assist in identifying opportunities to heighten the involvement of other donors and multilateral and bilateral credit institutions so that it can be more selective in focusing its operations on a more limited number of sectors. b. Considerations in the operations’ programming, design, and execution

3.23

Comprehensive approach to strengthening the public sector’s institutional capacity. The main factor that interferes with a majority of the operations included

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in the portfolio is the institutional weakness associated with a shortage of qualified professionals and high staff turnover. Institutional-strengthening efforts undertaken on a case-by-case basis have not yielded the expected results, and action in this direction therefore needs to be incorporated into a comprehensive approach aimed at professionalizing the civil service.

3.24

Institutional analysis of project design. The institutional analysis should determine executing agencies’ actual capacity and define clear-cut, simple project execution mechanisms. In order to enhance project sustainability, the end purpose of institutional development efforts should be to strengthen executing agencies rather than simply to create them.

3.25

Engagement of society. Building on the experience gained from educational reforms and the neighborhood improvement program, civil society should be encouraged to help support project execution and monitor these operations.

IV. THE BANK’S OBJECTIVES, ITS STRATEGY, AND THE AGENDA FOR

DIALOGUE A.

Objectives

4.1

The objective of the Bank’s work in Paraguay is to collaborate with the country as it strives to overcome major development challenges with a view to attaining sustainable growth and a reduction in poverty. To this end, the Bank will provide technical and financial assistance to the government in developing and implementing programs in some of its priority areas.

B.

Core areas of the strategy

4.2

In view of the existing challenges, the government’s program, the current portfolio, the lessons learned from the implementation of previous strategies, and the Bank Group’s comparative advantages, the strategy for 2004-2008 calls for the Bank’s work to be concentrated in the following areas: •

Strengthening governance by restoring the credibility of State institutions.

The aim of this component will be to enable the State to coordinate the economic development process by heightening the efficiency and transparency of public administration, promoting greater citizen participation, and consolidating democratic institutions;

•

Laying the foundations for sustainable growth through the consolidation of the market economy and greater regional and global integration by creating conditions conducive to increased private-sector participation, greater competitiveness, and deeper integration; and

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•

Reducing poverty and improving the quality of life of low-income sectors of the population through the development of human capital and the provision of greater access to quality basic services.

1. Strengthening governance 4.3

The Bank has put together a portfolio totaling US$59.2 million, with US$39.3 million of this sum yet to be disbursed as of 30 April 2004, to support the country’s efforts to enhance governance. Main lines of action to this end include collaboration in bringing about tax and customs reforms; strengthening the public investment system; increasing efficiency and transparency in procurement, public management, and control in partnership with civil society; increasing legal security by modernizing the civil registry and in strengthening judicial institutions,38 and providing an emergency social protection loan that has been supplemented by an economic reactivation loan from the World Bank.

4.4

The priority in this area is to collaborate with the government in reinforcing governance in the country and thus bringing governance indicators closer to the levels achieved by other countries with similar levels of per capita income. This will call for greater efforts in terms of fiscal accounts, in strengthening the public sector’s management capacity, in launching a frontal attack against corruption and inefficiency, and in promoting civil society involvement in monitoring publicsector affairs. All of these areas are priority issues on the new Administration’s agenda. a. Fiscal sustainability

4.5

The Bank will continue to provide technical cooperation to assist in strengthening tax administration and rationalizing expenditure. Efforts in this connection include the establishment of fiscal regulations designed to improve the management of public finances. In order to complement these efforts, the World Bank has expressed interest in collaborating with the pension reform program, and the IMF is furnishing technical assistance in the area of tax and customs affairs in coordination with the IDB. b. Consensus-building among the branches of government

4.6

38

The Bank will continue to provide technical cooperation to support initiatives aimed at strengthening links between the Executive Branch and the Legislature.

It will also furnish technical assistance in the establishment of priority legislative agendas for each session of the Legislature and in reaching a consensus with the Executive Branch regarding those agendas, thereby expediting the passage of bills into law. Support will be given for the creation of systems of technical advisory

The operations now underway are listed in Annex 2 and in the strategy matrix.

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assistance to improve the quality of legislation and help ensure that budgetary, inspection, and oversight functions are based on objective and technical criteria. c. The rule of law and administration of justice 4.7

The Bank will support measures designed to carry the administrative reform of the judicial system to a deeper level. A new loan will be furnished to help promote a merit-based career path for members of the judiciary, expand pro bono services, modernize and streamline judicial procedures by regulatory means, and improve the management of the judiciary. As progress in these directions is made, a new operation will be undertaken with a view to outsourcing some services, promoting the dissemination of information and provision of instruction regarding citizens’ fundamental rights, strengthening judicial accountability to the public, and expanding and modernizing the physical infrastructure of the courts. The work done in these areas will complement the efforts of the GTZ, which has been collaborating in the reform of criminal proceedings. The World Bank plans to contribute to the sector’s structural reform, and steps are therefore being taken to coordinate efforts in this connection. d.

4.8

In order to help strengthen the country’s participatory democratic system and contribute to its sound political governance, the Bank will support the development of institutional mechanisms and tools for fostering civil society’s participation in the formulation, monitoring, and assessment of public policies. The promotion of egovernment will be an important part of this effort. The participation of civil society is particularly important in programs for combating corruption, violence, and trafficking in human beings, and technical cooperation activities are planned in these areas. e.

4.9

Participation of civil society

Quality and efficiency in the management of the State

The Country Financial Accountability Assessment (CFAA), which has been prepared jointly by the IDB and the World Bank, sets out the framework for continued collaboration with the government in its efforts to establish formal rules and mechanisms for combating corruption and managing the public sector more effectively. Key tools for improving financial management and the efficiency and control of expenditure will include implementation of the CFAA recommendations, technical assistance in expanding the SIAF to encompass all decentralized agencies and departmental governments, implementation of the State Procurement Act, and the modernization of public-sector administration and its transition toward a results-based approach. These actions will be combined with the development of e-government capabilities for ensuring greater control, efficiency, transparency, and public participation. Technical cooperation activities

- 34 -

planned for this purpose include operations to strengthen the Ministry of Finance and the General Auditing Office of the Executive Branch.

4.10

The Bank will continue to work with the government to reform and modernize the civil service as a means of improving the quality, effectiveness, and efficiency of public policies and management, particularly in ways that will benefit the poorest sectors of the population. In order to strengthen the management of the State, the Bank will continue to collaborate in the institutional modernization of the central government’s administration (rationalization and streamlining of the organizational and functional structure), particularly in relation to the professionalization of the civil service in the three branches of government. This is expected to help attract and retain skilled personnel at the various levels of the public sector, thereby mitigating institutional weaknesses and their negative effects on the implementation of public policies and project execution. Steps will also be taken to modernize public management of the agrifood sector in support of the campesino community. The aim of these efforts will be to increase the effectiveness and cost-efficiency of services for promoting agricultural production.

4.11

The Bank will provide technical cooperation to backstop government efforts to strengthen the Executive Branch’s central budgetary management and control units; develop technical capabilities for congressional analysis of the government budget; reinforce the legal and institutional structure of the Office of the Comptroller-General and the General Auditing Office; and improve customer service. Lines of action in the latter respect will include outsourcing some services and streamlining bureaucratic procedures and processes, especially in connection with investments and legal proceedings. Support will also be provided for agencies and units responsible for designing and implementing international trade policies, with emphasis on enhancing interagency coordination and the negotiating power of Paraguay’s public and private sectors. The Ministry of Industry and Commerce will be restructured39 and the Ministry of Finance will be strengthened with a view to converting them into “islands of excellence” within the government service and moving toward a gradual reform and modernization of public-sector agencies. An important component of this effort will be support for the Ministry of Finance in the following areas: (i) training with respect to budgetary matters, treasury procedures, and finance; (ii) designing and coordinating the decentralization process; and (iii) building up the Ministry’s managerial, technical, and administrative capabilities, to include the start-up of a digital strategy and a business climate unit. These actions will be complemented by the work being done by the World Bank to strengthen the Ministry of Finance and by the European Commission’s efforts to build up the country’s capacities for administering the civil service and combating corruption.

39

Funds from business development loan 1349/OC-PR are being used for this purpose.

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2. Strengthening the foundations for sustainable growth by deepening the market economy and achieving greater regional and global integration 4.12

The Bank is providing a number of loans to promote sustainable growth in Paraguay. The balance of available loan funds as of 30 April 2004 was US$195.5 million, of which over 85% is to be used for road transportation. The successful execution of these projects, which is of critical importance for the successful performance of the Bank’s portfolio, will make a valuable contribution to the Administration’s program in the short term. Projects in the energy, rural development, and entrepreneurial sectors are also underway.

4.13

In order to achieve sustainable economic growth, the country’s private sector will have to provide leadership, and a great deal of fiscal, social, and environmental responsibility will have to be exercised in promoting a development model based on the formalization of the economy, regional integration, and export diversification. Private investment levels must be maintained in order for the country to raise its average per capita GDP growth rates enough to reduce poverty.

4.14

If the reactivation of the economy is to be sustained over time, the country will need to have stable macroeconomic conditions, a credible form of State management that ensures good governance, a financial system that channels savings to investors and, above all, a stronger position in global markets. In order to provide a better setting for investment, the Bank has already begun to work with the government on the Investment Climate Initiative. a. Improving the business climate

4.15

40

The Bank is providing a business development loan to help create stable institutional mechanisms for generating and maintaining an agenda of high-priority issues relating to national and sector competitiveness within the context of an increasingly better and fuller form of international integration. The aim is to help strengthen entrepreneurial capabilities and capitalize upon the competitive potential of a number of (mainly agroindustrial) sectors that possess comparative advantages and display a considerable growth capacity in the short term.40 This effort will involve the establishment of sector competitiveness forums which are to be coordinated with specific business support activities conducted by other programs. The object of this initiative is to provide firms in each sector with assistance in such areas as quality control, phytosanitary certification, and marketing.

These sectors were identified in a study prepared by JICA as the following: balanced foods, vegetables, fruits, cotton, and metal manufactures and machinery. See “Estrategias de Competitividad y Desarrollo: Una Perspectiva Global” [Competitiveness and development strategies: a global perspective], JICA, 2000.

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4.16

Steps will be taken to promote links between national competitiveness forums and MERCOSUR’s regional competitiveness forums in order to foster the incorporation of Paraguayan firms into regional production chains. Links between the public and private sectors will also be sought as a means of directing the national competitiveness agenda toward the challenges involved in gaining a firmer footing in international markets.

4.17

In order to diminish the impact of the elimination of trade triangulation, which could include an increase in poverty and an expansion of the informal sector, an effort will be made to open up new economic opportunities for the affected population. To this end, options will be explored for reengineering the economy of border areas or sectors that could be hurt by this change in the trade regime. A structural change of this magnitude will call for comprehensive support for trade, integration, and competitiveness in order to meet the economic and social challenges posed by the transition to a more formal trade regime. In addition, support will be furnished for the country’s initiative to create and start up an export network. Efforts will also be made to maximize the involvement of other donors, particularly the European Commission.

4.18

The provision of national and regional public goods, such as sanitary conditions for plant- and animal-based agrifood production, is vital here, since nearly all the sectors with the potential to swiftly improve their position within the international economy are rural in origin and are composed primarily of microenterprises and small businesses. The Bank can work with the government to improve the exportable supply with the help of a sector program aimed at boosting competitiveness and diversifying production and a program to support the development of science, technology, and innovation. The latter program will seek to improve scientific and technological infrastructure, particularly as it relates to the reinforcement of the national quality system. Technical cooperation will be provided to strengthen the agencies responsible for the technical and health certification of Paraguayan products with a view to standardizing and harmonizing these activities within MERCOSUR.

4.19

In view of the importance of labor skills in the adoption of technology and the achievement of productivity gains, an attempt should be made to look more closely at factors that help to improve the quality of higher education. To this end, a study on the available options for strengthening the national system for the accreditation of institutions of higher learning will be conducted. In addition, MIF resources will be used to continue support for innovative demands and initiatives focusing on the enhancement of the business climate and for efforts to boost the competitiveness of microenterprises and small and medium-sized businesses.

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b. Strengthening the financial system 4.20

This is a sector in which a concerted effort on the Bank’s part is required. The Bank will help to deepen the reform of the financial sector, especially with regard to the removal of obstacles to suitable financial intermediation functions, and will provide lines of credit for medium- and long-term private investment projects, with special emphasis on microenterprises and SMEs. Support should also be supplied for efforts to deepen the rural financial system, create mechanisms for securing longterm loans denominated in the local currency, and ensure the proper supervision of all existing financial institutions, including cooperatives. The Bank will contribute to this effort by furnishing loans for the reform of the public banking system in close coordination with a World Bank operation focusing on the financial sector, for an SME line of credit, and for a structural reorganization of the central bank’s operational activities, in addition to operations for microenterprises via the Social Entrepreneurship Program (SEP). IIC resources will be used to finance lines of credit in support of SMEs, principally in the agroindustrial and export sectors. Technical cooperation will be furnished to support research and measures for strengthening capacities and instruments to help the sector function better, especially with regard to its supervision and regulation. c. Expanding, upgrading, and maintaining basic infrastructure

4.21

The demand for funding for infrastructure works will remain high, and the involvement of a number of different lending agencies and private-sector institutions will therefore be necessary. Road transportation projects account for 44% of the undisbursed balance of the Bank’s portfolio in Paraguay. The Bank plans to continue to support the government in its efforts to upgrade the road transportation network and expand its coverage. This effort will devote particular attention to the design of policies and projects for the maintenance of road transportation infrastructure, in partnership with the private sector, based on CREMA contracts (contracts for road rehabilitation and maintenance). One of the crucial steps in this process is to strengthen public-sector management, and the institutional reorganization of the Ministry of Public Works will be one of the components of this initiative. Support will also be provided for government initiatives focusing on physical integration within the framework of the Initiative for the Integration of Regional Infrastructure in South America (IIRSA). As one way of heightening the impact of these investments, an effort will be made to expand the rural electrification grid, especially in areas that are already being served by rural road programs.

4.22

Given the scale of what needs to be done in terms of the expansion and operation of infrastructure, the participation of private operators and investors will be required.

The Bank will offer its support to the government in identifying opportunities of this sort (in the sanitation and transportation sectors, for example) and in conducting studies and developing suitable instruments. The Bank could also

- 38 -

provide support for the implementation of concessions, management contracts, and public-private partnerships (PPPs) in order to maximize the use of the Bank Group’s resources and tools with a view to augmenting synergies between public and private interventions, as well as with the work of other donors. To this end, technical cooperation activities could be provided in such areas as training, the creation of regulatory agencies, feasibility studies, and even the preparation of documentation for competitive bidding processes and contracts for private-sector concessions in MIF lines of activity. These actions would help to set the stage for realizing the potential benefits of regional integration and would be complemented by assistance from Japan, the European Community, Taipei China,∗ the Andean Development Corporation, and others. d.

Deepening global and regional integration

4.23

Successful participation in a regional integration scheme and in global markets presupposes the adoption of a comprehensive strategy that provides for a coordinated, coherent sequencing of operations to address the major challenges to be met in the short and medium terms. The country stands in urgent need of immediate technical support for its participation in the trade negotiations to be held over the next few quarters. In the short run, it will need support in consolidating the necessary institutional capacity to fulfill the commitments it assumes and to prepare the country to make the adjustments entailed by free trade and regional integration. In the medium term, the prospects for growth based on the country’s success in positioning itself in the international marketplace will depend on how well it promotes macroeconomic and sector reforms that bring its economy’s level of competitiveness into line with the demands of international competition while promoting an economically and socially efficient transition to a freer and more formal trade regime.

4.24

Given the country’s landlocked status and structural traits, its competitiveness strategy should be designed to take its interdependence and integration with its regional partners into consideration with a view to improving its position in global markets. Paraguay needs to adopt an ambitious strategy for adapting its economy to a free trade regime capable of: (i) promoting the competitiveness of exporters; (ii) fostering production linkages with its regional partners; (iii) upgrading its exportable supply so that it meets the high quality standards of international markets; and (iv) establishing a tax policy that is less reliant on international trade.

4.25

To promote regional integration and help the country establish a more solid position in the international economy, the Bank will, in addition to taking action to upgrade and diversify the exportable supply and physical integration, place priority on the adoption of measures in crucial areas to improve the profile of regional

∗

Use of the phrase "Taipei China" does not in any way reflect a position by the Bank or any of its member countries regarding issues of national sovereignty or diplomatic recognition.

- 39 -

integration by maximizing the country’s comparative advantages. These advantages include: (i) consolidation of regional markets, with support in such areas as the evaluation of sector costs and benefits and the macroeconomic impact of integration; (ii) institution-strengthening to prepare the way for integration, development of the necessary technical capacity for engaging in negotiations and implementing international trade agreements, pursuing customs facilitation initiatives, and contributing to the adjustment of the tax system; (iii) promotion of regional public goods41 conducive to regional cooperation in addressing a growing number of transnational challenges, such as infectious diseases, macroeconomic contagion, financial and social crises, the need for greater security and stability, and natural disasters. In all these areas, due account must be taken of the asymmetries existing between Paraguay its integration partners, especially the other members of MERCOSUR. 4.26

To achieve these objectives, a specific sequencing of operational instruments is proposed. These tools would include: (i) immediate implementation of technical cooperation programs to meet the country’s needs in relation to international negotiations; (ii) the fast-disbursing Trade Sector Facility to speedily consolidate institutional capacity for engaging in negotiations and fulfilling international agreements; and (iii) regional technical cooperation programs and the FTAA Hemispheric Cooperation Program to maximize the complementarity and synergies between national and regional operations and to counteract asymmetries by promoting structural convergence within MERCOSUR. e. Promoting environmental protection

4.27

41

The Bank has been working to help set up a decentralized, participatory institutional framework for environmental management in Paraguay.

Environmental protection and mitigation are cross-cutting issues in Bank-financed operations, in which an effort is made to prevent, correct, or mitigate projects’ environmental impacts.

Regional public goods can be employed to help correct negative cross-border externalities and capitalize upon the positive ones. There are three categories of regional public goods: (i) global investments in knowledge, research, and negotiation of agreements on shared standards and/or policy regimes, etc.; (ii) transnational mechanisms for managing externalities in areas such as investment in public health policies to contain the spread of pests and diseases, investment in infrastructure to enhance growth and regional integration, the creation of institutions for cooperation in areas subject to contagion effects, etc.; and (iii) Country-specific action to maximize absorption of the benefits generated under the two foregoing modalities. See Ferroni M. (2001), "Regional Public Goods in Official Development Assistance," ITD-STA Occasional Paper No. 11, IDB-INTAL: Buenos Aires.

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3. Reducing poverty and improving the quality of life of low-income sectors of the population 4.28

As of 30 April 2004, the portfolio included US$130.4 million for social projects and initiatives to support early and basic education reforms; skills training; expansion of the coverage of preschool education; primary health care; and sanitation service delivery. It also includes operations that have recently been approved in the areas of social service delivery and the protection of social expenditure. a.

Poverty reduction

4.29

In order to reduce poverty, concurrent economic policy efforts are required to stimulate sustainable, long-term economic growth and to achieve more equitable income distribution. The effectiveness of economic growth in reducing poverty is going to hinge on whether the poorest groups are given access to new productive opportunities and to the benefits to be derived from their human and physical capital. To accomplish this, progress must be made in the following areas: (i) improving the educational level of the poorest segments of the population so that they can gain access to better-paid nonfarm jobs in urban or rural areas; (ii) enhancing the workings of the labor market by rationalizing labor laws and regulations; (iii) furnishing rural inhabitants with full, transferable title to their land, which is, in many cases, the only asset they possess; and (iv) achieving better land distribution and, ultimately, increasing the efficiency of its use through the effective application of rural property taxes. Public expenditure also should be targeted in order to broaden the poorest groups’ access to basic services and to strengthen their stock of human capital. This would also help ensure that the labor market functions properly, since it would help to shrink the informal sector and increase employment opportunities.

4.30

The Bank plans to further progress toward these objectives through the execution of existing programs and new operations. A diagnostic assessment of Paraguay’s labor market will be conducted to provide inputs for decision-making in this area.

In the field of education, the Bank will continue to work with the country to boost school enrollment and educational quality and equity, which play an influential role in reducing poverty over the medium term. These programs include bilingual education components, which were first introduced in the country in 1994 in response to its linguistic and sociocultural diversity. Support will also continue for measures to rationalize the Ministry of Education’s expenditures. Efforts in this area are directed toward generating savings that can then be used to carry forward the implementation of compensatory policies via programs targeting sectors at educational risk. A new operation is proposed to support the design and implementation of a technical/vocational educational system to help create a more highly skilled workforce that would be better able to meet the demands of a modern economy. The Bank will also undertake a study in order to analyze the

- 41 -

impact that higher education has on economic growth and on the reduction of poverty and inequality. This research is expected to complement the work of the World Bank in the area of secondary education, of Spain with regard to higher education, of the European Commission regarding basic distance education, and of Japan in relation to vocational training. b. Access to quality basic services 4.31

Components of the portfolio relating to the expansion of basic services for poor segments of the population include operations in the areas of health and basic sanitation. In the first of these fields, the operation now underway is concerned with improving maternal and child health, which is the country’s most serious public health problem. The operation is specifically directed toward helping to reach the Millennium Development Goals, which include reducing infant and under-five child mortality by two thirds and maternal mortality by three fourths.42 The Bank will pursue its dialogue with the Paraguayan authorities regarding increases in the coverage and quality of maternal and infant health services with a view to complementing the efforts of the World Bank, the European Community, the GTZ, Japan, and USAID.

4.32

Because of its direct impact in improving health indicators, especially among lowincome groups, the coverage of drinking water and sewerage services should be broadened. Care should be taken to ensure that the beneficiary communities are involved in the design and execution of projects in this connection. The portfolio is contributing to this end by financing small-scale drinking water projects in rural and indigenous communities. However, halving the proportion of the population lacking reliable access to safe drinking water by 2015, as called for by the Millennium Development Goals, would require that the bulk of the necessary investments be made by service providers. This, in turn, would require an appropriate regulatory framework for the sector and steps to strengthen the financial and institutional structures of the service providers (ESSAP and SENASA), together with the development of mechanisms for engaging the private sector in the expansion and management of such services.

4.33

Support will also be continued for environmentally responsible urban and community development programs. The initiatives to be supported will seek to improve the living conditions of low-income groups, particularly in the low-lying areas of the city of Asunción, by developing the cityscape and economic potential of the areas bordering the river. Neighborhood improvement programs to benefit people living in substandard conditions will also be put in place. In addition, the Bank will collaborate on research into trends and determinants of migration and the impact on basic services.

42

Paraguay is not expected to reach the health-related targets set for 2015.

- 42 -

4.34

All of these efforts to improve the supply of services, chiefly in the fields of health and education, can be complemented by the implementation of a social safety net based on monetary transfers that are tied to the use of these services. Networks of this sort have been successfully implemented in various countries of the region and provide a way of raising the income and consumption levels of extremely poor households along with their stock of human capital. The portfolio also includes a technical cooperation component through which it is assisting the country to learn more about these experiences and adapt them to conditions in Paraguay. This is an area of endeavor that the Bank should track closely should be closely followed in the Bank’s dialogue with the authorities.

4.35

Ethnic and gender considerations will continue to be addressed, as appropriate, in the Bank’s regular programs focusing on access to basic services, land titling, State reform, justice, microenterprise, and others. Continued efforts to promote the participatory formulation of a policy on indigenous communities are proposed. The Ministry of Education must also take up the challenge of developing an indigenous educational system, and the Bank will assist it with the drafting of curricular parameters, the sharing of experiences with other countries, and the reinforcement of a team in the Ministry to lead this effort. The National Plan on Equal Opportunities for Women sets out nine priority areas for gender mainstreaming in Paraguay, including: justice, education, access to economic resources and employment, comprehensive health care for women, the eradication of violence, and social and political participation. These elements should be taken into account by the Bank, as appropriate, in the design of new operations.

C.

Implementation of the strategy

4.36

In drawing up the new strategy for 2004-2008, consideration was given to the portfolio’s vital importance, both because of the volume of resources to be disbursed (around US$364 million as of 30 April 2004) and because it focuses on areas that are crucial to the government program’s success and are suitably aligned with the challenges to be addressed. These areas are: (i) infrastructure, which represents a sizeable portion of the portfolio awaiting execution; (ii) rural development; and, to a lesser extent, (iii) the strengthening of governance, chiefly in terms of fiscal management; and (iv) social advancement programs for lowincome sectors.

4.37

During the first phase of the strategy’s implementation, the main focus in these areas will be the portfolio’s execution. Fresh resources may also be brought in to support the institutional consolidation process (measures to support governance based on reforms in the justice system and improvements in the management capacity of various ministries) and the reform effort, especially with respect to the financial sector (the reform of the public-sector banking system and the structural reorganization of the central bank). New resources may also be used to backstop the economic reactivation.

- 43 -

4.38

The Bank plans to continue supporting government’s work in the priority area of governance. This support will include interventions of critical importance throughout the implementation of the strategy. A broad technical cooperation program will also be undertaken to promote transparency in public-sector management, citizen participation, and measures for strengthening the Legislative Branch. Another priority area of action throughout this period will be support for regional and global economic integration. As part of this effort, a loan will be provided to help the country improve its capacity for engaging successfully in trade negotiations and to furnish technical cooperation in the area of institutional coordination.

4.39

The fresh resources used in the strategy’s implementation will primarily be devoted to fostering increased competitiveness. Continued support will be provided in the area of transportation infrastructure, with emphasis on the development and continuation of incentives for private-sector participation. The aim of this effort will be to consolidate and safeguard the major investments made by the country, as well as to meet demands that, by virtue of their scale, require the involvement of multilateral agencies. In addition, the Bank will backstop efforts to address other challenges in the area of competitiveness through the diversification of production, the development of science and technology, measures designed to bring informal production and service activities into the mainstream economy, and supplementary interventions to heighten the impact of ongoing infrastructure programs (rural electrification). Conditions permitting, a sector operation to boost competitiveness may be initiated with a view to widening the impact in this area through additional interventions. Technical cooperation activities aimed at raising quality standards, improving quality control, and supporting the deepening of reforms in the financial sector would supplement these initiatives.

4.40

In the area of social and human development, efforts to address new issues in the field of education, such as the development of a technical/vocational educational system, will be intensified. In addition, it is proposed that support be provided for initiatives that address the growing demand for access to basic service in urban areas.

4.41

The strategy takes the work of other members of the international cooperation community into consideration and seeks to help create opportunities for increased participation and a diversification of financing sources. Suggested areas in which other donors might step up their involvement include: (i) rural development, a field in which other donors are already working, is a prime area for international cooperation efforts and will continue to be a priority for existing and new Bank projects; (ii) infrastructure, given the volume of resources required in such sectors as electricity, telecommunications, and air and river transportation, where financial assistance will be complemented by support for reforms that open the way for different types of private-sector participation; (iii) pension system reform; (iv) decentralization of public administration; and (v) satisfaction of basic needs,

- 44 -

particularly in the priority areas of health, sanitation, and urban services and utilities, where exceedingly large volumes of resources are needed.

4.42

The strategy’s design takes into account the lessons that have been learned in terms of the need for more precise targeting and the decisive role of institutional capacity.

The strategy does call for greater selectivity and sequencing of Bank interventions, but there are limits to how much the Bank can target its activities, given its role as lead lender and the convergence of multiple demands. Advances in this regard will be a process that unfolds gradually over the medium and long terms. Progress in this area will also depend on the pace of the portfolio’s execution and on greater participation by other donors in order to avert setbacks and ensure the continuity of the reforms being undertaken.

4.43

One of the issues in the area of institutional capacity that cuts across all components of the strategy is the need to strengthen the public sector’s management capacity to implement, coordinate, and assess policies and projects. The chances for success in each of these priority areas will hinge on the existence of one common, decisive factor: the restoration of the State’s Table IV-1: Composition of External Debt management capacity in a broad December 2003 sense, i.e., the restoration of political Description Millions of US$ % and institutional governance, the rule A. Multilateral agencies 1,354.7 54.7 IDB 978.3 39.5 of law, fiscal sustainability, and the World Bank 278.4 11.2 quality, effectiveness, and efficiency Other 98.0 4.0 B. Official bilateral sources 1,118.6 45.2 of public policies and organizations Japan 374.3 15.1 needed to ensure that they acquire a Taiwan 539.2 21.8 Other 205.1 8.3 sense of program ownership.

C. Foreign private banks TOTAL

3.1 2,476.4

0.1 100.0

D.

Participation and coordination with other donors

4.44

The Bank is Paraguay’s main source of financing and its largest external creditor.

Paraguay’s debt with the IDB represents 39.5% of the country’s total external debt, while its bilateral debt amounts to 45.2% of the total (see Table IV-1). This debt structure can only be modified in the long term, and it is hoped that the deepening process of reform under way may create conditions that will help the country access more resources and new external lenders.43 At present, Paraguay receives a fairly small flow of international cooperation resources compared to the funds received by other countries with similar per capita incomes.

4.45

One of the challenges for the future is to coordinate international cooperation efforts more closely so as to heighten the impact of external assistance and reduce transaction costs. The Bank should support the government in its leadership role as

43

In its recently approved Country Assistance Strategy (CAS), the World Bank, for example, described its current strategy in Paraguay as being one of “re-engagement”.

- 45 -

it deals with the invariably complicated question of donor coordination by collaborating in pursuing the priorities set by the country. The creation of the Central Public Investment Unit in the Ministry of Finance (and the possible unification of planning functions proposed in a bill now before Congress) offers an opportunity along these lines that should be seized.

4.46

Other major sources of financing for Paraguay have been Taipei China, Japan and the World Bank. Most of the loans provided by Taipei China have been used for infrastructure and equipment, production credits, and SMEs. Japan’s cooperation has been instrumental in the development of production sectors, with financing infrastructure for and support for rural competitiveness. It has also permitted the preparation of a study on Paraguay’s competitiveness within MERCOSUR, which identifies the (mainly agroindustrial) sectors that possess the greatest comparative advantages. The available balance as of the end of 2003 was US$400 million (JBIC and JICA). Brazil, through the BNDES, is looking into the possibility of funding nearly US$200 million in road transportation projects in Paraguay over the next few years.

4.47

In 1998 the World Bank suspended new loans to Paraguay in response to the deterioration of its portfolio (over 50% of which was composed of problem loans) and differences of opinion regarding privatization in the sanitation and telecommunications sectors. In 2002 it resumed its operations, approving three new loans by December 200344 and drafting the CFAA in conjunction with the IDB. At the end of December 2003, its portfolio comprised seven loans for a total of US$206.3 million, with a balance of US$115.1 million awaiting disbursement. The Country Assistance Strategy (CAS) approved in late 2003 provides for a gradual increase in operations in the future, with possible lending scenarios ranging between US$150 million and US$475 million for 2004-2008. The US$325 million baseline scenario provides for actions dealing with the financial sector, road maintenance, rural development, health, secondary education, rural drinking water supply, reforestation, municipal financial administration, and measures for strengthening the Ministry of Finance and monitoring the status of social safety nets. The high scenario would add interventions in the areas of judicial reform, provision of clear title to land holdings, community development, and one or two adjustment operations regarding business development, pension system reform, social safety nets, or the structural reorganization of public enterprises.

4.48

The areas that benefited the most from external loans in 2001-2003 were economic development and competitiveness, with approximately US$650 million; rural development, with close to US$205 million; social development (education and health), with US$108 million; and modernization of the State, with US$16 million.

44

The pilot community development project, the secondary education reform project, and the economic recovery loan.

- 46 -

4.49

The European Commission has a bilateral program involving US$78 million in donations to be disbursed between 2002 and 2006, of which US$55 million is to be committed during the next three years. The Commission also has a regional MERCOSUR program, from which Paraguay benefits, aimed at improving access to external markets, raising technical standards, and concluding veterinary and phytosanitary agreements. Approximately US$165 million in additional funds are expected during 2002-2006 from such major donors as Japan, Germany, USAID, Spain (AECI), France, the United Kingdom, the UNDP, Korea, the Andean Development Corporation, and FONPLATA.

E.

Lending scenarios and the country’s debt position

4.50

In preparation for the strategy’s implementation, lending scenarios were formulated for the relevant time period (2004-2008) based on the core areas agreed upon with the country, together with a series of assumptions about macroeconomic factors (continuation of the stabilization process along the lines determined by the government with the Figure IV-1. External public debt balance IMF) and institutional conditions (consolidation of the reform process now underway). Consideration was also given to the size of the country’s debt and its profile, the portfolio being implemented, and possible trends in resource flows.

45.0

2400.0

40.0 35.0 30.0

%

Millions of US$

2100.0

1800.0

25.0 20.0

1500.0

02

00

98

96

94

92

90

03

15.0

1200.0

10.0

Source: Public Debt Report

4.51

45

The total public-sector debt, measured as a percentage of GDP, jumped from levels bordering on 20% in 1998 to nearly 48% in 2003; 42.3% of this amount was in the form of external debt (see Figure IV-1). The country’s debt, while high, is not considered to be excessive,45 and a downward trend is projected that could lower it to 36% of GDP by 2008. Most of Paraguay’s external debt is long-term, lowinterest concessional financing, and the debt service is therefore fairly low (12% of the value of exports); accordingly, a primary surplus of just 2% of GDP is required to cover those service obligations. Paraguay did have difficulty in paying its debt service in 2002 and 2003, but this was mainly the result of tight liquidity and its exclusion from international capital markets. These problems are now being resolved under the IMF arrangement.

In its March 2004 report, Standard & Poor’s asserts that, despite Paraguay’s selective default in its long term foreign currency rating, its debt level is fairly moderate and is substantially lower than the median for countries with better (B median) risk ratings.

- 47 -

4.52

In constructing strategy scenarios, consideration was also given to resource absorption capacity and the Bank’s exposure. These criteria are relevant to any scenario, in view of the fact that, as of December 2003, US$384 million was available for disbursement in the form of strategic loans. Furthermore, an increase is expected in repayments over the next few years.46 Given the relative importance of the Bank’s role, this constitutes an influential factor in terms of the country’s financial planning functions.

4.53

Two lending scenarios have been designed (see Annex 1). Both assume the existence of stable macroeconomic conditions based on the achievement of the targets set under the agreement reached with the IMF, which projects a moderate pace of economic growth. Both are also based on the idea of capitalizing upon the opportunities and favorable expectations generated by the change in Administration to support the priority reforms it is seeking to bring about. The baseline scenario posits US$350 million in approvals over the life of the strategy (thus maintaining the annual average of US$70 million recorded in 1998-2003) and assumes a marginal improvement in portfolio execution.47

4.54

The high scenario of US$450 million (an annual average of US$90 million) is identical to the baseline scenario for the first year but would entail increased lending volumes in the following years. It is based on the assumption that actions already underway would pave the way for new reforms, for which financing would be required. These reforms would then help to improve the investment climate and thus attract more private capital (possibly including, for the first time, an operation financed by the Private Sector Department) and help to speed up the pace of project execution, with average annual disbursements for 2004 and 2005 equivalent to 20% of the balance of the active portfolio as of the start of 2004. This scenario would call for a major institutional and management effort to expedite project implementation.

4.55

The debt projections implicit in these scenarios are consistent with those contained in the agreement reached by the government and the IMF, which assumes that the external debt, measured as a percentage of GDP, will decrease over time. Under these assumptions, in the baseline scenario, Paraguay’s debt with the IDB would decline from 16.1% of GDP in 2003 to 13.7% by 2008 (see Annex 6), while in the high scenario, it would hold steady. In both scenarios, the Bank’s exposure in Paraguay would increase in the first few years in nominal terms relative to its end2003 level of US$978 million and would then begin to fall. In terms of the structure

46

Annual average amortization payments will rise from US$42 million in 2000-2004 to US$77.5 million in 2004-2008. Based on the assumptions used in calculating these scenarios, it is also estimated that interest payments and charges will climb from US$37 million to US$63 million during that same period.

47

Since 2002, increased use of the Project Preparation and Execution Facility (PROPEF) in new operations has helped to expedite execution.

- 48 -

of the external debt by creditor, a slight increase in the Bank’s exposure is estimated, and the World Bank is expected to increase its own. This trend is expected to counterbalance the projected decrease in the share of the total debt accounted for by binational lenders. The IDB’s loans to Paraguay represent 1.6% of the Bank’s total portfolio (see Annex 6).

F.

Possible sector and country studies

4.56

During the strategy’s formulation, a need was found for more detailed or additional studies in certain areas to serve as a basis for even more precise targeting of the Bank’s future actions. The subjects identified, on a preliminary basis, are listed in Annex 3.

G.

Risks associated with the strategy’s implementation

4.57

Judging from past patterns of political behavior, there is a risk that the course of events may generate political instability. In the short run, this risk has been substantially reduced by the Administration’s strong position of legitimacy and the agreement on the interagency agenda signed by the Executive and Legislative Branches in September 2003; this agreement reflects a multiparty consensus regarding the major reforms to be pursued in the areas of taxation, customs, the public banking and financial systems, a fiscally responsible budget, and the pension system. In the long run, however, as the public-sector’s liquidity crunch dissipates and the time for new elections approaches, there is a risk that escalating political disputes and competition for available resources could jeopardize governance.

4.58

This risk could be mitigated by the country’s political dynamics since, as the reactivation takes hold, the various parties may be able to compete on the basis of an agenda that provides continuity for successful policies. Within this context, Bank operations that strengthen the relationship between the Executive and Legislative Branches and that foster greater participation by civil society would help to lessen this risk.

4.59

The Paraguayan economy is highly vulnerable to external shocks, particularly from downturns in soybean and cotton prices or production and from economic instability in the region. Because the economy is so small, such shocks may be magnified by minor macroeconomic disequilibria. Recent measures and the IMF agreement have done a great deal to reduce this risk in the short term. In the medium term, operations involving lines of action such as the structural reorganization of the central bank and the improvement of public administration will also help the country to manage this risk more successfully.

4.60

Paraguay is also vulnerable to the reaction of domestic groups that are adversely affected by government measures. The effort being made to combat corruption, informal economic dealings, and the illegal triangulation of trade activities affects

- 49 -

powerful groups that wield influence in various spheres of political and economic affairs in Paraguay and could trigger a reaction against the government’s reform program. International backing for these initiatives, increased transparency, and greater citizen participation in monitoring the workings of government would mitigate this risk.

4.61

Another risk associated with this strategy is that, during the transition, the volume of external resources coming into the country may fall short of the desired level for any of a variety of reasons, even if no crisis erupts. If this occurs, difficulties may arise that have not been provided for in the country’s financial programming. Such a situation would have an impact on the strategies being pursued in conjunction with multilateral agencies, including the IDB and could hamper their implementation, interfering with their contents and sequencing unless alternative sources come forward to provide substantive assistance. The steps being taken by the government and the support being supplied by international financial institutions seek to minimize this risk.

4.62

Conversely, a different type of risk could arise if the convergence of favorable conditions at the outset of this initiative and the success of the reforms were to trigger an interplay of high expectations that spurred the return of private capital to the country, increased lending from multilateral agencies, and the arrival of new foreign investors and other donors, thereby injecting a level of resources that would greatly outstrip the absorption capacity of the economy and public sector. This would entail the risk of a relaxation of fiscal discipline and, without proper coordination, a duplication of effort. This risk could be managed by strengthening the new unit set up in the Ministry of Finance to coordinate loans and donor activities and by ensuring that multilateral agencies monitor events on a continuing basis.

4.63

The existing stock of institutional and project-execution capacity could become a bottleneck if the portion of the loan portfolio awaiting execution and new programs were to place too heavy a load on those capacities at the same time (loan approvals are concentrated in the initial years of the operations programs of both the IDB and the World Bank). To mitigate this risk, priority would be placed on the operations designed to modernize and strengthen public administration, which are a crosscutting component of the strategy. In addition, the strategy’s high scenario uses proper portfolio performance and the progress of reforms as triggers.

4.64

Finally, there is the risk that the strategy’s selectivity and sequencing could be undermined if the demands placed on the Bank, as the lead lender in the country, become overwhelming. In order to mitigate this risk, the government must be supported in its efforts to gain regular access to new resources and sources of public and private financing, to set up institutional mechanisms for the effective coordination of international cooperation activities, and to create a favorable business climate that will attract fresh private investment. These areas of endeavor

- 50 -

should be monitored by the Bank and the authorities as part of their periodic reviews of their agreed agenda for dialogue.

H.

Monitoring of the strategy and indicators

4.65

The strategy will be monitored in close coordination with the government, and specifically the Ministry of Finance. Its progress will be jointly evaluated on a regular basis by the country and the Bank using the following tools: (i)

Mid-term portfolio reviews

(ii)

Annual portfolio review missions

(iii)

Sector missions

(iv)

Updates of the Country Institutional and Policy Evaluation (CIPE) for the allocation of resources from the Intermediate Financing Facility (IFF) account

(v)

Annual updates of the operations program

(vi)

Periodic reviews of the agenda for dialogue

4.66

The strategy includes indicators for use in national monitoring of progress toward the country’s objectives in the various spheres of Bank action. It also provides for the use of indicators to help track interim outputs relating to proposed projects. The use of these indicators will take into account the parameters established in the aidemÊmoire agreed with the Paraguayan authorities.

4.67

The selected country indicators are designed to track the inroads made by the government in priority areas. They include some trend indicators to measure such things as perceptions of government effectiveness and competitiveness, which make it possible to gauge how the country is doing in comparison with other nations having similar per capita income levels. Another important set of country indicators concern the development of human capital and measure progress toward the Millennium Development Goals.

4.68

Information on the contributions being made by the Bank will be obtained from the interim performance indicators that measure the quantitative and qualitative outputs of IDB-executed projects and from trends in portfolio performance.

I.

Agenda for dialogue with the country

4.69

Paraguay is at a critical stage in its effort to transition out of the institutional and economic decline and increased poverty that overtook the country in the last few years. Today, political and economic conditions in the country make this a good

- 51 -

time to lay the groundwork for the start of a new sustainable growth cycle that will bring greater equity and relief from poverty. The Bank plans to be a key partner for Paraguay in this new cycle through the implementation of the new strategy.

4.70

The approach proposed by the strategy acknowledges the need to provide immediate support for government action in key strategy areas. It also offers a flexible frame of reference for identifying future interventions in support of the country. This is the approach used in determining the operations program for 2004 and in identifying additional operations for possible implementation later on. As the institutional process firms up and uncertainty about the economy subsides, new operations focusing on the proposed target areas can be defined in the course of the Bank’s dialogue with the government concerning the operations program for coming years.

4.71

In monitoring the strategy’s implementation and relations between Paraguay and the Bank, the following main areas of dialogue are proposed. More specific subjects within each of these areas will be defined: •

The progress made in carrying out the most urgent reforms and in portfolio performance. As headway is made in these areas, the Bank will proceed with the proposed loan operations. New operations may be defined in the areas covered by the strategy, and the priorities, sequencing, and scale of some operations may be revised.

•

Measures for improving public administration, with emphasis on those having the greatest impact in terms of fiscal sustainability, increased transparency, and the participation of society in monitoring State management.

•

Efforts to backstop a steady improvement in the business climate and to enhance Paraguay’s competitive profile as well as its position in the international arena, in general, and to promote the development of competitive small and medium-sized enterprises (SMEs), in particular.

•

Actions for attracting the private sector and encouraging it to take part in the operation and expansion of infrastructure and basic service delivery in a way that will complement public-sector investment.

•

The possible role of the Bank in helping to deepen regional integration (in particular, prioritization of the investment plans of the Initiative for the Integration of Regional Infrastructure in South America (IIRSA)).

•

Steps to speed progress in social sectors and in the development of the country’s human capital, with emphasis on action relating to the achievement

- 52 -

of the Millennium Development Goals and the monitoring of the relevant indicators.

4.72

This dialogue concerning portfolio performance is of vital importance, since it is geared to support for priority reforms and investments included in the strategy.

Many activities aimed at improving performance are already underway, and these actions figure as key elements of joint monitoring efforts. One of the foremost of these activities is the evaluation of institutional capacities as a basis for the identification of institution-strengthening initiatives and necessary adjustments in project execution schemes. Particular importance is also placed on measures for strengthening the Ministry of Finance’s ability to partner with executing agencies, coordinate international cooperation with Paraguay, and act as a focal point for the dialogue concerning the monitoring of the strategy’s implementation.

Annex 1 Page 1 of 2 PARAGUAY LENDING PROGRAM US$ million NUMBER

SCENARIOS BASE HIGH

NAME 2004

Governance PR-0146 PR-L1005

Judiciary System Strengthening Strengthening Negotiating Skills for Foreign Trade

10.0 2.0

10.0 2.0

4.0 50.0

4.0 50.0

5.0 71.0

5.0 71.0

5.0 NA 2.0

5.0 ND 2.0

20.0 ND 80.0

20.0 7.0 ND ND SD 30.0 80.0

55.0 ND

55.0 ND

Competitiveness PR-0145 PR-0137

CT Loan Support to Public Financial System Reform Support to Public Financial System Reform

Poverty Reduction and Improved Quality of Life PR-L1003

Professional Technical Training Program TOTAL PROJECT INVENTORY 2005 -2008

Governance PR-L1008 PR- L1001 PR-L1004

Civil Service Training Program, MF /SPF Moder.. Agricult Public Sector Management in Support of Small Farmers Central Bank Reengineering Program

Competitiveness PR-0127 PR-0126 PR-L1007 PR-L1009 PR-SN PR-SN PR-SN

Small, Medium, and Microenterprise Global Credit Innovation, Science and Technology Program Integration Corridors, Rehabilitation and Maintenance of the Road System Rural Electrification Program Economic Reconversion Plan for Border Areas Sector Program for Competitiveness and Productive Diversification National Rural Program II – 2nd Phase

Poverty Reduction and Improved Quality of Life PR-0143 PR-L1006

Asuncion “Franja Costera” Development Program Neighborhood Improvement Program

SOCIAL ENTREPRENEURSHIP PROGRAM 2004 US$ thousands Improvement in life conditions of waste recyclers of Cateura landfill Municipal commission for managing and promoting bio-diesel and coconut by-products Development of vegetable sponge by-products industry

700,0 750,0 550,0

Annex 1 Page 2 of 2 PARAGUAY Technical Cooperation Inventory With FOE resources for 2004/05

US$ thousands

Governance Support to the National Integrity Plan CISNI Strengthening of the Ministry of Finance * Strengthening of the Integration and Economic Subsecretariat.

Institutional Strengthening of Public Investment Central Unit MF/UCIP Strengthening of the Internal Audit Office Transparency International/ Paraguay Transparency and Citizen Participation – MF/TCP Strengthening of the Legislative Branch Strengthening of the Office of the Solicitor General

700,0 500,0 600,0 150,0 150,0 150,0 150,0 ND 150,0

Poverty Reduction Support for preparing the Professional Technical Training Program Total 2004

150,0 2,700.0

With other concessional resources (year to be determined) Governance Violence and citizen relations in Asuncion Campaign against human trafficking Strategy development for digital government, MF

100,0 100,0 ND

Competitiveness Strengthening standards and quality control of relevant institutions Defining schemes for Firms of Warranty Reciprocity

ND ND

Poverty Reduction Asuncion Public Transport Feasibility Studies 450,0 * Includes support for Decentralization Design and Coordination Unit as well as a component for training of Ministry of Finance employees. ** Includes US$200 thousand for creating a Business Environment Unit

MIF 2004-2005 Competitiveness International standards for auditing and accounting Clean production processes for productive chains Regulatory strengthening for cooperatives Financial superintendency for non-banking sector

800,0 450,0 ND ND

Inventory Corporate social responsibility Exporters network Promoting quality management for SMEs Rural financial services expansion Development of rural micro-enterprises

ND ND ND ND ND

Annex 1-A Page 1 of 3

IDB GROUP OPERATIONS PROGRAM, 2004-2008 LINKAGES WITH OBJECTIVES FOR SUSTAINABLE ECONOMIC GROWTH AND POVERTY REDUCTION AND WITH THE BANK’S SECTOR STRATEGIES

Projects/Scenarios

Objectives

Linkages

Deepen the administrative reform of the judicial system, to include the streamlining of court proceedings and improvements in the management of the justice system.

Strategy for modernizing the State (rule of law) Support the objective of contributing to the modernization of the justice system, reducing transaction costs, and providing effective access for marginal sectors; streamline procedures in order to permit poor and disadvantaged groups to avail themselves of their rights.

Governance PR-0146

Strengthening the Justice System

PR-L1005 Strengthening Foreign Develop the technical capacity to negotiate and Trade Negotiating Capacity implement international trade agreements; pursue customs facilitation initiatives.

Integration strategy: Support the objective of strengthening regional integration and of consolidating regional markets.

PR-L1004 Program for Restructuring the Central Bank

Strategy for modernizing the State: Support the objectives of strengthening public administration, in particular of agencies responsible for inspection, supervision, and oversight.

Contribute to the functional nationalization and modernization of the Central Bank of Paraguay.

Strategy for modernizing the State: Strengthen integration and trade institutions, taking the need for economic inclusiveness into account.

Strategy for achieving sustainable economic growth: Support the objective of strengthening public institutions and improving the political climate.

PR-L1008 Program for the Professionalization of the Civil Service

Boost the quality and efficiency of the civil service in Strategy for modernizing the State: Support the objectives of all three branches of government. strengthening civil service systems based on merit and flexibility.

PR-L1001 Program for the Modernization of Public Administration of the Agrifood Industry in Support of the Campesino Sector

Help to make the delivery of production promotion services for the agricultural sector more efficient and cost-effective.

Competitiveness strategy: Enhance public policy-making and implementation capacity.

Strategy for modernizing the State (State, market and society) : Improve public institutions’ capacity to design active, inclusive policies; (public administration) and promote more efficient public administration in terms of the design and execution of policies

Annex 1-A Page 2 of 3

Projects/Scenarios

Objectives

Linkages needed for growth and for meeting the needs of sectors excluded from the mainstream society.

Competitiveness PR-0137

Reform of the Public Banking System

Deepen the reform of the financial sector by removing obstacles hindering appropriate financial intermediation functions.

Competitiveness strategy: Promote the financial system’s development in order to provide the private sector with greater access to financing; promote competition, and increase the efficiency of intermediation.

PR-0145

TC Loan for the Reform of the Public Banking System

PR-0127

Global Credit Program

Furnish lines of credit that will channel medium- and long-term resources to the private sector for use in investment projects.

Competitiveness strategy: Make more financial resources available for production activities.

PR-0126

Program for Science, Technology, and Innovation

Strengthen institutions in this sector and promote improvements in scientific and technological infrastructure, particularly in relation to efforts to strengthen the national quality system, while helping to improve the exportable supply.

Competitiveness strategy: Support the development and assimilation of new production technologies and increase cooperation between the public and private sectors in fostering the competitiveness of SMEs and microenterprises.

PR-L1007 Integration Corridors, Road Rehabilitation and Maintenance

Contribute to the improvement, efficiency, and Competitiveness strategy: Increase the financing, coverage, and coverage of the road transportation system, particularly efficiency of infrastructure service delivery. through the definition of policies and maintenance Regional integration strategy: Contribute to the objective of works in which the private sector plays a role. promoting regional infrastructure.

PR-L1009 Rural Electrification Program

Heighten the impact of investments by expanding the Competitiveness strategy: Increase financing for appropriate rural electrification grid, particularly in areas already infrastructure service delivery. served by rural roads, in order to enhance the poorest Poverty reduction strategy: Promote inclusiveness through the rural population groups’ quality of life. delivery of basic infrastructure services for poor groups.

PR- XX

Promote new economic opportunities for groups Competitiveness strategy: Improve labor intermediation with a view adversely affected by the change in the trade regime in to raising employment and productivity and improving the climate border areas in order to mitigate increases in poverty for private activity. and informal economic activity.

Plan for Reengineering the Economy of Border Areas

Annex 1-A Page 3 of 3

Projects/Scenarios

Objectives

Linkages

PR-XX

Sector Program on Competitiveness and the Diversification of Production

Strengthen public and private institutions in support of competitiveness, eliminate obstacles to the development of SMEs, and expand and diversify the exportable supply.

Competitiveness strategy (market institutions): Intensify cooperation between the public and private sectors in order to promote the competitiveness of SMEs and microenterprises through the development of production chains.

PR-XX

National Rural Roads Program II – Second phase

Help to boost competitiveness and raise the living standards of the rural population by increasing and maintaining the service levels of a substantial portion of the priority rural road network.

Competitiveness strategy: Increase financing for appropriate infrastructure service delivery.

Poverty reduction strategy: Promote inclusiveness through the delivery of basic infrastructure services for poor groups.

Poverty reduction and improved quality of life PR-0143

Program for the Development of the Riverside Area of Asunción

Improve the living conditions of low-income groups living in low-lying areas of Asunción by developing the economic potential and cityscape of the riverside area.

Poverty reduction strategy: Social development and responses to environmental degradation in poor areas; cooperation between the public and private sectors to boost the competitiveness of poor groups; and promotion of inclusiveness through the delivery of basic infrastructure services to poor sectors of the population.

PRL-1003 Design and Implementation Implement a technical/vocational educational system of a Technical/Vocational to contribute to the creation of a labor force that is Educational System better equipped to meet the demands of a modern economy.

Poverty reduction strategy (competitiveness): Provide better job opportunities for poor workers; (social development) reduce inequalities in access to education; and eliminate social exclusion through the development of social capital.

PRL-1006 Neighborhood Improvement Improve the living standards of population groups Program living in substandard conditions.

Poverty reduction strategy: Promote inclusiveness through the delivery of basic infrastructure services to poor sectors of the population; improve the property rights of poor persons; reduce inequalities in the area of housing services.

Annex 2 Page 1 of 1

PARAGUAY - Classification of the Current Loan Portfolio and Sums to be Disbursed

by Strategy Area As of 30 April 2004 (Millions of US dollars) Strategy area

Oper. #

Loan #

Operation/Objective

Year approved

No. Proj.

% of total

Value US$

%

Available balance

PR-0030

918/OC

YacyretĂĄ power transmission system

Feb. 96

1

50.0

7.6%

US$ 3.6

% 1.0%

PR-0035

933/OC

Program to improve highway corridors

June 96

1

82.3

12.5%

20.3

5.5%

1. Competitiveness PR-0112

1117/OC

Infrastructure rehabilitation program (El NiĂąo)

Aug 98

1

35.0

5.3%

2.7

0.7%

PR-0113 PR-0100 PR-0144

1278/OC 1349/OC 1428/OC

Western integration corridors Competitiveness & market expansion PROPEF - Public banking reform

Nov-00 Sep-01 Oct-02

1 1 1

100.0 10.0 1.0

15.2% 1.5% 0.2%

91.5 9.5 0.9

24.9% 2.6% 0.2%

278.3

42.3%

128.5

34.9%

PR-0081

934A/OC 934B/OC

State modernization program

June 96

22.0

3.3%

12.4

3.4%

PR-0093

1143/OC

Preinvestment program

Nov-98

1

5.0

0.8%

4.0

1.1%

2. Modernization of PR-0115 the State PR-0116

1253/OC

Fiscal mgmt. modernization & strengthening program

July 00

1

6.0

0.9%

4.0

1.1%

1300/OC

Support for National environmental system

Dec 00

1

8.0

1.2%

6.6

1.8%

PR-0130

1301/OC

Support for 2002 national census

Dec 00

1

9.2

1.4%

3.3

0.9%

PR-0132

1448/OC

Cadastre and property registry program

Jan 03

1

Subtotal

6

Subtotal 3. Rural sector development

1

6

23.1%

9.0

1.4%

9.0

2.4%

59.2

9.0%

39.3

10.7%

PR-0082

1109/OC

Support for small-scale cotton producers

June 98

1

25.7

3.9%

5.0

1.4%

PR-0104

1230/OC

National rural roads program II

Dec 99

1

67.0

10.2%

52.6

14.3%

PR-084

1255/OC

Modernization & diversification of small-scale farming

July 00

1

10.0

1.5%

9.4

2.6%

102.7

15.6%

67.0

18.2%

Subtotal

4. Social sector reform

23.1%

3

11.5%

PR-0038 PR-0028 PR-0094

851/OC 1006/OC 1016/OC

Vocational training program Primary health care reform program Global microenterprise credit program

Dec 94 Apr 97 June 97

1 1 1

20.7 39.0 20.0

3.1% 5.9% 3.0%

7.1 22.7 5.4

1.9% 6.2% 1.5%

PR-0117

1254/OC

Basic education reform

July 00

1

40.0

6.1%

22.4

6.1%

PR-0118

1312/OC

Water supply & sanitation in small communities SENASA

Feb-01

1

12.0

1.8%

11.0

3.0%

PR-0125

1422/OC

Social investment program PROPAIS II

Sep-02

1

28.4

4.3%

28.4

7.7%

PR-0148

1447/OC

PROPEF - Riverside area

Jan 03

1

1.5

0.2%

1.0

0.3%

PR-0149

1462/OC

PPF-Early and preschool education

June 03

1

0.9

0.1%

0.8

0.2%

PR-0124

1467/OC

Early and preschool education

July 03

1

23.4

3.6%

23.4

6.4%

PR-0125

1481/OC

PROPEF - Support for execution of PROPAIS II

Oct-03

1

1.2

0.2%

1.2

0.3%

PR-0147

1520/OC

Social protection program

Dec 03

1

30.0

4.6%

10.0

2.7%

Subtotal Total in execution

11

42.3%

217.1

33.0%

133.4

36.2%

26

100.0%

657.3

100.0%

368.2

100.0%

Annex 3 Page 1 of 1

POSSIBLE SECTOR AND COUNTRY STUDIES 1. Competitiveness, trade, and integration •

Informality in Paraguay (2004).

•

Development of local-currency financial markets

•

Computable general equilibrium simulations for use in evaluating Paraguay’s integration options

•

Alternative approaches for strengthening the national accreditation system for institutions of higher learning

2. Reducing poverty and improving the quality of life of low-income groups •

The impact of higher education on economic growth and the reduction of poverty and inequality (2004)

•

A demographic window of opportunity for reducing inequality

•

A diagnostic assessment of the labor market in Paraguay (2004)

•

Trends and determinants of migration, and its impact on basic services

3. Governance •

Update of the CFAA

Annex 4 Page 1 of 3

SELECTED BIBLIOGRAPHY 1.

IDB, Análisis de Situación Político-Institucional, Bordón, José, O., Paraguay, June 2003.

2.

IDB, ¿Cómo Salir de la Crisis? Estudio Exploratorio del Alto Paraná, Gonzalo Falabella and Fernando Masi, February 2003.

3.

IDB, “Competitiveness: The Business of Growth.” Report on Economic and Social Progress in Latin American, 2001, IDB.

4.

IDB, Capital Social, Gobernabilidad y Desarrollo: En Búsqueda de Relaciones entre Estado y la Sociedad más Fructíferas en Paraguay, May 2003.

5.

IDB-World Bank, Country Accountability Assessment, Washington, D.C., January 2004.

6.

IDB, Estudio de Gobernabilidad, Sustainable Development Department; State, Governance and Civil Society Division; Region 1; State and Civil Society Programs Division; August 2003.

7.

IDB. Estudio sobre Magnitud del Esfuerzo Fiscal, Sostentibilidad Fiscal en el Paraguay 2003-2008, Perspectivas y Desarrollo, Braun, Miguel, Kweitel, Mercedes, and Marongiu, Federico, May 2003.

8.

IDB, Intervenciones en el Área de Gobierno Digital, Sustainable Development Department, Information Technology for Development Division, June 2003.

9.

IDB, Matriz de Intervenciones. Seguimiento del logro de los resultados esperados indicados en el documento GN-2118-1. [Matrix of interventions. Monitoring of achievement of expected outcomes as indicated in document GN-2118-1]

10. IDB, Nota del Sector Agua Potable y Alcantarillado, Region 1, Environment Division, August 2003.

11. IDB, Nota del Sector Educación, Region 1, Social Programs Division, June 2003.

12. IDB, Nota sobre el Sector Financiero, Region 1, Finance and Basic Infrastructure Division, June 2003.

13. IDB, Nota sobre el Sector Salud, Region 1, Social Programs Division, June 2003.

Annex 4 Page 2 of 3

14. IDB, Nota sobre Género, Sustainable Development Department, Women in Development Unit, June 2003.

15. IDB, Nota sobre Poblaciones Indígenas en el Paraguay, Region 1, Social Programs Division, June 2003.

16. IDB, Nota sobre Protección Social, Region 1, Social Programs Division, June 2003.

17. IDB, Nota Técnica de Comercio e Integración, Integration and Regional Programs Department, November 2003.

18. IDB, Nota Técnica sobre Competitividad, Region 1, Finance and Basic Infrastructure Division, November 2003.

19. IDB, Nota del Sector Transporte, Region 1, Finance and Basic Infrastructure Division, Smith, Peter, G. M., September 2003.

20. IDB, Paraguay: Retos en la Lucha contra la Pobreza, Region 1, Environment Division and Social Programs Division , October 2003.

21. IDB, The IDB’s Paraguay Strategy: An Evaluation, Birch, Melissa & Baer, Werner, September 2003.

22. IDB, Lecciones Aprendidas de la Acción del Banco en Paraguay en la Última Década, Domínguez, Francisco and Navarro, Álvaro, September 2003.

23. IDB, Situación Macroeconómica y Opciones de Políticas, Cabrera, Mauricio, Gil-Díaz, José, and Fernández, Eduardo, June 2003.

24. Centurión López, Aldo, Factores Críticos del Sector Agrícola, June 2003.

25. ECLAC, Estudio Preliminar del Transporte de los Productos de Comercio Exterior de los Países sin Litoral de Sudamérica, Thomson Ian, Ricardo Sánchez and Alberto Bull, March 2003.

26. D. Kaufmann, A. Kray, and M. Mastruzzi (2003), Governance Matters III, The World Bank, Policy Research Working Paper 3106.

27. Encuesta Integrada de Hogares, Dirección General de Estadística, Encuestas and Censos (DGEEC), 2000/1. [Integrated Household Survey, 2000/1, Bureau of Statistics, Surveys and the Census] 28. Fernández-Valdovinos, Carlos and Monje Naranjo, Alexander, Economic Growth, 2002.

29. Ferroni, M., Regional Public Goods Development Assistance, ITD-STA, Discussion Paper No. 11, IDB-INTAL, Buenos Aires, 2001.

Annex 4 Page 3 of 3

30. Guinovart, Beatriz, Diagnóstico Institucional del Sistema de Servicio Civil: El Caso de Paraguay, May 2003.

31. International Monetary Fund, Washington, D.C., “Paraguay-Staff Report for 2002, Article IV Consultation,” 2002.

32. JICA: Estrategias de Competitividad y Desarrollo: Una Perspectiva Global. JICA, 2000.

33. Malajovich, Laura, and Filc, Gabriel, Transparencia en el Proceso Presupuestario y las Instituciones Fiscales, May 2003.

34. UNDP, Instituto Internacional de Gobernabilidad, “Diagnóstico Institucional de la República del Paraguay” 2003.

35. Rivarola M., Informe Nacional sobre Educación Superior en Paraguay, Asunción, CREASAL/UNESCO, 2002.

36. Robles M. Crecimiento, Desigualdad y Pobreza, November 2000.

37. UNDP, (a collaborative study by the World Bank, the IDB, Conrad Adenauer Stiftung, and the ILO), Estrategia Nacional de Reducción de la Pobreza y la Desigualdad, Secretaría de Acción Social de la Presidencia de la República [Secretariat for Social Action of the Office of the President of the Republic], September 2002.

38. Vera B. and Fernando Paciello, Paraguay: Profundización del Sistema Financiero y Opciones de Políticas, October 2003.

39. World Bank, De Ferranti, David, Closing the Education Gap & Technology, Latin America and Caribbean Series, 2003.

40. World Bank, Washington, D.C., Paraguay: Country Assistance Strategy, January 2004.

41. World Bank, Washington, D.C., Paraguay: Policy Options for the New Administration: Creating Conditions for Sustainable Growth, Volumes I & II, 2003.

Note: The documents listed in this annex may be accessed at the webpage for the strategy: http://re1/N-od1/documentos/nf_notassectoriales.htm

Annex 5 Page 1 of 3

CONSULTATIONS CONDUCTED IN CONNECTION WITH THE PREPARATION OF THE BANK’S COUNTRY STRATEGY WITH PARAGUAY 1.1

During the preparation of the new country strategy, Bank personnel conducted an ongoing dialogue with the authorities and carried out numerous activities designed to broaden the consultation process to include the main groups within Paraguayan society. The aim of this effort was to identify areas in which a sufficient consensus exists to back up the proposed agenda.

1.2

Early in 2003, Bank representatives met with all the presidential candidates and their economic teams to acquaint them with the Bank’s activities in the country and to learn about the main components of their election platforms. These conversations led to further meetings with various business associations and civil society organizations.

1.3

Following the general election in April 2003, a one-day working meeting was held in July with the transition team, including the President elect and his chosen ministers. The Bank presented its diagnostic assessment of the situation in the country, and the main challenges to be dealt with were discussed and identified.

The discussion drew upon a number of papers and presentations that had been prepared as part of the analytical work involved in formulating the country strategy.

This was a pivotal point in the ongoing dialogue because it created a stronger sense of ownership of the portfolio, the strategy, and the work plan covering the new Administration’s five-year mandate.

1.4

Various meetings were also held with the members of the incoming Administration in the Executive and Legislative Branches, as well as with various associations, analysts belonging to different schools of political thought, and representatives of civil society. The purpose of these gatherings was to seek consensus regarding possible ways of addressing national issues and to obtain technical inputs for consideration in the Bank’s new strategy with the country.

1.5

A very high priority was placed on developing closer relations without nongovernmental organizations, the private sector, and the Church. The topics examined at these meetings had to do with the Bank’s work in the country. Positive aspects of its work as well as other elements that warrant further examination were identified, and suggestions were made about possible improvements and areas for future action.

1.6

Throughout the preparation of the country strategy, the consultation process included the organization of seminars in which specific topics were explored in depth. The Bank’s approach (along with papers on specific subjects) was presented, along with the concepts of specialized consultants, and the positions of the various local stakeholders and the authorities. The subject areas covered were: fiscal

Annex 5 Page 2 of 3

sustainability and governance, social capital, and competitiveness and integration.

All these events were attended by a very wide range of different sectors, civil society organizations, and other stakeholders concerned with the various subjects at issue. At an appropriate point in time during the information activities and strategy introduction stage, a seminar will be held on the subject of poverty.

1.7

The new country strategy was also presented to the international agencies working in Paraguay. These agencies include: the World Bank, the UNDP, UNICEF, IICA, the European Union, USAID, GTZ, PAHO, FAO, the AECI and the Andean Development Corporation (CAF), as well as the Director of the Unidad Central de Inversión Pública (UCIP) [Central Public Investment Unit], the new unit that has been set up in the Ministry of Finance to coordinate projects funded by external borrowings and international cooperation. The strategy was well received by the international cooperation community, and various areas in which the coordination of programs and activities can be strengthened were identified.

1.8

Another noteworthy aspect of the Bank’s coordination with other financial institutions is its close collaboration with the IMF and the World Bank in the design of solutions for the liquidity problems that have troubled the government, as well as in the identification of the main types of changes that are needed in order to heighten the strategy’s impact on the economy. This collaboration was instrumental in the work-up to the Government of Paraguay’s conclusion of a stand-by arrangement with the IMF. That arrangement stipulates the macroeconomic parameters within which the strategy will be implemented. In the specific case of the World Bank, there has been an ongoing dialogue concerning the problems faced

by Paraguay and means of enhancing the complementarity of the two institutions’ work. This channel of communication has made it possible to ensure that the priority areas and operational programs defined in the IDB’s and World Bank’s strategies are highly complementary.

1.9

This process of dialogue and consultation has enabled the Bank to refine its diagnostic assessment and pinpoint crucial challenges and priorities more accurately. The most salient subjects addressed by the strategy are governance (with a strong emphasis on transparency and improved public administration); support for the creation of a larger role for the private sector as an engine of economic development, with emphasis on efforts to boost competitiveness; the development of human capital (especially through more thorough-going educational reform and improvements in higher education); and the effort to combat poverty.

1.10

As part of the information activities and strategy introduction stage, various events will be organized at which the strategy will be presented to groups that have been direct participants in the process, major political and social players, and civil society organizations that are involved in launching the strategy or that have shown an interest in learning more about it. A significant amount of analytical literature

Annex 5 Page 3 of 3

was produced during the formulation and discussion of the country strategy, and these materials will be made available to the public on the Internet.

1.11

A broad range of staff members and units within the Bank also were involved in the formulation of the strategy; the close collaboration between IDB Headquarters and the Country Office encompassed the Private Sector Department, the Inter-American Investment Corporation (IIC), the Multilateral Investment Fund (MIF), and the central departments. The preparation of the country strategy was greatly enriched by the close collaboration of professional personnel engaged in the Bank’s work in Paraguay, who produced a series of briefing and technical papers that served as the basis for the seminars discussed in paragraph 1.6. An open dialogue was also maintained with the Office of Evaluation and Oversight, which greatly added to the analysis of lessons learned and provided inputs for the preparation of the new strategy.

Annex 6 Page 1 of 1

INDICATORS OF EXPOSURE IN PARAGUAY (%)

BASELINE SCENARIO 2000 2001 2002 2003

2004 2005 2006 2007 2008 pj pj pj pj pj

Debt owed to IDB / IDB portfolio (<18%) IDB debt service1 / External public debt service (<30%) Multilateral debt service2 / External public debt service (<50%)

1.7 31.1 46.9

1.6 33.3 50.8

1.6 40.8 62.7

1.6 63.9 67.3

n.a.

34.2 39.9

IDB debt service1 / Exports B&S (<8%) External public debt service / Exports B&S Stock of public debt with IDB (% of GDP)

2.7 8.6 11.3

3.3 9.8 12.3

3.4 8.4 15.9

5.2 5.0 5.6 6.3 6.5 5.6 8.1 9.61 13.97 13.71 13.53 13.23 16.1 16.16 16.18 15.73 14.79 13.71

n.a.

40.3 47.2

n.a.

45.9 53.8

n.a.

48.1 n.a.

n.a.

42.6 n.a.

1/

Includes principal and interest payments Does not include debt owed to the IMF pj: Projected n.a.

Not available Note: The maturity profile of liabilities owed to some foreign governments’ financial institutions point to a considerable increase in the service on the external public debt beginning in 2005.

Source: IMF, World Bank, and IDB. 2/

HIGH SCENARIO 2000 2001 2002 2003

2004 2005 2006 2007 2008 pj pj pj pj pj

Debt owed to IDB / IDB portfolio (<18%) IDB debt service1 / External public debt service (<30%)

1.7 1.6 1.6 1.6 n.a. n.a. n.a. n.a. n.a.

31.1 33.3 40.8 63.9 34.3 40.7 46.9 49.7 44.8

Multilateral debt service2/ External public debt service (<50%)

46.9 50.8 62.7 67.3 40.0 47.7 55.0 n.a.

IDB debt service 1 / Exports B&S (<8%) External public debt service / Exports B&S Stock of public debt with IDB (% of GDP)

2.7 3.3 3.4 5.2 5.0 5.7 6.4 6.7 5.9 8.6 9.8 8.4 8.1 9.61 14.03 13.86 13.74 13.51 11.3 12.3 15.9 16.1 16.6 17.1 17.4 16.8 16.0

1/

n.a.

Includes principal and interest payments.

Does not include debt owed to the IMF pj: Projected n.a.

Not available Note: The maturity profile of liabilities owed to some foreign governments’ financial institutions point to a considerable increase in the service on the external public debt beginning in 2005.

Source: IMF, World Bank and IDB. 2/