Hi everyone, welcome back. Today, We are speaking with Tomas Mandl. He is a senior program manager for Latin America and the Caribbean at the Center for International Private Enterprise. He is the author of the deeply interesting book Modern Paraguay a recovering America's America's secret, and that is what we're going to be discussing today. I hope you hope enjoy show ; hi the show Tomas, and thank you so much for joining me today on the podcast.
Tomás Mandl:Hi Rashid, good morning from Falls Church. Thank you very much for having me in your podcast. It's really a great pleasure.
Rasheed Griffith:I want to jump right in. I have a question about this why did Elizabeth Nietzsche, the sister of Nietzsche, the philosopher, decide to move to Paraguay, for all places to start a new German colony?
Tomás Mandl:It's a good question. That obviously goes into her internal thinking that I don't know. But she married a white supremacist and in that period in Europe, especially in Germany before, even before the First World War, there was a lot of thinking and talking about the Aryan race and how the white people were different from the rest and they were in some way under threat in Europe and in Germany. So there were a lot of different projects all across the globe, not only in Paraguay, to start a new, so create new communities or cities of only Aryan people. Part of that effort was what brought Nietzsche's sister to Paraguay, in a project that didn't last very long. As I explained my book, the leader ended up committing suicide in Paraguay and to this day the little town is called Nueva Germania In Paraguay. It still exists, but it's very much not obviously, thankfully, not along the lines of the founders.
Rasheed Griffith:Is this an area that's known well by people let's say in Asuncion that, oh, we know how that happened, we know where it came from or is it one of those niche knowledge sets that you know if you only go back in history of Paraguay?
Tomás Mandl:Not the average citizen, not at all. And in general it is something I explained in the book too that there's a disconnect between the perception of Paraguay is among Spanish speakers and Latin Americans and what the perception of Paraguay is among English speakers and people mostly in the US and Europe, and for the latter the perception is that Paraguay is some sort of rescue center for refugees from Germany, for Nazis and so on and so forth. Part of that narrative that the Nietzsche experience, the Nietzsche sister experience Paraguay, is similar in that. Oh, of course they went to Paraguay. That's where all the Nazis go. But in the book I showed that's not really the case of where other countries in South America that were the world come up many more Nazis than Paraguay. And, like I said, if you ask a regular average Paraguayan about Nazis, they probably know some story here and there, but it's not part of their main narrative of what the perception of their country is to the world.
Rasheed Griffith:Basically, you had a very interesting description of some of the informal economy and informal entrepreneurship in Paraguay. How well do you think the what you call the career scenarios would perform in Hanoi?
Tomás Mandl:Paraguay is something that is very similar to other Latin American countries where informality it's pretty large. It's depending on the country, where, on average I don't know what the actual average, but it's above 50%. In Paraguay, depending on how you measure, it's 60%. There are other countries, like Peru is 70%, and so it's part of their daily life in Latin America. But it's obviously a case very similar in Africa and in Asia and it's basically a result of a mix of bad loss, of slow economic growth that take people to do and start in enterprises and try to survive and pursue economic means to survive. Basically, and that's the result.
Tomás Mandl:Paraguay, compared to other Latin American countries, this is interesting thing is that it's a low tax country. Normally, you see, in Latin America it's a high tax regime with a lot of regulations that usually tends to force people into the informal sector either because they can't afford taxes, they can't afford to follow other regulations, but that's not the case in Paraguay. But also in Paraguay that, as a result of a very recent transition from a very agricultural, rural-based population into an urban population, it's still below the average in Paraguay the percentage of people that live in cities compared to the rest of Latin America. But in other countries too, where you see that transition from the countryside to the cities creates a lot of informal economic opportunities for people and that's the only opportunity they have.
Rasheed Griffith:Why do you think that Paraguay has persisted in such a low tax jurisdiction, given it's surrounded by literally such very high tax countries?
Tomás Mandl:In a way it's a result of the Paraguayan history. You had a very long dictatorship under Alfredo Strasner and the way that dictatorship worked is that it didn't have a lot of safe capacity in general. It was very much focused on the military and making sure that the regime survived the state in power. And there was not, like you see in other Latin American countries with military regimes, even in Asia and Africa, where there was a lot of investment in import substitution and build an infrastructure and so on and so forth. So you have that history in Paraguay. Then you have Paraguay needs to have some competitive advantage compared to the bigger neighbors, argentina and Brazil, where you have all these regulations. So for I would say for the past two, three decades, that's been the strategy. The economic strategy for Paraguay is to attract investors from Argentina and Brazil. In the attraction, the incentive has been the low-tax regime.
Rasheed Griffith:Has the prominence of these what you call career scenarios? Have that decreased over time or is that still a pretty steady state portion of kind of workers in the Sudad del Este?
Tomás Mandl:This thing, I would say, is relatively stable. Again, part of an informal economy is that it's hard to measure right, especially in that part of the country where Sudad del Este is located. That's what it's called the Tri-Vorder area Argentina, brazil and Paraguay and there's a lot of very informal economy dark economy, if you wish. That happens. But if you see other countries that went from very informal economies to lower sector informal economies, it usually goes through 70, 60% to something lower and we haven't seen that change in Paraguay. You can argue whether it's 40% or 50%, 60%, but it's still pretty high and, based on what I've analyzed and seen, it hasn't changed much in the past two or three decades and I would expect that they won't change at least in the next decade.
Rasheed Griffith:Can we still learn anything about Paraguay from studying small towns like Tobati?
Tomás Mandl:That's obviously their limits to how much you can study a country from a city. My goal with studying this small town is called Tobati. It's called a Springfield, usa type of town. That is very representative and in Paraguay I think it's even more representative than other countries because Paraguay doesn't have a lot of racial diversity. In other countries it doesn't have a lot of religious diversity or even cultural diversity. You can take a small town in Tobati, paraguay, and it'll be representative of the rest of the country.
Tomás Mandl:And what I analyze in the book about Tobati is that it's very similar story to the rest of the country. It went from being very rural with very limited division of labor, limited investment, not only from locals but obviously from abroad, and then it became so more connected to the global economy once the big dam in Brazil started the construction process and then working, and that developed a small economy connected to those markets and that led to more workers, more higher population. And I would expect Tobati to become a sort of a regional commercial center in the next one or two decades, resembling some of the other towns in Paraguay. Something that I describe in Paraguay is that Paraguay has a very young population. So I expect the population both in Tobati and Paraguay to continue growing and that's in general a good thing and it helps economic growth and the division of labor in general.
Rasheed Griffith:So do you say that the Mennonites of the Chaco region in Paraguay have perhaps been the most successful community in Paraguay in 20th century?
Tomás Mandl:Yeah, for me it's a fascinating story, the story of the Mennonites in Paraguay, and it shows that we international development experts, we like to say, okay, you need to follow this formula, you need to do A, b and C, build a road, this or that. But then, to the day, it's mostly about human capital. And the Mennonites show that in Paraguay, where they moved, mostly in between the first and second world war to Paraguay because they were looking for a place that would allow them to have complete autonomy in terms of religious beliefs, in terms of capacity to operate as the religion calls them to do, and they went to probably one of the most difficult places on earth. It's the Chaco region of Paraguay, on the west side. It's very dry, it's very hard to grow anything, especially imagine, in those circumstances in between first and the second world war, the lack of technologies that we have right now.
Tomás Mandl:But for any challenges you can throw at the group of human people and the Mennonites in Paraguay, the early Mennonites faced those challenges and they survived. Not only survived, but currently they have the, if you measure, the highest income per capita in country, with levels compared to what in Europe we're talking about 50 to $60,000 a year, and they're very different from the rest of the countries. It's a very loaded, obviously, issue because it involves culture, involves the ethnic groups and so on and so forth, but I think that the main lesson is that human capital does have a lifting in development.
Rasheed Griffith:So Paraguay ranks the highest when it comes to the gender ratio of skilled women in Latin America. What is your opinion on this?
Tomás Mandl:Let's see in the case for most of the history, mostly because of the triple alliance war, that very much killed the majority of working age men. To what extent that explains the current economic or social situation in Paraguay, it hasn't really been studied that much. What I learned in Paraguay, and what Paraguayans will tell you, is that one of the reasons the most important is that women have all these freedoms that you don't see in other Latin American countries in terms of being free to pursue their work, their hobbies in general, while women are supposed to be working at home and doing the heavy lifting of the domestic work. That has to do with the result of the triple alliance war, where there were very few men, so women had to compete for men and pretty much attract them by letting them have all these favors, in other words, having all these autonomy that you don't see in countries like, for example, in China and other Asian countries, where there are more men than women because families have abortions when they know about women, they want to have men.
Tomás Mandl:But you see the opposite, right, that men try to lure women and they behave differently, but then again that not only in Latin America but in other countries, that the lack of participation of women in the economy. It's very much distracts or delays economic growth in general. Because you have in Latin America and Paraguay women usually have attained higher educational levels. If you go more exactly, remember the percentage. But in colleges in Paraguay there's 60% usually are women. If you don't put those women into the economy and to produce and to bring the general labor productivity of the country to a higher level, you're going to delay your economic development.
Rasheed Griffith:If you keep them at home working on domestic chores, so I find particularly Paraguay is still a far more diplomatic ally of women Of Taiwan to this day, as the only country in South America, and is also one of the 12 remaining such allies of Taiwan. Why this Paraguay, such a large country, still maintains such relations with Taiwan, given all the others are very small countries?
Tomás Mandl:Yeah, I will say it right now Paraguay is probably the biggest country in the world with relations with Taiwan. The origin of the bilateral relations with Taiwan has to do with the Strostner dictatorship and the anti-communist fight or the campaign during the Cold War and that then it evolved when Paraguay became a democracy or started having an election in 89. It's not an ideological, obviously, and Paraguay really don't care about communism, but it became a sort of something that is part of the Colorado party, the party that dominates politics in Paraguay. That relationship with Taiwan, as in opposition to China, again because of the origin, was the fight against communism and so on and so forth. But the base pretty open right now in Paraguay about whether the country should break relationship and establish relationship with the People's Republic of China. At the end of the day it's an economic calculus, right, and that's in the book.
Tomás Mandl:I said that it's not very clear which way is better for Paraguay. Paraguay already has a pretty strong economic relationship with continental China, the biggest importer of Paraguay. Imports from Paraguay are Chinese products and Paraguay exports soybeans and cattle not directly to China but through other markets. Sometimes Argentinean companies or Uruguayan companies purchase Paraguayan commodities and then they export it and, in general, what we have seen in Latin America is that there's a lot of promises of establishing relationship with China in terms of investment, in terms of economic flows that usually don't turn out as promised, while, on the other hand, paraguay right now gets a lot of free money from Taiwan in terms of foreign aid and projects and so on and so forth. So, yeah, I will say that, in an ideal scenario, paraguay will have a free trade agreement with the two biggest economists in the world, the US and China, and right now it doesn't. So it has to be a very pragmatic decision on the side of the Paraguayans. In the book, I said that it's not very clear or obvious that Paraguay needs to establish relationship with China.
Rasheed Griffith:So another curious thing about Paraguay to me, coming from a monetary economic perspective here is Robert Triffin. When Robert Triffin essentially became the head of the Treasury Department at the time had a Latin American office and the IMF was moving into a new level of engagement in the world and Robert Triffin and people in his team decided that the standard, call it, more British ideas of monetary policy and economic growth were no longer applicable and it had a more like interventionist use of monetary policy to get going. And the first country which he and the IMF and the Treasury deployed these new strategies was Paraguay, which I only learned very recently and I'm curious how you think that actually, if you had to run a counterfactual how that impacted the growth and macro stability of Paraguay since 1950s.
Tomás Mandl:In the counterfactual. It's also pretty straightforward if you look at the neighbors right, if you look at Argentina, if you look at other Latin American countries, inflation has always been the problem and you see what happens. In other countries that change to dollarize, like Ecuador, el Salvador, panama, they've responded to bouts of really high inflation and so monetary policy in general Latin America has always been an issue, a problem, and they've tested everything there is to test Paraguay. Their hand has been a success story and a lot has to do with the advice that he got from Triffin and from other advisors. And to this day, the central bank of Paraguay, I would say, is the better run government agency in the whole country, and the Guadani, the currency of Paraguay, has been the most stable currency in the region.
Tomás Mandl:Typically in Argentina and Brazil in the past two or three decades they have to cut zeros from their bills and create new currencies. Paraguay has not done that, so it's been really successful. And that also, at the same time, shows you the limits of good monetary policy, monetary policy. It's one element of the development strategy and Paraguay has done really well in that sense. But yeah, I will say the kind of fractal is pretty clear if you look at what the neighbors have done and that in the elections in Argentina right now, with Millet, the main conversation or one of the main policy prescriptions is to dollarize. It's still an important issue In internal conversations when sometimes one or two drinks people talk about the future of Mercosur, the trade agreement between Argentina, brazil, paraguay and Uruguay. If there was ever going to be a common currency, it should be the Paraguayan Guadani and the central bank of the Americas should be in Asuncion because it's definitely the best run monetary policy of the four countries. Do you?
Rasheed Griffith:think it would benefit the financial integration of Paraguay into the world economy if it was actually dollarized, like Panama.
Tomás Mandl:Sure, actually Paraguay is not very connected to the global economy as Panama is or even as Ecuador is. Like I said, paraguay doesn't have free trade agreements with the two biggest economies. It has the main free trade agreements with the Mercosur and it's a very problematic. As you probably know, the trade area was a lot of protectionism, a lot of regulations and there's very little foreign direct investment in Paraguay as a percentage of the economy. So I wouldn't recommend dollarizing, like I said, because Paraguay has a pretty good, stable monetary policy and I don't see the benefits, like you see in Argentina. There, obviously the stability that will bring immediately to Argentina of dollarizing is very clear when Paraguay is not that clear.
Rasheed Griffith:So you mentioned here and also in the book that the central bank and the ministry of finance in Paraguay are the most competent government agencies in the country. So the recently elected president that just took office this week, I believe Cientego Peña, was the former director of central bank. He also the former minister of finance in Paraguay. Are you optimistic for his administration of Paraguay?
Tomás Mandl:Yes, I am optimistic because the foundations of Paraguay right now are in a good place. Like I said, it's an open economy with a young population, with a number of regulations in terms of tax policy and others that are open to the world economy. In that will, I would expect, high economic growth, regardless of who is the president. The current president is a very like you said. He used to be minister of finance. He's a sort of a technocrat, if you wish, and he's there because he's supported by the most powerful person in Paraguay, that is, a former president, horacio Cartes. So Horacio Cartes, the former president, put Cientego Peña with his support, basically assure the election of Peña to the presidency.
Tomás Mandl:There are many things that can change. It's hard to predict if it's going to be a global pandemic or any other major crisis. So, under normal circumstances, I would say Paraguay will probably do something similar to what's been doing in the past 10 years hopefully remain with a sort of a curve of mid to low to high economic growth and avoid some of the problems you're seeing right now, for example in Ecuador, with the influence of narcotrafficking and narco money in politics and how much that can delay other more pressing problems, like in Paraguay in terms of education and in terms of access to health services and, obviously, to attract more foreign direct investment.
Rasheed Griffith:Coming to the conclusion of the book, you discuss the idea of the benefits that Paraguay could have by trying to transform in itself on a road to Denmark. Explain this idea of how and why Paraguay should use Denmark as like an ideal route to go to.
Tomás Mandl:Yeah, you said that because I didn't want to become too technical about what Paraguay needs to do in terms of international development and so on and so forth. It's not an original idea. It's something that an American economist, juan Lan Pritchett, developed to create a model of a successful country that is not aligned with any right or left wing ideology. It's more like if you want to become a successful country, you need to have a number of very basic staff, like Denmark has, you need to be able to provide some basic public services, you need to have some economic stability and economic growth, you need to be able to have a largely educated population, and so on and so forth. But then also Francis Fukuyama he spoke about the political origins of the state used that metaphor.
Tomás Mandl:I think it describes what Paraguay needs to do and again, it's complicated. It's not, like I said in the book, a roadmap, something you can copy and paste and do it, but it's mostly about very general guidelines and areas we need to work, without getting into the more ideological conversations, trying to experiment with new ideas and so on and so forth, because most of what we think, what we know it works in general for international development, is known. There's no real magic bullet. So that was also the reason why I used Denmark. Just follow this very practical, tangible reality of Denmark and you will be in a good place.
Rasheed Griffith:So, if there is one thing that someone who is not familiar with Paraguay and Paraguay's growth story, what is one particular thing that you would want them to know firsthand?
Tomás Mandl:I don't know if they don't know it. I'm sure the current president is aware of this. Access to electricity is the key to development. You can have sustained high economic growth the type of growth that changed the country from being low income to high income, like you saw, with the Asian Tigers, even Europe and the US without access to electricity.
Tomás Mandl:Paraguay has an amazing that's described this in the book Advantage Over Other Countries with Clean Energy that comes from dams that Paraguay has with Brazil, the biggest one, one with Argentina, one internal that belongs to Paraguay. But Paraguay lacks the infrastructure to connect and this is something that I'm surprised that Paraguay and governments in the past acre do have not done much to develop that infrastructure. Paraguay should be connecting every corner of the country with electricity infrastructure in the way of cables, whatever it is. Most of the cars in transportation in Paraguay should be run by electricity, not diesel, like it is mostly in Paraguay. I don't know if the question you asked me. If they knew this, I wish they would emphasize more this and work more on developing the electricity infrastructure so they can connect to this amazing resource that they have.
Rasheed Griffith:DeMars, thank you so much for joining me on the podcast today. It was a great conversation.
Tomás Mandl:Thank you very much. It was a pleasure. Thank you.