Boom Times in Paraguay Leave Many Behind

But just a few minutes away by car one recent morning, grandmothers waded through raw sewage in the labyrinthine slum of La Chacarita, scavenging copper wire and aluminum cans to sell at scrap yards.

“Tell me about this growth,” said Cecilia Aguirre, 60, grasping a plastic bag holding her day’s takings, worth about $4. Squinting under the hot sun, she said she worked every day to feed the four grandchildren who live in her home. Asked about Paraguay’s robust economy, she added, “I’ve heard of no such thing in my lifetime.”

Indeed, Paraguay’s economic boom, fueled by bountiful harvests of export commodities like soybeans and corn, exists only in pockets. In parts of Asunción, showrooms are selling out of Porsches and Audis, and cranes are putting the finishing touches on luxury towers like the Ícono, a 37-story skyscraper of SoHo-inspired lofts.

Yet much of the country, which has long figured among South America’s poorest and most unequal nations, remains left behind. More than 30 percent of the population lives in poverty, according to the central bank, and Paraguay ranks near the bottom among South American countries in reducing poverty over the last decade, according to the United Nations.

Social spending for antipoverty projects is minimal, largely because taxation is lacking. Paraguay did not even have an income tax until this year, but even though the new across-the-board rate is low, at 10 percent, few people are expected to pay it, as exemptions and loopholes abound. The result: the economic boom may be accentuating the festering inequality in one of Latin America’s most politically unstable nations.

“Nearly all of the growth is driven by highly mechanized agriculture, which generates few jobs for the population,” said Andrew Dickson, an expert on Paraguay’s development policies at the University of Birmingham in Britain. “With a government that finances itself largely through value-added taxes and taxes on imports, you have a situation rather like a low-income African country.”

Paraguay is a landlocked nation about the size of California, sandwiched between southern Brazil and northern Argentina, with a population of 6.5 million. About 77 percent of its arable land is controlled by 1 percent of the nation’s landowners, according to the last agricultural census, and land disputes simmer in various parts of the country.

Activists claim that for decades large tracts of land were illegally distributed by corrupt officials, leaving many land titles in question. In one particularly bloody clash last June, 11 peasants and six police officers were killed at a soy estate in Curuguaty, in eastern Paraguay.

Legislators seized on that episode as a way to oust Fernando Lugo, the former Roman Catholic bishop who was elected president in 2008, ending six decades of one-party rule. Mr. Lugo had initially been expected to focus on reducing inequality, but faced obstacles in doing so.

Paraguay’s new president is one of the nation’s wealthiest men, the tobacco magnate Horacio Cartes, who was elected Sunday after promoting conservative, business-friendly policies during his campaign. He recognized poverty as an issue but has been vague about any plans for reducing it beyond trying to create more jobs through private investment.

The government’s economists remain bullish about growth, arguing that Paraguay, devastated by a 19th-century war that wiped out most of its male population and ruled throughout much of the 20th century by Gen. Alfredo Stroessner, one of the world’s longest-ruling dictators, is emerging from decades of ostracism in the global economy.

Paraguay sold $500 million of bonds in January in international markets, a rare source of financing for a nation overlooked by many foreign bankers for decades. Inflation and unemployment remain low, at less than 2 percent and less than 6 percent, respectively, and the overall poverty rate has fallen to about 32 percent in 2011 from 44 percent in 2003, said Roland Horst, a board member at the central bank.

“We do have a peasant issue now and then,” Mr. Horst said in an interview. “But there is less tension than 10 years ago.” He said the government had been trying to reduce poverty, noting that a program of giving small cash stipends to people in extreme poverty, begun in 2005, now included more than 75,000 families. Other economists, however, dispute such sunny assessments, arguing that the economy remains subject to wide swings, surging this year thanks in part to favorable weather conditions for certain crops, after contracting slightly in 2012 when farmers struggled with a drought.

They also contend that Paraguay’s social welfare programs remain meager compared with antipoverty projects in neighboring countries, which have lifted tens of millions of people out of abject living conditions. They blame Paraguay’s relatively weak state, with tax collection corresponding to only about 18 percent of gross domestic product, a figure lower than that of African nations like Congo and Chad.

“The statistics showing historically low unemployment are a farce,” said Luis Rojas Villagra, an economist at the National University, who estimates that as much as half of Paraguay’s work force is unemployed or underemployed in jobs with degrading wages and working conditions.

“How is it possible to reconcile the fact that hundreds of people survive each day by sifting through garbage in the municipal dump of Asunción while Paraguayans are also the biggest per-capita spenders in Punta del Este?” said Mr. Rojas Villagra, referring to the Uruguayan resort city where rich Paraguayans vacation alongside moneyed Argentines and Brazilians.

Such contrasts persist across Paraguay’s economy. Pockets of luxury, for instance, are expanding near Ciudad del Este, the city on the Brazilian border renowned as a smuggler’s haven.

One development, the Paraná Country Club, includes mansions selling for more than $3 million, largely to soybean growers or business executives from Brazil who have opened factories in Paraguay, a migration of manufacturing that is starting to resemble that of companies from the United States opening factories in low-wage Mexican border cities.

“2013 is starting to look like an amazing year,” said Thelma Amaral, an architect who designs homes near Ciudad del Este.

But elsewhere, including the soybean regions at the root of the growth, examples abound of disparities and disputes, largely over land. A small leftist rebel group, the Paraguayan People’s Army, has been picking off security forces in remote areas. Last weekend, the group killed at least one police officer and wounded several others.

In December, gunmen shot dead Vidal Vega, a leader of the peasant movement involved in the deadly clash at Curuguaty. He had been expected to be a witness at the criminal trial intended to shed light on the massacre. The inquiry into his killing, as in similar cases of peasant leaders killed in Paraguay in recent years, has turned up few leads.

DealBook: Comparing the Valuations Behind Amazon and Apple Shares

And people wonder why it’s hard to understand the stock market.

Take a consumer sitting at home buying stuff on Amazon.com with his iPhone. To him, Apple’s product is a clear leader in the market, while Amazon is the retailer he uses most. Amazon’s shares are up nearly 40 percent over the last 12 months, while Apple’s are down nearly 30 percent over the same period. So why have their stock prices diverged so much when both companies appear to be at the top of their game?

Growth is the most common answer you’ll hear. When a company convinces investors that its earnings can keep going up, an enthusiasm grows around the shares, and they tend to perform well. Wall Street analysts expect Amazon’s earnings next year to be 66 percent higher than the forecast for 2013. They project a 10 percent uptick for Apple.

But there’s another conversation you need to have.

It revolves around whether the market has already factored the hoped-for growth into the stock price. It is possible to pay too much for excellence.

There are all sorts of ways to gauge how much credibility investors ascribe to a company’s “growth story.” One is to look at what investors are paying now for a company’s free cash flows, or the hard dollars it takes in from profits (minus the spending it does on plant and equipment). The results are stark. Apple’s stock market value is nine times last year’s free cash flows. On this metric, Amazon is at over 300 times. Sane investors would never touch a stock with such a dear valuation unless they felt cash flows were going to soar in the future.

And this brings us to the part of investing that usually separates winners from losers: guessing whether companies will actually do what we expect them to.

Amazon’s believers don’t mind that it’s spending such huge amounts on setting up new operations for its retail and data businesses. At some point, hopefully in the not too distant future, that spending will fall as the expansion reaches its limits. In that case, Amazon will be churning out much bigger cash flows as it enjoys near unassailable dominance.

Sure, but how wondrous will those cash flows be? Amazon’s operations produced $4.2 billion of cash flows last year. Let’s generously assume 10 percent annual growth for them, which would take them to $5.1 billion by the end of 2014.

Let’s be kind again and assume that capital expenditures fall a lot, to, say, $1 billion a year, from last year’s $3.8 billion. Free cash flows in 2014 would therefore total $4.1 billion.

Now, remember, at this future point, Amazon’s growth in free cash flow will have slowed a lot. Investors will probably decide to attach a lower valuation to the company. Being generous, let’s assume they value those hypothetical 2014 free cash flows at 21 times, Google’s multiple today. That would give Amazon a market worth of about $86 billion. That’s 30 percent lower than today.

Of course, the stock market believes what it wants to believe. It may well decide to remain starry-eyed about Amazon and give it a much higher valuation for years to come. But Apple’s recent drubbing suggests even the strongest runs can end nastily.

DealBook: Strategic Posturing Behind the Suit Against Corzine

Harry Campbell

Louis J. Freeh, the bankruptcy trustee for the failed futures firm MF Global, filed a lawsuit aimed at pinning its collapse squarely on Jon S. Corzine, the former chief executive, and two of his top lieutenants. And unlike in many other suits, Mr. Freeh has not named other groups like a company’s directors.

The tale Mr. Freeh weaves in the complaint presents Mr. Corzine and the other defendants, Bradley I. Abelow, the former chief operating officer, and Henri J. Steenkamp, the former chief financial officer, as having failed to properly manage risk at MF Global while recklessly trading in European sovereign debt. It is a picture of a headlong rush into failure. Mr. Freeh asserts that the three defendants breached their fiduciary duties by allowing MF Global to take on excessive risks.

The core of the case is that the three men did not properly “develop the appropriate controls, procedures and systems needed to transform” MF Global into a full-service investment bank. Not only that, but Mr. Corzine took personal control of MF Global’s proprietary trading “without ensuring that the Company had sufficient controls and adequate liquidity to properly manage the risks inherent in such trading.”

Mr. Corzine’s representatives have vehemently denied the accusations, and question why Mr. Freeh is taking such actions while court-order mediation is still proceeding.

But regardless of the merits of the case, Mr. Freeh is clearly making a tactical move with his lawsuit. Among the questions that arise in any corporate failure is this important one: Where were the directors, who are ultimately responsible for oversight of the company? In Mr. Freeh’s version of events, it turns out they were quite active in approving the risk limits and other acts by Mr. Corzine. But they were not the primary wrongdoers in this tale, and are not named as defendants. This seems to be part of his legal strategy in this suit. He appears to feel he has a better chance at overcoming the legal hurdles to holding executives liable for business decisions than members of MF Global’s board.

Mr. Freeh’s complaint is noteworthy for adopting an all-in strategy against Mr. Corzine, Mr. Abelow and Mr. Steenkamp. Strategically, Mr. Freeh may be hoping the directors will turn on Mr. Corzine and blame him for being a pied piper who led them to approve policies that turned out to be disastrous for MF Global. In corporate litigation, it is always helpful to have someone inside the boardroom pointing the finger at a wrongdoer to help show that these were not just ordinary business decisions that turned out badly.

It may be that Mr. Freeh will settle a claim against the directors later. But by suing Mr. Corzine first, the directors should get the message that they are bit players at best in Mr. Freeh’s account.

In addition, it is much easier under the law to hold officers liable for misdeeds than it is in the case of directors. Under Delaware law, where MF Global was incorporated, corporate directors cannot be sued to recover monetary damages for anything except a breach of the duty of loyalty, which usually requires showing that they gained improper benefits from their actions. To establish that directors are liable for failing to oversee the company and its risk management practices, Mr. Freeh would have to prove that “the directors demonstrated a conscious disregard for their responsibilities” and acted in bad faith.

This is an extremely high standard to meet, and Delaware courts regularly dismiss such claims. In a shareholder derivative case involving claims that Citigroup’s board failed to properly oversee the bank’s risk management before the financial crisis, for example, a Delaware court refused to find the board liable despite the bank’s near collapse and subsequent government bailout. Indeed, the court stated that under Delaware law “[t]o impose oversight liability on directors for failure to monitor ‘excessive’ risk would involve courts in conducting hindsight evaluations of decisions at the heart of the business judgment of directors.” The case against the Citigroup directors was dismissed because the plaintiffs could not show that the directors had acted in bad faith, but instead may have merely failed in their risk monitoring.

Mr. Freeh is keenly aware that Delaware law presents an almost insurmountable barrier to any suit against the directors. The board certainly looks foolhardy in trusting Mr. Corzine to take the risks that he did, but proving that they acted in bad faith would be quite difficult.

In contrast, Delaware law does not afford corporate officers the same level of protection. That means Mr. Freeh can seek to recover for a breach of the duty of due care by showing gross negligence on the part of the leaders of MF Global.

That is still a high standard, requiring something akin to proving recklessness by Mr. Corzine. But unlike a suit against the directors, which would probably be dismissed quickly, this claim has a reasonable chance of surviving a motion to dismiss that would allow it to proceed toward a trial. A public airing of MF Global’s plunge into bankruptcy is probably the last thing Mr. Corzine wants, so the settlement value of the case is higher.

Mr. Corzine was very careful to state in his Congressional testimony that he acted in good faith and that his actions were based on advice provide by others for policies that were ultimately approved by the directors. He will offer the business judgment rule, a cornerstone of Delaware corporate law, to argue that these were merely bad business decisions, which cannot create liability. Even Mr. Freeh admits that the MF Global directors signed off on much of the conduct, giving Mr. Corzine some cover for his management of the firm.

While Mr. Freeh has an uphill battle to win the case, Mr. Corzine’s more immediate problem may be the high costs of a potential trial. Because MF Global is in bankruptcy, he cannot look to the company to indemnify him for any settlement or even pay his legal expenses, something normally provided to corporate officers sued for their actions.

Instead, Mr. Corzine must rely on MF Global’s insurance – and it had two pretty hefty policies. At the time of the bankruptcy, MF Global had a “directors and officers” liability policy for $225 million and an “errors and omissions” liability policy for $150 million. The judge in the bankruptcy case has already authorized Mr. Corzine and other employees to draw up to $30 million from the policy to pay for their legal fees.

But this cap has probably been exceeded by now, given the numerous Congressional hearings about MF Global’s collapse and the criminal and regulatory investigations of the firm. The question is whether the bankruptcy court will allow Mr. Corzine and the other defendants to continue to draw on the insurance to pay for their mounting legal costs or seek to preserve the policy for payments to MF Global’s customers and claims holders.

Mr. Corzine’s biggest concern is not that he may lose the case, but that the mounting legal fees will take a significant bite out of the fortune he amassed from his days at Goldman Sachs. Mr. Freeh is clearly aiming straight at Mr. Corzine, and is not the type of opponent who can be sent packing with a quick settlement.