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.

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
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
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
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
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
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
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
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
References
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2012 Article IV Consultation, (IMF Country Report No. 12/211) International
Monetary Fund.
Associated Press (AP). (April 21, 2013). Paraguayans elect tobacco magnate Horacio
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magnate-horacio-cartes-returning-colorado-party-to-
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Bernstein, Adam (August 17, 2006) Alfredo Stroessner; Paraguayan Dictator.
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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
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
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must-choose-his-battles/
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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
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11. 11
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