Can Paraguay Escape Decades of Despotism, Ineptitude, and Corruption?

Despite promising one of the biggest turnaround stories in the southern hemisphere, President Horacio Cartes has more work to do.

Photographer: Norberto Duarte/AFP/Getty Images

Last fall, New York University sponsored a lecture entitled “Introducing Paraguay: A Land of Opportunity.” It was an offering that until recently might have produced shrugs of indifference, or snickering about the country’s tawdry history: Opportunities for whom? Dictators? Smugglers? Nazis? But here was the president of Paraguay, stepping to the lectern to deliver that speech as 150 students, professors, and distinguished guests applauded. A smiling and stocky 59-year-old with a helmet of bristly black hair, Horacio Cartes hailed his country’s transformation from corrupt Latin American backwater to untapped vein of economic promise, and chronicled his own move from businessman to head of state. “Armed with the values instilled in me by my parents, I started my political career, giving the country a new model of government, a new direction,” said Cartes, adding later, “Although much remains to be done, we are moving forward.”

After centuries of isolation and experiments in tyranny, Paraguay is having its moment. Construction cranes loom over an emerging skyline in the capital city of Asunción, foreign investors are buying up swaths of land to raise livestock or grow crops, and the government has begun to deliver a bit of transparency. “This is an important first step to improve the quality of institutions in Paraguay on a lasting basis,” according to a generally upbeat report issued last month on the country’s progress by the International Monetary Fund. In a region badly hurt by corruption and a commodities bust, Paraguay’s economy is a standout, projected by the World Bank to grow more than 3 percent in 2016, the second-fastest in South America. This makeover has made Cartes a darling of good-government types, academics, and business groups. In introducing Cartes at NYU, President John Sexton described him as “a remarkable man.” “I love the diversity of your business acumen,” Sexton said, “ranging from beverages to tobacco to soccer.”

Diversity is one way to put it. No one mentioned it that morning in New York, but the president was once accused of currency fraud, which caused him to spend four years as a fugitive and then do time in jail before the charges were dropped. He was the focus of a U.S. investigation into potential money laundering (no charges were filed). And the tobacco company Sexton referred to? It’s the favorite of smugglers who flood Brazil with black-market cigarettes.

Cartes dove into his speech, and then, as he began promoting a new scholarship program to send 1,500 Paraguayans to study abroad, his teleprompter malfunctioned. It was the kind of minor snafu most seasoned politicians would handle with a joke, or by ad-libbing the remainder of the speech. Cartes remained silent, glowering as aides scrambled to fix the problem. He then returned to his scripted remarks.

“It is possible to change a life,” Cartes said. “It’s possible to change a country. And I assure you that together we can change the world.”

Cartes is trying to pull off one of the hemisphere’s more remarkable transformations, for both himself and Paraguay. In doing so, he has pitched himself as a blunt and successful entrepreneur with little regard for the norms of politics—just the kind of leader a young democracy needs to overcome decades of despotism, ineptitude, poverty, and corruption. On one level at least, it seems to be working: Paraguayans appear to share the investing world’s view that the past is the past. But there are signs they are growing impatient with their entrepreneur president. Now that they’ve seen change, they want more—and they want it now.

A fisherman rows his boat along polluted waters of La Chacarita in Asunción, Paraguay, Apr. 19, 2013.
A fisherman rows his boat along polluted waters of La Chacarita in Asunción, Paraguay, Apr. 19, 2013.
Photographer: Tomas Munita/The New York Times

It’s no accident that Paraguay is an infrequent stop for backpackers exploring Latin America. In a region known for its natural wonders, Paraguay has the Chaco, a hot, dry, and thorny forest that covers roughly 60 percent of the country, in the north and west. It is sometimes referred to as Infierno Verde, the Green Hell. The remainder of Paraguay, in the south and east, is home to most of the country’s 6.8 million people. Asunción won’t be mistaken for Buenos Aires anytime soon. It is small and slightly seedy, tucked in a bend of the Rio Paraguay and crowded with beat-up taxis, cigarette billboards, and plywood-shack slums, one of which sits in the shadow of the lavish presidential palace. Still, there are minor pleasures here and a populace that is both young (the median age is 27, compared with 38 in the U.S.) and increasingly upbeat. Paraguayans were ranked as the happiest people on earth, according to a 2014 Gallup poll that measured positive experiences.

Nearly as big as California, Paraguay is bordered and split by rivers. Because of its forbidding geography and decades of dictatorial rule, it has remained fairly isolated from its neighbors—“an island surrounded by land,” its most famous writer, Augusto Roa Bastos, called it. The official languages of Paraguay are Spanish and Guarani, an indigenous language spoken by an estimated 90 percent of the population. And its Catholic population tends to be more conservative than others in South America. As a presidential candidate, Cartes said he would “shoot myself in the balls” if his son wanted to marry another man.

Paraguay gained independence from Spain in 1811, but it’s progress has been stunted by a collection of dictators and sadists, as described in At the Tomb of the Inflatable Pig: Travels Through Paraguay, a raucous travelogue and history by the British author John Gimlette. One of the country’s first leaders, José Gaspar Rodríguez de Francia, known as El Supremo, kept a ledger of his sexual conquests and created a prison known as the “Chamber of Truth.” Another dictator, Francisco Solano López, was infatuated with Napoleon and squeezed his portly frame into a replica of the French emperor’s uniform. In the 1860s, he led Paraguay into the disastrous War of the Triple Alliance against Brazil, Argentina, and Uruguay, in which as much as 60 percent of the population was killed. General Alfredo Stroessner, who seized power in 1954 and ruled for 35 years, provided safe haven to Nazis and oversaw a security force that tortured and killed opponents with chilling creativity: dunking them in vats of excrement, or dismembering them with a chain saw as the general listened on the phone.

President General Alfredo Stroessner of Paraguay on July 1, 1973.
President General Alfredo Stroessner of Paraguay on July 1, 1973.
Photographer: Keystone/Getty Images

Despite his appetite for cruelty, Stroessner is credited by some with bringing Paraguay a measure of economic stability, in part by implementing economic reforms urged by international agencies including the International Monetary Fund. Even today, Paraguay maintains conservative monetary and fiscal habits, and as a result has avoided the hyperinflation that has plagued the likes of Brazil and Argentina.

It is still a poor country, though, and continued economic progress faces an enormous obstacle: an underground economy that starves government coffers of tax revenue and undermines Paraguay’s legitimacy. During Stroessner’s regime, military leaders were involved in the smuggling racket; Stroessner said that was el precio de la paz, the price of peace. An Asunción think tank estimates the informal economy equals 39 percent of official gross domestic product. And while there's currently a downturn in business in the notorious border town of Ciudad del Este, it's mostly because its biggest market for goods, Brazil, is an economic basket case.

Illegal cigarettes account for about a third of all cigarette purchases in Brazil, costing the government an estimated $1.2 billion in tax revenue each year. In the Brazilian border town of Foz do Iguaçu, the tax authority’s shredder grinds 300,000 cigarettes per day on average. On a swelteringly hot day in October, the cigarettes being destroyed carried the brand Eight. Workers dumped cartons of Eights onto a conveyer belt that fed into a giant shredder, which in turn spit out bales of shredded tobacco. (They were destined to be burned as fuel at a local ceramics studio.) Eight is the brand most often seized by Brazilian authorities. It is manufactured by Tabacalera del Este, the company co-founded and still at least partially owned by Horacio Cartes.

Rafael Dolzan, the local tax-authority chief, lamented the daunting nature of the task. “We managed to reduce the amount of smuggling entering Brazil through this region with this fight we are doing,” he said. “Obviously then this migrates to other regions.” In December, Brazilian authorities confiscated 5 million packs of cigarettes made by Tabesa, as the president’s firm is known, according to media reports. In all, Paraguayans legally purchased almost 1 billion cigarettes in 2014; as many as 65 billion more were produced and shipped—or smuggled—abroad, according to a study commissioned by British American Tobacco.

Paraguayans tend to view the smuggling as Brazil’s problem. Jose Ortiz, president of Tabesa, says his company sells its cigarettes legally and pays taxes to the Paraguayan government. “The problem in Brazil is not that Paraguay has moderate taxes, but that Brazil has exorbitant taxes,” Ortiz says. While Cartes remains a Tabesa shareholder, Ortiz said, he hasn’t had an active role in the company while he has served as a candidate and as president.

A Brazilian Tax Authority agent communicates to colleagues that he has discovered a load of smuggled cigarettes near the border with Paraguay in Foz do Iguacu, Brazil Oct. 7, 2015.
A Brazilian Tax Authority agent communicates to colleagues that he has discovered a load of smuggled cigarettes near the border with Paraguay in Foz do Iguacu, Brazil, on Oct. 7, 2015.
Photographer: Dado Galdieri/Bloomberg

The son of Paraguay’s Cessna Aircraft representative, Cartes was born in Asunción and and attended private schools. His parents were so passionately pro-American that his mother wept when John F. Kennedy was killed, as if she’d lost her own child, Cartes has said. He showed an early knack for business, importing spare parts of airplanes while still in school. By the 1980s, he’d started a foreign exchange firm.

In 1985 he was charged with being part of a ring that allegedly faked documents to get more favorable exchange rates from Paraguay’s central bank. He fled, and remained a fugitive for four years in a Brazilian border town, according to media reports. He came out of hiding and returned to Asunción when Stroessner was ousted by a military coup in 1989. He spent a few months in jail but was ultimately cleared of the charges.

Cartes started Tabesa a few years later, in 1994, with several partners. The timing was shrewd. For years, subsidiaries of Philip Morris and British American Tobacco had been exporting huge quantities of cigarettes to Paraguay from their factories in Brazil, to avoid taxes intended to curb smoking. Most of the cigarettes were then smuggled back into Brazil, where they sold for less than heavily taxed domestic brands. The Brazilian government eventually got wise to the scheme and, in 1999, imposed a steep export tax on cigarettes to stop the illegal trade. By that time, Tabesa had set up a factory a few miles from the Brazilian border. It was poised to fill the void. Tabesa sells cigarette legally to distributors who then deploy smugglers to ferry them to Brazil, according to law enforcement and media reports.

Tabesa is now just one business within Grupo Cartes, of which the president remains the majority shareholder. Grupo Cartes also owns a beverage company, livestock operations, and a sports firm that manages Club Libertad—a soccer club and perennial champion, according to its website.

Even as his companies flourished, Cartes continued to be dogged by controversy. In 2000, police seized a plane loaded drugs on one of his ranches. Cartes said the plane made an emergency landing. In 2010, a memo from the U.S. Drug Enforcement Administration, also released by WikiLeaks, described a joint investigation with the U.S. Bureau of Alcohol, Tobacco, and Firearms that examined an alleged “Cartes money laundering enterprise, an organization believed to launder large quantities of United States currency generated through illegal means.” Cartes was never charged, and neither the DEA nor the ATF would comment for this article.

Cartes has brushed aside the allegations. “Go to the courts and check. There’s nothing. Not a single charge against me,” he told journalists in 2013. “For years I’ve been a public figure in football, but as soon as I get into politics these kinds of stories pop up, circulated by bad people.” He declined to be interviewed for this story.

When Cartes ran for president in 2012, Paraguay was just two decades into a bumpy experiment with democracy and the bar for good governance remained dismally low. Though Cartes had never held elected office—and in fact had never voted before expressing interest in the top job, according to local media accounts—he was nominated as the candidate for the conservative Colorado Party, which has dominated Paraguayan politics for most of the past seven decades. Cartes’s political consultants found that voters weren’t worried about the candidate’s past so much as they wanted to move beyond Paraguay’s own tortured history. He campaigned on the slogan Nuevo Rumbo, or “New Direction,” which he repeated in speeches and plastered on billboards. “We here in Paraguay are accustomed to having some presidents of the Republic involved in illicit business,” says Ricardo Rodríguez Silvero, economist in Asunción, in an interview last fall. “We have to support his presidency despite his past.”

“We have to support his presidency despite his past”

When he took office in August 2013, Cartes laid out an ambitious plan for change. He pushed through a fiscal responsibility law, limiting the budget deficit to 1.5 percent of GDP, and a public-private partnership program to encourage investment in Paraguay’s crumbling infrastructure. More important, perhaps, he supported legislation to make government more transparent, including releasing the salaries of public employees.

In another move that defied expectations, Cartes passed over party loyalists for cabinet posts, choosing policy wonks instead. They include Finance Minister Santiago Peña Palacios, 37, who holds a master’s degree from Columbia University and aligns himself with the opposition Liberal Party. After working as an economist for the IMF in Washington, Peña returned to Paraguay in 2012, taking a job at the central bank. He decided to work for Cartes despite the controversy surrounding the president’s past. “It was clear from the very beginning that he had a vision,” Peña says, adding that Cartes’s push for greater transparency was both gutsy and transformative. “These are improvements that can’t go back.”

Cartes also attempted to upgrade Paraguay’s image by selling his country abroad, plugging it as a “hidden treasure” with low taxes, minimal regulation, and cheap electricity. “I want you to feel at home,” he told Brazilian investors in 2014. “Use and abuse Paraguay.”

Hagen and Mechtild Stahr bought Cartes’s pitch. Tall, blond, and sunburned, the Stahrs spent a fall afternoon in the mostly empty dining room of Asunción’s posh La Misión Hotel Boutique, relishing their good fortune. Originally from a German-speaking community in Namibia, the Stahrs moved to Uruguay a dozen years ago to convince investors to buy land for raising cattle and then hire the Stahrs to manage the ranches for them. In recent years, they’ve advised clients that Paraguay is a better buy, in particular the vast and largely undeveloped Chaco. Land is cheap and fertile, and Cartes’s government is pro-investor, said Hagen, swigging Bavarian beer in jeans and a Western-style checked shirt. German-speaking Mennonites, who settled in the Chaco decades ago, provide skilled ranch managers.

“It’s beef production heaven,” said Mechtild, between sips of sparkling wine. “We try to convince investors to go to Paraguay. We try to get them to understand that Uruguay isn’t the same Uruguay and Paraguay isn’t the same Paraguay.”

Cartes’s reforms have drawn praise from the likes of the World Bank and Harvard professor Michael Porter, a management guru whose Social Progress Index ranked Paraguay 56th out of 133 countries in 2015, 16 spots higher than the year before. Last October, Cartes was hailed as the Innovative Leader of the Year by the publisher Latin Trade Group for “raising the bar for public service in our region.” Cartes was supposed to make the keynote speech at the awards ceremony in Miami but canceled a week before. For all the international accolades, problems were mounting at home.

A suspected smuggler is questioned by Brazilian Tax Authority agents near the border with Paraguay in Foz do Iguacu, Brazil on Oct. 7, 2015.
A suspected smuggler is questioned by Brazilian Tax Authority agents near the border with Paraguay in Foz do Iguacu, Brazil Oct. 7, 2015.
Photographer: Dado Galdieri/Bloomberg

Cartes’s approval ratings were tanking, with a young electorate increasingly frustrated by the pace of change. Promises of job creation, new roads, and mass transit haven’t yet materialized, slowed by bureaucracy and the inability of Cartes’s staff to translate business acumen to Paraguayan politics, according to political analysts. Even the new transparency laws, which won raves abroad, have boomeranged on Cartes domestically. They revealed rampant corruption on public payrolls; that ignited student protests and voter discontent.

“We can talk about a new concept of accountability from the public administration,” said Sebastián Acha, a former member of Congress who runs an Asunción think tank. “I think his biggest failure is to not use that information to punish some close collaborators of the executive branch involved in proven corruption cases.”

Cartes’s party was turning on him, too: Colorado Party members had taken the brunt of the corruption allegations, and some accused the president of pursuing his own agenda with little regard for other opinions. Still, Cartes kept control of the party going into November’s midterm elections and played a key role in managing campaigns. The party ended up losing several key races, including the mayor’s office in Asunción.

“It was a big mistake,” says Benjamín Fernández Bogado, a political analyst and director of the business newspaper 5 Dias. “He tried to use the election to show how popular he is.”

Claudia Pompa, a Paraguayan political analyst, says Cartes’s international image was enhanced by the incompetence of other Latin American leaders and by the commodities boom that ended about the time he took office. Ultimately, she says, Cartes has fallen short of his goals because he underestimated the power of his own party. “People thought a novice in politics could solve some of the issues,” she says. “Business is not government. He had to learn that the hard way.”

Cartes’s five-year term ends in 2018 and speculation that he will seek a second term—which would require a change in the law—has quieted since the November election. Still, having already antagonized political elites, Cartes seems intent on pushing forward with his agenda. He recently demanded that public agencies divulge data on salaries, qualifications, and level of training, an effort to rid government payrolls of unqualified and no-show employees, known as planilleros. Union leaders called Cartes’s plan a populist ploy that would hurt workers’ rights.

Cartes’s minister of Industry and Commerce, Gustavo Leite defended Cartes’s actions, telling reporters it was important that Paraguayans learn who abused the public payroll. “I am proud to work for a president who doesn’t steal,” he added.

In Paraguay, at least it’s a start.

—With Michael Smith

(Corrects the name of Ciudad de Este in the eleventh paragraph.)