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The Fiscal Wage Tool
in the Web of Paraguay
Brienne Thomson
SIS-658: Financial Issues in Latin America
Professor Andrew ...
2
In August of 2012, police in the capital city of Asunciónused tear gas and rubber
bullets to disbanda protest of public ...
3
Thus, given this ratio between minimum wage and median
income,what are the economic repercussions?
Obviously, the more w...
4
The land-locked country has just surpassed the two-decade mark beyond a 35-
year existence under the repressive and dist...
5
percent of the land; not an easy feat. However, just in the initial 100 days of Lugo‟s
presidency, Paraguay had already ...
6
In the past five years Paraguay has seen both record lows, resulting from the
2008-2009 financial crisis repercussions, ...
7
At this point, with the 2011 10-percent minimum wage increase and 2012 30-
percent public wage increase, between 2008 an...
8
recent presidential elections have resulted in a fairly elected candidate1
, despite his
allegiance to the Colorado Part...
9
References
Abrego, Magud, Podpiera, Ross, &Tulin (August 2012). Paraguay: Staff Report for the
2012 Article IV Consultat...
10
Lambert, Peter (2011) Countries at the Crossroads 2011: Paraguay. Washington, DC:
Freedom House.
Lemus, Billy (April 30...
11
UltimaHora.com, (August 20, 2012).Video del Forcejeo Frente al Ministerio de
Hacienda.Retrieved from http://economia.ul...
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The Fiscal Wage Tool in the Web of Paraguay

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In order to hone in on a few financial factors within Paraguay’s capricious economic web, this study will focus on both public wages and the minimum wage of the private sector in relation to inflation, GDP growth and commodity prices; including, why the wages are set at the level they are and who they effect. It will also review the tumultuous foundation of the Paraguayan government to help substantiate both fiscal decisions and the social perception of wage discrepancies. Finally, fiscal measures that recently instituted both private and public wage hikes will be reviewed as to whether they were adjusted in a timely manner to accommodate the counter-cyclical goal.

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Transcript of "The Fiscal Wage Tool in the Web of Paraguay"

  1. 1. 1 The Fiscal Wage Tool in the Web of Paraguay Brienne Thomson SIS-658: Financial Issues in Latin America Professor Andrew Wolfe April 24, 2013 In great anticipation of absorbing myself into the socially volatile, resource rich hinterlands of Paraguay for 27-months of Peace Corps service, I found it only reasonable to peer into a bit of the financial world surrounding my future neighbors as I attempt to make headway in the Community Economic Development sector in which I‟ll be toiling away. Based on preliminary reading about the demoralizing War of the Triple Alliance driven by pride, to vastly unequal land distribution in a country where 32% of the population live in poverty and one-in-five exist on the fringes of the destitute end, I can see that there are plenty of „peripherals‟ to compensate in the plight to achieve any sort of egalitarian policy (WB, 2013). In short, I expect corruption, or at least superfluous obstacles in between A and B. Thus, while researching a few areas of economic focus that this paper will cover, one must take into account the real driving, orfilibustering, forces behind the policy and politics of Paraguay. In order to hone in on a few financial factors within Paraguay‟s capricious economic web, this study will focus on both public wages and the minimum wage of the private sector in relation to inflation, GDP growth and commodity prices; including, why the wages are set at the level they are and who they effect.It will also review the tumultuous foundation of the Paraguayan government to help substantiate both fiscal decisions and the social perception of wage discrepancies. Finally, fiscal measures that recently instituted both private and public wage hikes will be reviewed as to whether they were adjusted in a timely manner to accommodate the counter-cyclical goal.
  2. 2. 2 In August of 2012, police in the capital city of Asunciónused tear gas and rubber bullets to disbanda protest of public sector workers demonstrating against insufficient compensation and benefits in front of the Ministry of Finance(ITUC, 2012).The Ministry of Finance is the authoritative department in charge of making budgetary space for pay increases of public workers; a fitting place to take a stand (Lafuente, 2010, p.14). But the anomaly of the situation was that the protestors whom police so violently shut down were, in fact, Ministry of Finance employees. According to UltimaHora.com, the officials on strike were earning 16-minnimum wages per year and were demanding a salary increase to 18-minimum wages(UltimaHora, 2012). It sounds like a hefty multiple, but in Paraguay, “one minimum wage” is the monthly salary with the bare minimum being 12-per year.So the demand was a 12.5% salary increase. However, in the past few years, the Ministry of Finance has not been the only sector up-in-arms over compensation. Now, as denoted on the table, the minimum wagein Paraguay is greater than to GNI per capita, but what does this signify andwhy so much union and labor force turmoil?(WB, 2013)  September 2011: Over 15 teachers unions take to the streets to demand a pay raise, claiming earnings are below the minimum wage floor(Rogers, 2012)  December 2011: Healthcare workers in Paraguay are on a general strike for equal pay along with a demand to regularize their payment of debts (Malaysian Digest, 2011)  October 2012: Central government rejectssetting a standard wage and implementing demanded bonuses for officials, public employees and teachers(Johansson, 2012)  November 2012: Thousands of workersand judicial officials supported by the Law Officers Union began a strike, demanding a 20% increase on salaries in accordance with age and academic degree (Johansson, 2012) But before detailing the causes of this labor force unrest, the minimum wage floor, which is more like a ceiling in this case, needs to be addressed. So, what does it mean to have a minimum wage higher than the median wage? In Paraguay, the minimum wage is greater than the median earnings of the population, which meansthat most actual wages are below the minimum. So, if the objective of minimum wage is to cover the minimum needs of a citizen in accordance with socio-economic conditions, and most of the Paraguayan labor force is at or below this threshold, the 32% of the population living even further down the income ladder, under the national poverty line,rationalizes the labor force angst(WB, 2013). Monthly Minimum Wage as of July 2011 to Current =₲1.658.232 Guaraní Monthly Min. in USD using average 2011 exchange ₲4200/$1 = $394.82 Annual Minimum Wage (no holidays/vacation included) = $4,737.84 Hourly Minimum Wage (26 days/month,6 days/week, 8 hours/day) = $1.90 GNI Per Capita as of 2011 = $3,020 Minimum Wage as a Percent of GNI Per Capita =157% *NOTE: Labor hours = 48 hours/week Source: World Bank
  3. 3. 3 Thus, given this ratio between minimum wage and median income,what are the economic repercussions? Obviously, the more workers who earn at or near the minimum wage, the more people will be effected by an increase, and thus the more substantial the economic ramifications. However, these results would entail enforcement;whereas, little enforcementwould equate tolittle impact. The lack of enforcement not only leads to a larger informal sector, but, according to Jan Rutkowski‟scorrelations in, “The Minimum Wage: Curse or Cure?,” high minimum wages can also exacerbate noncompliance and encourage informal sector growth(2003, p.7). Additionally, the scant number of formal private sector firms of over 50 workers in Paraguay, who actually do abide by minimum wage regulations, represent under 4- percent of the labor force(Berry, 2010, p.57). And to bring another influential statistic into the picture, as reported by the International Monetary Fundin 2008, the size of Paraguay‟s informal economy accounts for over 70-percent of measured GDP(Vuletin, 2008, p.6). So, with a high minimumwage “floor” and a GDP mainly based on small private sector firms and an informaleconomy, it is not surprising that in the 2010 publication, “Losing Ground in the Employment Challenge: The Case of Paraguay,”Albert Berry states thatthe minimum wage is disregardedby most of the formal sector: The Ministry of Labor in any case lacks the administrative capacity to enforce the minimum wage through its inspectors. In summary, for 80-percent of workers it is as if this requirement doesn't exist. And given the grave current condition of the labor market, there is no labor law that could be enforced in the face of 50- percent of the labor force with employment problems and disposed to participate in a virtual auction for the few formal sector paid jobs created annually. More than the rule of a minimum wage, what exists is a "take it or leave it" situation.(p.57) Unlike equitable collective bargaining contracts and largely enforced minimum wage standards for all economic sectors that exist within more formal G-8 economies, not only is the official minimum wage not applicable to Paraguayan public sector employees, but they can be, and are, contracted at sub-minimum salaries. As troubling as it is to see wasted potential of a suppressed labor force, it can paradoxically be rationalized in conjunction with the repressive history from which Paraguay has come. “I believe the legal minimum wage is about 1.4 million Guaranies which is about US $290 per month. Of course this is the LEGAL minimum wage - there are many people who are paid much, much less. For example I recently was told that the going rate for a day maid in Caaguazu is 200,000 Guaranies which is like $53 per month. Much like your nephew many people survive with additional help from relatives working abroad (mostly in Spain and/or Argentina). Speaking of law vs. social conventions: Even if you manage to get a high paying job here there is no guarantee that your salary won't slowly diminish or plain old disappear within a couple of months. Foreigners looking to work in Paraguay should be aware of this. Unless you are a direct hire from a US or other foreign employer you will be subject to the same shenanigans many Paraguayans in white collar jobs have to deal with.” Source: Expat-Blog.com, Posted by Guide to Paraguay, November 2009
  4. 4. 4 The land-locked country has just surpassed the two-decade mark beyond a 35- year existence under the repressive and distressingly corrupt military dictatorship of Alfredo Stroessner. Consequently,the continual corruption and lack of transparency of the modern day Paraguayan government is tainted by the residuals of the despot‟s cult- like manipulation. On the lighter side of what was endured during his reign, public officials who opposed Stroessner‟s Colorado Party would be denied healthcare and promotions. On the other extreme, accounts of torture and politically motivated murder are, now after the fact, well documented. (Bernstein, 2006) From the 1989 dethroning of Stroessner, the Paraguayan government and its people have been slowly transitioning, into a more open market. But after earning the title of the second most corrupt country on Transparency International‟s Corruption PerceptionIndex in 1998 to finally ascending above Sudan and Somalia to breach the bottom ten of the 159 tabulated countries in 2005, progress has been slow. Still today, Paraguay‟s informal economy and banking system, its misappropriated and underfunded social programs, like health and education, are the consequences of the lack of institutionalization and accountability on the part of the central government. In a harsh, but frank analogy, the inter-network of the Paraguayan government operates more on par with a fraternity than the “alleged” democracy that it claims to be; it‟s not what you know, it's who you know, implied Robert Andrew Nickson in his 2010 publishing of, "Political economy of policymaking in Paraguay:” There is an almost complete disjoint between salary levels and job classification, the former being determined largely by personal and political loyalties. These features help to explain the poor delivery of public services, both in terms of quality and coverage… Even by Latin American standards Paraguay‟s political parties are highly fragmented… which coalesce and dissolve around issues of personal and group loyalty in pursuit of rents from the capture of state resources for individual benefit. (p.294) With this erratic and unregulated past still lingering in the system, theApril 20, 2008 election of the leftist Patriotic Alliance for Change (PAC) candidate, Fernando Lugo, was abreakthrough. It marked a rift in the six-decade stretch of rule by the Colorado Party, and the first and only democratic change of power in Paraguay‟s history. (Lambert, 2011) But with the goals of implementing radical social reforms, specifically relating to land rights and the inescapable povertyand prejudice faced by the majority of Paraguay‟s indigenous Guaraní, Lugo faced an uphill battle with an opposition majority in congress. And whilethe two congressional houses stood as a great impediment to moving forward with PAC policies, the inconvenient threat of Lugo‟s progressive changesculminated when an attempted land occupation turned deadly. The final straw used by congress to execute the impeachmentof President Lugo happened when an eviction of farmworker peasants from land owned by a Colorado Party politician ended with 17 lives lost. Opponents to Lugo claimed that the campesinos were armed and trained by leftist groups that he supported(Lambert, 2011). Throughout his time in office, Lugo‟s platform that all Paraguayan‟s had the right to own land seemed to be taken as instigation to “squat” by many campesinos versus awaiting land reform policy in a country where one-percent of the population owns 77-
  5. 5. 5 percent of the land; not an easy feat. However, just in the initial 100 days of Lugo‟s presidency, Paraguay had already seen 80 land occupations followed by subsequent evictions(Lemus, 2009). But were the aggressive actions of the indigenous fighting for land rights grounds for impeachment? The ousting of Lugo was constitutionally legal, but suspicious, occurring just 10- months prior to the termination of his five-year term. “It‟s important not to confuse legality and constitutionality with democracy. This is a constitution that was written during what was an extended dictatorship, and it was written to protect that dictatorship,” said American University Anthropology Professor Adriane Pine in a 2012 interview with Al Jazeera. During the light-speed impeachment hearing, once the Chamber of Deputies and Senate votes were tallied, Lugo was immediately replaced by Federico Franco, his Vice President. And, although likewise elected in 2008, Francobore allegiance to the Authentic Radical Liberal Party (PLRA), a staunch opponent to the Colorado Party since the ousting of Stroessner and the most influential member of the multi-partyalliance that comprised Lugo‟s PAC coalition; thus, adding to the shadiness of this non-violent coup. On top of this chaotic change of power, and as a result of it, fellow members of the Mercosur trade bloc, Argentina, Uruguay and Brazil, banned Paraguay‟s participation pending the outcome of the formal elections in April of 2013. During the four-years Lugo was in office he was able to make headway in closing a decade-long dispute with Brazil over theItaipú hydroelectric dam that would lead to a more fair payment for electricity and tripling Paraguay‟s income. And in 2011, with a growing economy and rising inflation rate, Lugo upheld legislation that calls forthe minimum wage to be renegotiation if the inflation rate reached 10-percent or higher. The private sector wage was subsequently increased by 10-percent, but as previously stated, without enforcement this increase does not necessarily entail a big impact on the economy (ILO, 2013). Record High 13.4% June 2008 Record Low 1.1% July 2009
  6. 6. 6 In the past five years Paraguay has seen both record lows, resulting from the 2008-2009 financial crisis repercussions, to record highs as one of the fastest growing economies in Latin America. The 2010 upswing was due to international demand on agricultural exports, specifically soybeans, which is Paraguay‟s largest production crop and the source of China‟s soy-based cattle feed. This growth fluctuated greatly with a severe drought at the end of 2011 that significantly impacted key agricultural exports, causing a GDP contraction of 3-percent. Paraguay‟s largest non-agricultural export of beef also took a hit in 2011 with an outbreak of foot-and-mouth disease, followed by a month-long beef export ban (Abrego, 2012, p.5). To offset the squeeze Mother Nature gave to Paraguay‟s 2011 growth statistics, the Ministry of Finance played a counter-cyclical card and implemented a 30-percent wage increase for public employees in January of 2012. This increase in spendingled to Paraguay‟s first deficit of approximately 1% of GDP in a decade. (Francis, 2013, p.7) However, according to Standard & Poor‟s Credit Analyst Richard Francis, the 2003 default instigated Paraguay‟s Administrative Reorganization and Fiscal Adjustment Law, which increased tax revenue by 1.5-percent of GDP and restrained spending, specifically on wages, giving the government fiscal surpluses through 2011(p.3).Obviously, with an average annual GDP growth rate of 4-percent between 2008 and 2012, and a hold on wage spending to compensate, protests should have been expected. According to statistical information acquired from the Paraguayan government, the International Labour Organization further documented the need for wage standardization and enforcement when they noted that, “Non-compliance with applicable minimum wage rates in the period 2009-11 remained particularly high with up to 60-percent of private sector employees and almost 19-percent of public sector employees earning less than the minimum wage.” (ILO, 2013) Record High March 2010 Record Low March 2009
  7. 7. 7 At this point, with the 2011 10-percent minimum wage increase and 2012 30- percent public wage increase, between 2008 and 2012 wages and salaries have jumped from 7.1 to 10.3-percent of GDP (Abrego, 2012, p.32). As wages arenot a lackadaisically adjustable fiscal tool, at least in formal sectors, these increases are not temporary expenditures and will force an overhaul of the central government‟s budget. In consequence, reaction to this measure of stimulus has beenmixed. The International Monetary Fund‟s 2012 Country Report on Paraguay published that, “The permanent large increase inpublic sector wages this year would crowd out needed capital spending, thus hindering a betterallocation of scarce budgetary resources.” And, while Francisof Standard & Poor‟s alleged that the public-sector wage increases were “populist measures… that undermine the past five years of relatively prudent fiscal and monetary policies, [and] could raise the vulnerability to an unexpected drop in commodity prices,” he also stated that he expects Paraguay to “balance its fiscal position in 2013 as a result of a strong rebound in growth and the introduction of a personal income tax this year.”(2003, p.13, 7) Conclusion & Recommendations With a decade of growth and new income taxes, I find that lack of sufficient compensation for the Paraguayan labor force reached its limit. Without theaforementioned wage hikes, not only would consumer spending contract, but I would suspect that both lack of reparation and time away on the picket-line would result in a further declinein productivity, causing a moreintense hit to GDP growth than the instituted public and minimum wage increases. With forecasted growth in 2013, I also find the timing to have beenwell played, or fortunate, as a counter-cyclical stimulus response to GDP contraction from the devastating 2011/12 drought. And, now that the
  8. 8. 8 recent presidential elections have resulted in a fairly elected candidate1 , despite his allegiance to the Colorado Party, Mercosur members have already reached out to Paraguay. Argentinian President Cristina Fernandez extended her congratulations to president-elect HoracioCartes and the Paraguayan people and tweeted, “What is more important: we are waiting for you in Mercosur.” Likewise, President Jose Mujica of Uruguaycongratulated Cartes, the U.S. educated, tobacco tycoon, and invited him to the next Mercosur summit in June in Montevideo(MercoPress, 2013). And while the restoration of Paraguay‟s inclusion in the Mercosur network upholds the positive 2013 forecast, it also prompts the question of inter-bloc wage parity. As Paraguay starts down its new path, guided by Mercosur support, any plans for future economic convergence need to follow a unity and parity of wages and macroeconomic policy. And for this discussion, I recommend beginning with Roberto González and Hector Sala‟s report, “The Frisch elasticity in the Mercosur countries: A pseudo-panel approach,” that notes a 40% earnings discrepancy between Paraguay and the third lowest of the four countries in the trade bloc. 1 According to the Associated Press, there were over 500-observers from the Organization of American States, the European Union, the Union of South American Nations (UNASUR) and the Union of Latin American Electoral Organizations present to ensure a fair election (AP, 2013).
  9. 9. 9 References Abrego, Magud, Podpiera, Ross, &Tulin (August 2012). Paraguay: Staff Report for the 2012 Article IV Consultation, (IMF Country Report No. 12/211) International Monetary Fund. Associated Press (AP). (April 21, 2013). Paraguayans elect tobacco magnate Horacio Cartes, returning Colorado Party to presidency.The Washington Post.Retrieved from http://www.washingtonpost.com/business/paraguayans-elect-tobacco- magnate-horacio-cartes-returning-colorado-party-to- presidency/2013/04/21/9d9b7c9e-aae5-11e2-9493-2ff3bf26c4b4_story.html Bernstein, Adam (August 17, 2006) Alfredo Stroessner; Paraguayan Dictator. Washington Post. Retrieved fromhttp://www.washingtonpost.com/wp- dyn/content/article/2006/08/16/AR2006081601729.html Berry, Albert (2010). Losing Ground in the Employment Challenge: The Case of Paraguay. New Brunswick, New Jersey: Transaction Publishers. Expat-Blog.com (November 9, 2009) Wages In Paraguay. Posted by Guide to Paraguay. Retrieved fromhttp://www.expat- blog.com/forum/viewtopic.php?id=18959 Francis, Richard A. (February 8, 2013). The New Kids On The Block: Bolivia And Paraguay Issue Their First Global Bonds. Standard & Poor's Financial Services LLC. International Labour Organization (ILO), (2013). Minimum Wage-Fixing Machinery Convention: Paraguay. (102nd ILC session) Retrieved fromhttp://www.ilo.org/dyn/normlex/en/f?p=1000:13100:0::NO:13100:P13100_C OMMENT_ID:3080545 International Trade Union Confederation (ITUC), (August 23, 2012).Paraguay: Police Violence against Finance Ministry Employees. Retrieved from http://www.ituc- csi.org/paraguay-police-violence-against?lang=en Johansson, Anna (November 2, 2012). Paraguay: Judicial Workers on Strike Demanding Salary Raise.The Argentina Independent. Retrieved from http://www.argentinaindependent.com/currentaffairs/newsfromlatinamerica/parag uay-judicial-workers-on-strike-demanding-salary-raise/ Lafuente, Mariano&Manning, Nick (January 2010). Executive-Legislative authority over public servants' pay: Lessons from Paraguay. (Working paper 0210)World Bank: Latin America and the Caribbean.
  10. 10. 10 Lambert, Peter (2011) Countries at the Crossroads 2011: Paraguay. Washington, DC: Freedom House. Lemus, Billy (April 30, 2009) A Year of Lugo: In an Effort to Remain Relevant, Lugo Must Choose his Battles.Council on Hemispheric Affairs.Retrieved fromhttp://www.coha.org/a-year-of-lugo-in-an-effort-to-remain-relevant-lugo- must-choose-his-battles/ Malaysian Digest (December 29, 2011). Health Workers in Paraguay on Strike for Wage Claims. MalaysianDigest.com Retrieved from http://www.malaysiandigest.com/top-news/37997-health-workers-in-paraguay-on- strike-for-wage-claims.html MercoPress. (April 22, 2013). Cristina Fernandez and Mujica tell Cartes, Mercosur ‘is waiting for the return of Paraguay’. South Atlantic News Agency. Retrieved from http://en.mercopress.com/2013/04/22/cristina-fernandez-and-mujica-tell-cartes- mercosur-is-waiting-for-the-return-of-paraguay Nickson, Robert Andrew (2010) “Political economy of policymaking in Paraguay," Chapter 13 from Losing ground in the employment challenge: The case of Paraguay. Ed. Albert Berry. New Brunswick, New Jersey: Transaction Publishers. 265-294. Pine, Adrienne interviewed byAnandNaidoo(June 26, 2012).Paraguay: Impeachment or political coup?Inside Story Americas: Al Jazeera. Retrieved from http://www.aljazeera.com/programmes/insidestoryamericas/2012/06/2012626545 1105780.html Rogers, Marc (September 6, 2012). Paraguay: Public Worker and Union Strikes Over Wages. The Argentina Independent. Retrieved from http://www.argentinaindependent.com/currentaffairs/newsfromlatinamerica/parag uay-more-labour-strikes-ahead/ Rutkowski,Jan (July 1, 2003 ). The Minimum Wage: Curse Or Cure?.(Human Development Economics) The World Bank. Vuletin, Guillermo (April 2008). Measuring the Informal Economy in Latin America and the Caribbean.(Working Paper 08/102) International Monetary Fund. Trading EconomicsGraphs (2013).2008-2012 Inflation, GDP, Per Capita GDP for Paraguay. Retrieved fromhttp://www.tradingeconomics.com/paraguay/indicators Transparency International (2011).Corruption Perceptions Index. (Archived CPI 1998 & 2005) Retrieved from http://archive.transparency.org/policy_research/surveys_indices/cpi
  11. 11. 11 UltimaHora.com, (August 20, 2012).Video del Forcejeo Frente al Ministerio de Hacienda.Retrieved from http://economia.ultimahora.com/notas/553517-Video- del-forcejeo-frente-al-Ministerio-de-Hacienda World Bank (WB). (n.d.). Data: Paraguay. Retrieved April 19, 2013, from http://data.worldbank.org/country/paraguay

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