Paraguay's President Lugo -- Stronger Latin America

May 1, 2008

Paraguay's recent Presidential election of former Bishop Fernando Lugo means economic growth for the country. It also means the end of a six decade single-party rule that has left most Paraguayans in poverty, despite a 5% annual growth rate.

As President, Lugo will push for greater profits from the Itaipu dam, which is the largest hydroelectric power plant in the world. It is jointly owned with Brazil, who insists Paraguay receive less than half of the power, and charge far below market prices for the power it sells to Brazil. Lugo has threatened to take Brazil to the World Court, if necessary.

Lugo will also pressure Brazil to remove trade restrictions within Mercosur, which has forced Paraguay into crippling trade deficit. Brazil's economic strength has caused it to dominate Mercosur, to smaller countries' disadvantage. (Source: The Economist, Liberation politics, April 19, 2008; Der Spiegel, Clean Elections, April 22, 2008; Venezuelan Analysis, Paraguayan Election Could Tip the Scale Toward Venezuela, April 22, 2008

What Paraguay's Presidential election means:

Lugo's election reflects a growing shift in power in Latin America to indigenous, low income populations. This has led to the election of populist leaders in Bolivia, Venezuela, Ecuador and Nicaragua. Like Brazil, these countries are using profits from the sale of natural resources to help raise the standard of living.

Even more encouraging, however, are the internally-generated good fiscal policies that most Latin American countries have generated. These include strong central banks that have proven their ability to lower inflation, creating investor confidence and an increase in FDI. This lowered inflation risk also allows a flexible exchange rate system, which helps these emerging markets to absorb economic shocks.

The election also represents the broadening of democracy itself in Latin America, which is also good for the region’s economy. Elected governments have the legitimacy mandated by the people who voted for them to enact economic reforms. This legitimacy supports the reforms despite opposition from the small interest groups that may feel the pain. An example would be Brazil’s need to reduce taxes by decreasing the numbers of government workers.

Action steps:
Make sure your emerging markets funds include Latin American countries, especially top performers Brazil and Chile. Don’t let the headlines about "leftist leaders" in Venezuela, Bolivia, Nicaragua and now Paraguay scare you away from the potential gains for your personal finances.

Related Reading:

Bolivarism in Latin American Economies

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