Source: Mayeli Villalba/Anadolu Agency.
An upheaval in the global economy has been underway since 2020. Its numerous repercussions include the emergence of a handful of smaller countries that stand to disproportionately benefit from the circumstances. Paraguay finds itself among this select group. The current Paraguayan government understands the country’s advantageous moment and aims to leverage it in a way that elevates the country’s standing in the Americas.
Paraguay has often been overlooked due to several constraints that, relative to its neighbors, put it at a disadvantage. The country serves as a small buffer state between regional giants Brazil and Argentina and thus sits in the crosshairs of any rivalry. Additionally, the country is landlocked; consequently, it depends on neighbors Brazil and Argentina for maritime access and trade. Together, these features result in Brasilia and Buenos Aires having an outsized influence on the country’s economy. Lastly, the country spent much of the 20th century recovering from a demographic crisis triggered by the Triple Alliance War (1864-1870)—during which Paraguay lost most of its adult (and adolescent) male population, with some estimates as high as 90 percent.
In the wake of the Triple Alliance War, Paraguay mastered the ability to leverage its strengths in pursuit of its interests against stronger opponents. This primarily entailed developing expertise related to international law and diplomacy, which helped put it on a more level playing field with its larger neighbors. For example, a major objective of Paraguay’s 21st century foreign policy has been to get better terms in economic negotiations. Officials have utilized international law and negotiation skills to secure more favorable deals and prices over the years, such as the sale of hydroelectricity to neighbors and access to riverways leading to the Atlantic. Asunción also leans on diplomacy for gaining the support of outside players—especially the U.S.—that can help offset Brazil and Argentina. For example, Washington’s mediation between Paraguay and Argentina at the end of the Triple Alliance War resulted in Paraguay receiving the Chaco region. Paraguay’s current foreign relations broadly align with the U.S. in that Asunción supports Israel and Taiwan in global affairs—notably using its diplomatic prowess to recognize Taiwan without completely alienating China.
Now Paraguay finds itself in a global scenario that supports its economic development and regional rise. High commodity prices have translated into more money for Paraguay, given exports consist overwhelmingly of agriculture goods and account for just over a third of GDP. In the first ten months of this year, Paraguayan exports grew at an annual rate of nearly 25 percent and totaled USD 14.44 billion. In early November 2023, persistent drought conditions in the U.S. prompted Washington to reopen access to exports of Paraguay beef, breaking a 25-year hiatus. Considering that beef is a major export for Paraguay and the U.S. a major consumer market, the U.S. action is a major development.
The current administration is well positioned to capitalize on this favorable scenario. President Santiago Peña won the April 2023 presidential election with a nearly 15-point advantage over the second-place contender, and he holds a majority in both houses of the legislature. This translates into significant political capital that will facilitate governance and significantly reduce the risk of deadlock. Stability is what investors look for, and it seems that the current political environment is set to offer just that. Lastly, Peña possess a strong economic background at a time when geoeconomics drives the global system, meaning he is expected to be skilled at navigating this landscape. On the economic front, the government is also supported by a stable macroeconomic environment. Paraguay current stands one step away (BB+) from investment grade, according to Fitch, due largely to its low public debt and hefty foreign currency liquidity. In 2022, the country had a net inflow of USD 725 million of investment, up 34 percent from the previous year, according to the Central Bank of Paraguay. Interest rates have also gone down 1.25 base points this year and currently stand at 7.25 percent with prospects of going down further next year.
Unsurprisingly, the Peña administration has aggressively pursued a business–friendly agenda during its first months in office. Direct investment and foreign capital play fundamental roles in the country’s economic development, and Paraguay cannot afford to miss the current opportunity to increase private sector participation in the economy. The government implemented several incentives to support businesses in the few months it has been in office. These include the approval of the carbon credit law, reforms to the Finance Ministry, support for the streamlining of the tax system as well as plans to reform the pension system, and its Policy Coordination Instrument agreed to with the IMF.
The current government will likely also use its traditional expertise in international law and diplomacy to further support its national objectives. Paraguay and Brazil are currently renegotiating Annex C of the Itaipú Binational Treaty which stipulates the financial bases for the provision of electricity services (and pricing) to both countries. In addition to fair market prices for electricity sales to Brazil, Paraguay now also seeks additional energy to support domestic development through industrializing and financing development bonds. These moves are essential to supporting future ambitions, such as leveraging the country’s low labor costs and rising productivity to provide the region with cheap manufactured goods. On the diplomatic side of things, Paraguay is working to improve ties with Washington. This past September, authorities from Paraguay and the United States agreed to extend until 2025 an agreement that expedites the exchange, marketing, importation, and exportation of agricultural products. Paraguay is also turning to Washington (as well as Parlasur and the OAS) for help brokering an arrangement with Argentina related to tolls on the Paraná River Waterway.
In addition to its bilateral diplomacy, Paraguay is pursuing a resurgence of regionalism in South America, complimentary to its national development. At the turn of the century, regionalism was widely supported by South American countries. They believed that by banding together, they could gain favorable trade terms and leverage in the broader geopolitical system. In recent years, however, the regionalism concept lost its as heavy migration flows, economic downturns, and shifting political ideologies overtook South America. Asunción finds itself in a region undergoing considerable change, relating to the global energy transition, climate change, and a degree of regional political turnover with recent elections in Brazil, Chile, and Argentina. However, Paraguay still stands to benefit from a regionalist approach given its smaller size relative to other countries in the region. To this end, Peña has renewed diplomatic ties with Venezuela and thrown his support behind modernizing Mercosur so it remains relevant, functional, and beneficial to its members.
It appears that Paraguay, often relegated to the sidelines in international affairs, is stepping up its profile. Peña’s efforts to move Paraguay into a faster lane of economic engagement is getting the attention of Washington and its Mercosur neighbors. Asunción’s progress will be of particular interest to the U.S. given it will align with U.S. foreign policy interests and provide a stable partnership for Washington in the southern cone.
Allison Fedirka is a fellow at Global Americans, Director of Analysis at Geopolitical Futures, and co-founder of Allonia Group.
Global Americans takes pride in serving as a platform that offers in-depth analyses on various political, economic, environmental, and foreign affairs issues in the Western Hemisphere. The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the views of Global Americans or anyone associated with it, and publication by Global Americans does not constitute an endorsement of all or any part of the views expressed.
