Is Paraguay the Texas of South America?
We've been reading for years about companies leaving high-tax blue states and moving to Texas, or the biggest of the red states. They move here for one simple reason: a more attractive business landscape, from taxes to litigation reform. They are not leaving their allegiance to the Yankees or Giants, as you can see when those teams come to play.
Well, something is happening in South America as more companies leave Brazil, the region's version of California's high taxes and unbearable state regulations, and moving to Paraguay.
This is from Sabrina Martin:
At least 40 Brazilian companies — encouraged by the National Industry Confederation (CNI) — have decided to transfer part or all of their production lines to Paraguay. The CNI says that the current Paraguayan government is “business friendly” and enjoys political stability.
Paraguay offers Brazilian business owners various incentives, such as more affordable electricity, lower taxes, and the so-called Maquila Law, which establishes a tax exemption for foreign companies that import raw materials and machinery, so long as they export the finished product.
Furthermore, in Paraguay, the income tax (ISLR) and value-added tax (VAT) are each set at 10 percent. In Brazil, however, businesses must pay 25 percent in income tax, as well as three other taxes that add up to over 25 percent.
According to Brazilian daily Folha de Sao Paulo, the industrial gas manufacturerOxygroup has closed its operations in Pará, Minas Gerais, and moved to Paraguay, investing more than US$7.5 million in the transfer.
Folha also reports that there are five Brazilian toy manufacturers in the final stages of their feasibility research to determine whether to open operations in Paraguay.
Obviously, Paraguay is a small country and can take only so much business from Brazil or anywhere else. After all, Brazil has a $3.3-trillion GDP, whereas Paraguay is only $62 billion.
The larger point is that some countries are starting to realize that capitalism and a more attractive business climate work. Multinational companies look for political stability, the rule of law, and little corruption. Sadly, Brazil is politically unstable and very corrupt, and its administrative state takes the gold medal for crony capitalism.
So hooray for little Paraguay, a country of fewer than 7 million people surrounded by Bolivia, Brazil, and Argentina.
Let me close with a little story about Paraguay and President Rutherford Hayes, our 19th president. This is a great story from NPR that ran on President's Day a few years ago:
In fact, an industrial city on the banks of the Paraguay River is named Villa Hayes — Spanish for "Hayesville" — in his honor.
Here's why: Hayes took office in 1877 in the aftermath of the Triple Alliance War, a conflict that nearly destroyed Paraguay. The country lost huge chunks of territory to victorious Brazil and Argentina. Later, Argentina later tried to claim the Chaco, the vast wilderness region of northern Paraguay.
At the time there was no United Nations or World Court. So the two sides asked the United States to settle the dispute — and President Hayes sided with Paraguay. The decision gave Paraguay 60 percent of its present territory and helped guarantee its survival as a nation, says Maria Teresa Garozzo, director of the Villa Hayes Museum.
There are also a soccer team, a postage stamp, and quite a few places named after him. It's safe to say that Paraguay would look very different today if President Hayes had made a different decision.