Paraguay’s uneasy exterior

Often out of the spotlight of Latin America observers, Paraguay continues to make quiet but sustained economic progress. However, Paraguay’s path toward prosperity is increasingly complicated by external constraints on growth.


Photo: Paraguayan President Mario Abdo Benítez and his Brazilian counterpart, Jair Bolsonaro / Christian Rizzi / Folhapress 

Often out of the spotlight of Latin America observers, Paraguay continues to make quiet but sustained economic progress. Last year, Paraguay saw the smallest economic contraction in Latin America. The country’s economy is expected to expand by nearly 5 percent in 2021,  pushing GDP above pre-pandemic levels. This can largely be explained by two decades of orthodox fiscal and monetary policy that has kept debt and inflation low, earned the trust of international creditors, and stimulated a substantial rise in foreign direct investment. However, Paraguay’s path toward prosperity is increasingly complicated by external constraints on growth. Reducing these asymmetries—in climate, trade, security—requires a renewed regional policy from a country stuck in the shadow of larger neighbors.

At the core: a changing climate

The most visible of constraints runs down the country’s center: the Río Paraguay. Historically, landlocked Paraguay depended on the goodwill of Argentina to access Atlantic markets via river outlets. Today, its rivers are in the hands of a changing climate. As the Río Paraguay—moving over 90 percent of Paraguayan trade—descended to record lows in 2021, drought also sapped the Paraná, on which Paraguay’s 3,600-barge river fleet navigates to the Atlantic. Lightened loads lowered export earnings and increased import costs. Making matters worse, Paraguayan exporters find themselves squeezed between neighbors’ economic and environmental policies. Downstream, Argentina’s Fernández administration now controls Paraná dredging operations after the end of a 26-year private concession, while upstream river flows depend on a climate made increasingly volatile by Brazilian deforestation.

Paraguay’s asymmetrical relationship to climate—adding little to global emissions, but impacted disproportionately—necessarily shapes its foreign policy. Significant deforestation within national borders is traced to foreign capital, too, as in the case of Brazilian agribusiness in Paraguay’s Atlantic Forest. As President Mario Abdo Benítez told the 2021 UN General Assembly, drying rivers underscore “the importance of honoring international commitments to the Paris Agreement … to support the mitigation and adaptation efforts of developing countries, especially those of us most vulnerable to global warming.”

On the border: commerce and crime

Paraguay also sits vulnerable to forces that originate in the near-abroad, as informal commercial ties to neighbors expose the country to financial contagion and organized crime. Mid-century protectionism in Brazil and Argentina made Paraguay’s unregulated border an escape valve for foreigners, feeding the growth of Ciudad del Este and Encarnación (Paraguay’s second and third-largest cities, respectively), but exposing the economy to its neighbors’ vacillating economic policies. Today, a depreciated Brazilian Real curtails Ciudad del Este commerce, and severe capital controls from Buenos Aires exasperate Encarnación. Along the border, Argentines buy the “guaraní blue” amid a scarcity of dollars, while Paraguayan merchants’ competitive advantage narrows further due to a spate of price controls by the Fernández administration.

The pandemic measures introduced in Argentina brought additional headaches. Misiones Province repeatedly delayed its border opening, retaining pesos that typically cross the Río Paraná. While Misiones enjoyed an 81 percent increase in fiscal revenue in 2020, Paraguay suffered a 42 percent fall in re-exports. In turn, closed bridges funneled business to organized crime, with low river levels aiding contraband criss-crossing of the border. Insecurity is diagnosed as a Brazilian disease, as cartels Primeiro Comando da Capital and Comando Vermelho view Paraguay as fertile territory to expand transnational footholds.

In the world: troubled ties

Paraguay’s asymmetrical relations with its neighbors have also led the country into disadvantageous deals, such as electricity exports (Paraguay’s most lucrative, along with soy), which are ceded to Brazil at a fixed, below-market price from the binational Itaipú Dam. High energy prices in Brazil have raised opportunity costs for Paraguay, whose export revenue from the dam dipped by 17 percent through October 2021 from a year earlier. Although Paraguay will likely push for a fairer tariff as it renegotiates the Itaipú treaty in 2023, the energy crisis hardens Brazil’s position for lower prices.

Beyond the bilateral Brazilian relationship, Paraguay’s other international ties risk greater strain. As Mercosur’s smallest economy, Paraguay values association with its neighbors but is being sidelined as rifts deepen within the trade bloc. While an outward orientation allows fellow small state Uruguay to aggressively campaign for Mercosur modernization, landlocked Paraguay remains tethered to decisions in Brasília and Buenos Aires that are increasingly at odds. Beyond the Southern Cone, Paraguay’s strong relationship with Taiwan faces an uncertain future. At the forefront is the uncertain future of the island nation itself. In the background are the opportunity costs incurred as China engages with the broader region. Some lawmakers in Paraguay asked if the country’s slow COVID-19 vaccination campaign would have been accelerated by recognizing Beijing.

From the capital: policy possibilities

Paraguayan policymakers must strike a balance of guarding against risk and engaging with the region. Some actions are clear-cut: A crackdown on corruption, for example, would raise guardrails against Brazilian organized crime. In Ciudad del Este, voters said so in their recent election of independent Miguel Prieto, the first non-Colorado Party mayor in the city’s history. (The U.S. State Department implicated Prieto’s opponent in transnational crimes earlier in 2021.)

Other actions are less obvious but could help Paraguay level its asymmetric relations with neighbors. Policy that attracts energy-intensive industry would use electricity surplus more productively than electricity exports to Brazil. Here, Paraguay sees slow but tangible progress: British-firm Atome Energy recently announced investment in an Itaipú-powered, $550 million hydrogen and ammonia plant, while Paraguay’s utilities company projects 7 percent annual growth in electricity demand. Meanwhile, engineers are celebrating a new transmission line from Yacyretá—the binational hydroelectric dam on the Argentine border—that positions Paraguay as central to regional energy integration.

Integration, if strategic, can turn landlocked constraints into silver linings. Paraguay is building a “bioceanic corridor” across its Chaco region and a new bridge to Brazil at the Triple Border, part of the Abdo administration’s extensive investment in roadways. An evolving Mercosur is also an opportunity: As Brasilia backs Uruguay’s bid for modernization, Buenos Aires seeks an ally, giving Paraguay a rare window to voice its interests, such as lowered protectionism to reduce import costs.

Paraguay’s gaze will turn inward as it approaches 2023 elections, centering on divisions within the Colorado Party and whether the opposition can field a viable candidate. Yet the bigger picture remains outward: Paraguay’s external constraints are here to stay, no matter who heads the country’s next government. Serious strategy to manage these challenges is central to protecting the progress made by years of disciplined fiscal and monetary policy in Asunción. In turn, policymakers in Brasilia, Buenos Aires, and Washington would gain from understanding Paraguay not as an isolated outlier, but as an integrated actor in a complex region.

Greg Ross is a graduate student at the Johns Hopkins School of Advanced International Studies, where he researches politics and economics in the Southern Cone. Follow him on Twitter @gregory_ross.

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