Paraguay’s strengthening case for state reform

The pandemic has turned the government into a crucial actor of economic recovery, in reckoning with its post-pandemic outlook, Paraguay is building a case for state reform.


As Paraguay gradually emerges from a COVID-19 lockdown that, to date, has kept contagion under control, it faces a citizenry that is unemployed, underfed, and uncertain of its economic future. The pandemic has turned the state into a crucial actor of economic recovery, and in the process, re-centered corruption as an obstacle to a more equitable and prosperous Paraguay. In reckoning with its post-pandemic outlook, Paraguay is building a case for state reform.

Precarious Progress

Set against the backdrop of its neighbors’ problems—from financial malaise in Argentina to political turmoil in Brazil and Bolivia—Paraguay stands out for its relative stability over the past several years. Since the early 2000s, foreign investment has increased across sectors, and the country, despite some bumps, has continued its democratic consolidation. Earlier this year, the Heritage Foundation, a conservative D.C.-based think tank, called Paraguay the United States’ “new preferred partner in South America,” while praising its “sustained push for economic liberalization and greater transparency in government.” Most Paraguayans, however, would contend that transparency remains a work in progress.

A recent report by the Americas Society and Council of the Americas (AS/COA) and Control Risks ranked Paraguay 12th of 15 countries in Latin America for its capacity to combat corruption, and last in combating white collar crime. President Mario Abdo Benítez took office in 2018 on an anti-corruption platform, pledging that “whoever falls will fall.” However, campaign promises have failed to fully materialize: Only 10.2 percent of Paraguayans polled in 2019 believe corruption has decreased under Abdo’s administration. Last year’s closed-door deal with Brazil regarding energy sales from Itaipu Dam put President Abdo on the precipice of impeachment; the political maneuvering that followed left pundits to speculate the administration is compromised by the agenda of Horacio Cartes, Abdo’s predecessor.

In Paraguay there exists the perception that the state lacks not only capacity, but also political will to root out corruption. High-profile politicians have been prosecuted abroad, rather than in-country. Last November, the FBI arrested a former Paraguayan congresswoman in New Jersey for money laundering. During the same month, Lava Jato prosecutors in Brazil issued an arrest warrant for former president Cartes for alleged involvement in a money laundering and kickback scheme.

Recent months have seen both setbacks and steps forward. In April, as pandemic fears heightened, the Ministry of Health purchased faulty medical supplies from contractors owned by a well-connected Paraguayan businessman. And in June, the lower house of Paraguay’s legislature passed a brazen impunity bill intended to protect lawmakers who falsify sworn statements. President Abdo’s veto of the bill was widely applauded, as was a ruling by the country’s highest court to mandate open access to government officials’ sworn oral and written statements. The ruling published thousands of affidavits and financial statements dating back to 1998, pertaining to officials in municipalities, national ministries, binational entities, and other governmental bodies. As journalists now sift through these documents and report past earnings and transactions of elected officials, the cause for a reinvigorated anti-corruption movement grows.

Kattya González, a congresswoman from the center-left Partido Encuentro Nacional (PEN), has emerged as a leading voice for reform. She recently called on President Abdo to cut superfluous benefits granted to public officials, prioritize health and education, provide subsidies for select public services, and pursue more radical change like a structural overhaul of the bicameral legislature. A widespread social media campaign surfaced in recent weeks as Paraguayans changed profile pictures to the phrase #CheKuerai—“I’m fed up” in Guaraní. With quarantine restrictions in place, anti-corruption protests in Asunción have proceeded by caravan. 

Pressure is also building beyond the capital. In 2019, Ciudad del Este—Paraguay’s second-largest city and the economic heart of the Triple Frontier region—elected Miguel Prieto as mayor. Prieto, the first independent to lead the city, campaigned on reforming a municipality under Colorado Party rule since its foundation during the Alfredo Stroessner dictatorship. This May, after a plot by the city’s Colorado establishment to remove Prieto was uncovered, residents took to the streets—again, by caravan—to show support for Prieto. Normally, Paraguayans in border economies from Ciudad del Este to Salto del Guairá and Pedro Juan Caballero can afford to turn a blind eye to internal politics; livelihoods are made through daily dealings with Brazil rather than Asunción. The pandemic has closed the border, however, and residents are left with little recourse other than to rely on government support.

State Spending 

The umbrella of corruption covers a political culture that promotes costly inefficiencies. These costs are heightened as the pandemic presses the state into an increasingly active economic actor. In March, President Abdo invoked the “Emergency Law,” allowing the state to take on additional debt—roughly 5 percent of GDP—to fund increased spending and the suspension of various tax and utility payments. Resources are being directed toward a few government programs aimed at small businesses and informal workers. One of which, Fogapy, provides government-backed guarantees to financial institutions, facilitating credit for small and medium-sized businesses. While greater state support has turned the previously underutilized initiative into an important mechanism for recovery, it remains inaccessible to many informal enterprises.

The Abdo administration also launched Pytyvõ, a transfer-payment program focused on informal workers. Two payments of $80 have been made to applicants, with preparations for a third are underway. Although Pytyvõ has helped over a million Paraguayans, it highlights the difficulties of providing welfare in an economy with high rates of informal employment. The payments remain insufficient in size and scope to mitigate the effects of a strict lockdown. To bridge the gap, communities are organizing public cookouts and the delivery of care packages to feed the most vulnerable. Reliance on such networks underscores the state’s limited reach. 

Paraguay’s high rate of informality not only hinders the state’s ability to provide effective welfare during the pandemic, but also to address inequality in the long-term. Of 3.5 million economically-active workers in Paraguay, less than 900,000 contribute taxes. While new regulations entered into law at the start of 2020, simplifying the tax code and raising annual revenue by a projected $350 million, the changes fall far short of reform. The system remains largely regressive and weighs heavily on inequality. According to the OECD, Paraguay’s tax-to-GDP ratio sits at 14 percent—the third-lowest in Latin America and below the regional average of 23.1 percent. The country has made important progress over the past decade, but its Gini index is higher than the Latin American average, and well above Southern Cone counterparts Argentina and Uruguay. It also exceeds that of Chile, where protests last year centered on persistent inequality and prompted a plebiscite for a new national constitution.

Although Paraguay’s low tax rate suggests there is room for carefully-calibrated progressive reform, higher taxation remains politically infeasible if the electorate continues to perceive a corrupt and nontransparent state. In April, lawmakers proposed to raise the sales tax on alcoholic and sugary beverages; its sponsors wrote the bill “with the health emergency and the need to provide greater resources to the [Ministry of Health] in mind.” The bill, along with other proposals to raise taxes on tobacco consumption and certain soy exports—a subject of extensive debate in recent years—was rejected by a congressional majority.

Without increased revenue, the government may take on more debt to pay for state spending on the heels of the pandemic. The country’s debt-to-GDP ratio, while relatively low for the region at 29.7 percent, has risen to its highest level in 16 years. Nearly 85 percent of that debt has been issued on the international market. In April, Paraguay issued a $1 billion investment-grade bond to fund the initial COVID-19 response. Finance Minister Benigno López has indicated additional debt could be incurred to fund further emergency spending. 

Meanwhile, the Abdo administration has continued its commitment to infrastructure spending, building bridges, paving roads, and creating transportation networks—including a bicoastal route across the Chaco—that promise to pay off in the decades to come. Some researchers and policymakers have advocated for a more ambitious strategy to develop energy-intensive industries that take advantage of Paraguay’s hydroelectricity surplus, while others propose a stimulus to transform public housing, especially in the capital region, where urban sprawl has created unaffordable and unsustainable housing patterns. Investment in education is also overdue: In recent years, Paraguay spent 3.3 percent of GDP on education (average, 2013-2016), significantly less than Brazil (6.0 percent), Argentina (5.5 percent), Chile (4.9 percent), and Uruguay (4.8 percent).

Returns on Reform

Paraguay’s sound macroeconomics over past decades offer the Abdo administration some fiscal flexibility to manage this year’s economic shock. However, by underscoring structural challenges to more equitable growth, the pandemic offers a platform for conversation about reform. While the payment programs that have begun to aid informal workers and small businesses are stop-gap measures, they also demonstrate how the state’s expanding social reach could later lay the foundation for a more formalized, inclusive economy. 

Reform requires a broader societal commitment—which remains untenable until the government demonstrates its commitment to combat endemic corruption. Sustained anti-corruption efforts across multiple levels of government can gradually secure public trust in increased spending and open a window for more inclusive fiscal policy. President Abdo’s remaining three years in office will be occupied by pandemic response and recovery, but his campaign promise to tackle corruption should not be lost in the noise. A transparent state remains critical to the welfare of post-pandemic Paraguay. 

Greg Ross is an incoming M.A. student at the Paul H. Nitze School of Advanced International Studies (SAIS). He is a recipient of a Fulbright research grant to Paraguay, former research assistant at Centro para la Apertura y el Desarrollo de América Latina (CADAL), and holds a B.A. from the University of Chicago.

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