CGD Podcast: Paraguay’s Sustainable Growth Strategy with Carlos Fernández Valdovinos

Date: July 18, 2024
Host: Liliana Rojas Suarez (Senior Fellow, CGD)
Guest: Carlos Fernández Valdovinos (Minister of Finance, Paraguay)

Episode Overview

This episode spotlights Paraguay’s exceptional and sustainable economic growth amid a sluggish Latin American region. Liliana Rojas Suarez engages with Finance Minister Carlos Fernández Valdovinos to explore Paraguay's growth model, its pursuit of environmentally conscious development (“Green Paraguay”), export diversification, trade policy amidst global protectionism, and the challenges of state capability. The conversation also touches on Valdovinos’ perspective on reforms needed in global financial institutions, memorable moments on the job, and the economic principle he wishes the world would adopt.

Key Discussion Points and Insights

1. Paraguay’s Robust Economic Growth

• Exceptional Growth in Regional Context:

  • While Latin America is forecast to grow at a meager 2.2–2.5%, Paraguay grew at 4% last year and is on track for 4.5–5% growth in 2024 (02:30).
  • The focus is not just on growth numbers, but on translating growth into welfare for the people.

• Recipe for Growth:

  • Expansion traces back to reforms launched in 2002, maintaining average 4.2% growth till the pandemic.
  • "We continue to do the right things that actually promote economic growth in the medium to long term. I have to highlight first the stabilization that you can observe on the macro side for us." – Carlos F. Valdovinos (02:30)
  • Emphasis on macroeconomic stability: low inflation, low fiscal deficits, sustainable debt.
  • Aggressive reform agenda: 7 legislative reforms passed in the first 4 months, including pivotal pension reforms.

• Role of Private Sector:

  • Government’s approach is to "prepare the field," while the private sector "plays the game and scores the goals." (04:08)
  • Key ingredient: policy certainty—particularly maintaining a low, unchanging tax burden, to attract investment.

2. Sustainability of Growth: “Green Paraguay”

• No Tradeoff between Growth and Environment:

  • Unlike “grow first, clean up later” models, Paraguay’s growth and environmental goals are consciously complementary.

• Natural Advantages as Catalysts:

  • Abundant water, fertile land, and 100% clean, renewable energy underpin competitiveness in agriculture, biofuels, and new industries.
  • "Paraguay has a lot of water, very fertile land... not many countries in the region, all the world, have clean and renewable energy products..." – Carlos F. Valdovinos (07:47)

• Innovative Green Projects:

  • Diversifying via biofuels (biodiesel from corn, ethanol from sugarcane).
  • Ambitious plan to become a producer of green hydrogen and especially "100% green fertilizer" for regional export, leveraging Paraguay’s clean energy.
  • “When I'm talking about green fertilizer, we are green green… some countries are producing green fertilizers. But how they produce the electricity... is not that great. Therefore, this is 100% green fertilizer.” – Carlos F. Valdovinos (09:35)

3. Export Diversification & Regional Value Chains

• Beyond Agriculture:

  • Diversification pillars:
    • Maquila regime: Hosting Brazilian entrepreneurs to produce goods in Paraguay (with special tax advantages), then re-exporting to Brazil to displace Chinese—not Brazilian—products.
    • "We are able to insert ourselves in the Brazilian productive chain. That is another way we are diversifying the economy." – Carlos F. Valdovinos (10:59)
  • Growing services sector: Now ~60% of GDP, reflecting a rising middle class (14:11).

• Integrating with Mercosur and Beyond:

  • Maquila exports have reached $1B/year out of total $10B, and continue to grow.
  • Strategic use of Mercosur to diversify markets; political and macroeconomic instability in regional partners makes diversification critical.

4. Navigating Global Protectionism and Trade Fragmentation

• Views on the "Tariff War":

  • Openly critical of rising trade fragmentation and protectionist reactions in Brazil and globally.
  • “We do have exception to the MERCOSUR tariff... We're using to reduce the external tariff..." – Carlos F. Valdovinos (14:11)
  • Policy: Stay open in trade, pursue alternative partners (Emirates, Saudis, selected Asian economies) as Europe drags on concluding agreements.

• Necessity of Diversification:

  • “This is a tough neighborhood. Being in the middle of Brazil and Argentina is a tough neighborhood. But it has been tough during the past 200 years. So we learn how to survive this tough environment.” – Carlos F. Valdovinos (18:56)
  • Paraguay is used to volatility in its trading partners; the ability to "ride the waves" is now a source of resilience.

5. Addressing Domestic Challenges: State Capacity, Connectivity & Anti-Corruption

• Implementing Business-Friendly Reforms:

  • Highly competitive, simple tax regime (10% personal, 10% corporate, 10% VAT).
  • New regime allows a company to be established in 5 days, sharply reducing bureaucratic friction (21:27).

• Leveraging Strategic Geography:

  • Paraguay repositioned as the “heart of South America,” not “in the middle of nowhere.”
  • Major investments: Completing the Bi-Oceanic Corridor (Atlantic-Pacific highway), bridges linking with Argentina and Brazil, new waterway infrastructure.
  • “The shortest way to go from the east to the west, from the Atlantic to the Pacific, goes through Paraguay.” – Carlos F. Valdovinos (23:10)

• Building State Capability and Fighting Corruption:

  • Tackling tax evasion and corruption through integrating the Revenue Office and Customs, yielding a tax revenue increase of 20% y/y without rate hikes.
  • “You can pass many law, but if you do not comply with the law is very useless.” – Carlos F. Valdovinos (26:38)
  • Increased funding and technical partnerships for citizen security and transnational crime-fighting.

6. Role and Reform of Multilateral Organizations

• Dependency and Frustration:
  • Multilaterals (World Bank, IMF) remain vital, but loan approval is too slow (avg. 19 months from submission to board decision).
  • Urgent call for reform: “If you are in the private sector and for you lending approval takes 19 months, probably you are out of business very, very quickly... We need to do reforms in order to create really a much more agile institution.” – Carlos F. Valdovinos (30:01)
  • Suggests learning from more nimble regional institutions.

Notable Quotes & Memorable Moments

"We as government, we can be in charge of preparing the field... but it's going to be the private sector who is going to play the game and is going to score the goals."
— Carlos F. Valdovinos (04:08)

"We are green green... some countries are producing green fertilizers. But how they produce the electricity... is not that great. Therefore, this is 100% green fertilizer."
— Carlos F. Valdovinos (09:35)

"This is a tough neighborhood. Being in the middle of Brazil and Argentina... We learn how to survive this tough environment."
— Carlos F. Valdovinos (18:56)

"You can pass many law, but if you do not comply with the law is very useless."
— Carlos F. Valdovinos (26:38)

"If you are in the private sector and... lending approval takes 19 months, probably you are out of business very, very quickly. Out of totally."
— Carlos F. Valdovinos (30:13)

Personal & Light-hearted Moments

• Balancing Seriousness and Soccer:

  • Most people engage him about his beloved soccer club, not about the economy. "Everyone actually asked me a comment about soccer... On very few occasions, whoever talk to me, talk about economics, we talk about soccer." (33:18)

• Magic Wand Policy:

  • Would constitutionally forbid central banks from directly lending to governments:

    "There is nothing more dangerous, something that creates more damage to any economy or to any population than inflation. And usually inflation is a monetary phenomenon that is based on a huge fiscal deficit." (34:18)

Timestamps for Key Segments

| Segment | Timestamps | |---|---| | Paraguay’s standout growth in Latin America | 01:32–07:04 | | Ingredients for sustainable growth & Green Paraguay | 07:04–13:14 | | Export diversification and integration with Mercosur | 10:59–13:14 | | Navigating global protectionism & trade fragmentation | 13:14–18:10 | | Challenges and resilience in MERCOSUR | 17:19–19:56 | | Reform momentum: Business environment & connectivity | 21:27–26:17 | | State capability, anti-corruption, and security | 26:17–29:12 | | Reforming multilateral development banks | 30:01–32:32 | | Personal insights and closing questions | 33:18–35:32 |

Takeaways

• Paraguay’s economic performance is an outlier in Latin America, underpinned by macro stability, consistent policy, and strategic openness to trade and investment.
• The country seeks sustainability by aligning its green ambitions with its natural comparative advantages, rather than seeing growth and environment as a tradeoff.
• Strategic geographic positioning and policy discipline have allowed Paraguay to harness regional value chains and weather volatility among neighbors.
• State capability reforms focus on the tangible—real compliance, anti-corruption, and infrastructure development—alongside business facilitation.
• Frustration with the lagging bureaucracy of global lenders is clear: effectiveness now requires speed and flexibility.
• Minister Valdovinos’s pragmatism—tempered by humor and a passion for soccer—infuses the conversation with both hope and realism.