Paraguay GROWTH AND STRUCTURE OF THE ECONOMY
Selling perfume on the streets of Puerto Presidente
Stroessner
Courtesy Richard S. Sacks
Street markets in Asunción
Courtesy Tim Merrill
Until the Spanish established Asunción in 1537, economic
activity in Paraguay was limited to the subsistence agriculture of
the Guaraní Indians. The Spanish, however, found little of economic
interest in their colony, which had no precious metals and no sea
coasts. The typical feudal Spanish economic system did not dominate
colonial Paraguay, although the encomienda. System was
established
(see The Young Colony
, ch. 1). Economic relations were
distinguished by the reducciones (reductions or townships)
that were established by Jesuit missionaries from the early
seventeenth century until the 1760s,
(see The Sword of the Word
, ch. 1). The incorporation of Indians into
these Jesuit agricultural
communes laid the foundation for an agriculture-based economy that
survived in the late twentieth century.
Three years after Paraguay overthrew Spanish authority and
gained its independence, the country's economy was controlled by
the autarchic policies of José Gaspar Rodríguez de Francia (1814-
40), who closed the young nation's borders to virtually all
international trade
(see El Supremo Dictador
, ch. 1). Landlocked,
isolated, and underpopulated, Paraguay structured its economy
around a centrally administered agricultural sector, extensive
cattle grazing, and inefficient shipbuilding and textile
industries. After the demise of Francia, government policies
focused on expanding international trade and stimulating economic
development. The government built several roads and authorized
British construction of a railroad.
The War of the Triple Alliance (1865-70) fundamentally changed
the Paraguayan economy
(see The War of the Triple Alliance
, ch. 1).
Economic resources were employed in and destroyed by the war
effort. Paraguay was occupied by its enemies in 1870; the
countryside was in virtual ruin, the labor force was decimated,
peasants were pushed into the environs of Asunción from the east
and south, and the modernization of the preceding three decades was
undone. Sleepy, self-sufficient Paraguay, whose advances in
agriculture and quality of life had been the envy of many in the
Southern Cone (see Glossary), became the most backward nation in
that subregion.
To pay its substantial war debt, Paraguay sold large tracts of
land to foreigners, mostly Argentines. These large land sales
established the base of the present-day land tenure system, which
is characterized by a skewed distribution of land. Unlike most of
its neighbors, however, Paraguay's economy was controlled not by a
traditional, landed elite, but by foreign companies. Many
Paraguayans grew crops and worked as wage laborers on
latifundios (large landholdings) typically owned by
foreigners.
The late 1800s and the early 1900s saw a slow rebuilding of
ports, roads, the railroad, farms, cattle stock, and the labor
force. The country was slowly being repopulated by former Brazilian
soldiers who had fought in the War of the Triple Alliance, and
Paraguay's government encouraged European immigration. Although few
in number, British, German, Italian, and Spanish investors and
farmers helped modernize the country. Argentine, Brazilian, and
British companies in the late 1800s purchased some of Paraguay's
best land and started the first large-scale production of
agricultural goods for export. One Argentine company, whose owner
had purchased 15 percent of the immense Chaco region, processed
massive quantities of tannin, which were extracted from the bark of
the Chaco's ubiquitous quebracho (break-axe) hardwood
(see
fig. 3). Large quantities of the extract were used by the region's
thriving hide industry. Another focus of large-scale agro-
processing was the yerba maté bush, whose leaves produced the
potent tea that is the national beverage. Tobacco farming also
flourished. Beginning in 1904, foreign investment increased as a
succession of Liberal Party (Partido Liberal) administrations in
Paraguay maintained a staunch laissez-faire policy.
The period of steady economic recovery came to an abrupt halt in
1932 as the country entered another devastating war. This time
Paraguay fought Bolivia over possession of the Chaco and rumors of
oil deposits. The war ended in 1935 after extensive human losses on
both sides, and war veterans led the push for general social reform
(see The Chaco War and the February Revolution
, ch. 1). During the
1930s and 1940s, the state passed labor laws, implemented agrarian
reform, and assumed a role in modernization, influenced in part by
the leadership of Juan Domingo Perón in Argentina and Getúlio
Dornelles Vargas in Brazil. The 1940 constitution, for example,
rejected the laissez-faire approach of previous Liberal
governments. Reformist policies, however, did not enjoy a
consensus, and by 1947 the country had entered into a civil war,
which in turn initiated a period of economic chaos that lasted
until the mid-1950s. During this period, Paraguay experienced the
worst inflation in all of Latin America, averaging over 100 percent
annually in the 1950s.
After centuries of isolation, two devastating regional wars, and
a civil war, in 1954 Paraguay entered a period of prolonged
political and economic stability under the authoritarian rule of
Alfredo Stroessner Mattiauda. Stroessner's economic policies took
a middle course between social reform,
desarrollismo (see Glossary),
and laissez-faire, all in the context of patronage
politics. Relative to previous governments, Stroessner took a
fairly active role in the economy but reserved productive
activities for the local and foreign private sectors. The new
government's primary economic task was to arrest the country's
rampant and spiraling price instability. In 1955 Stroessner fired
the country's finance minister, who was unwilling to implement
reforms, and in 1956 accepted an International Monetary Fund
(
IMF-- see Glossary)
stabilization plan that abolished export duties,
lowered import tariffs, restricted credit, devalued the currency,
and implemented strict austerity measures. Although the sacrifice
was high, the plan helped bring economic stability to Paraguay.
Labor unions retaliated with a major strike in 1958, but the new
government, now firmly established, quelled the uprising and forced
many labor leaders into exile; most of them remained there in the
late 1980s.
By the 1960s, the economy was on a path of modest but steady
economic growth. Real GDP growth during the 1960s averaged 4.2
percent a year, under the Latin American average of 5.7 percent but
well ahead of the chaotic economy of the two previous decades. As
part of the United States-sponsored Alliance for Progress, the
government was encouraged to expand its planning apparatus for
economic development. With assistance from the Organization of
American States (OAS), the Inter-American Development Bank (IDB),
and the United Nations Economic Commission for Latin America
(ECLA), in 1962 Paraguay established the Technical Planning
Secretariat (Secretaría Técnica de Planificación--STP), the major
economic planning arm of the government. By 1965 the country had
its first National Economic Plan, a two-year plan for 1965-66. This
was followed by another two-year plan (1967-68) and then a series
of five-year plans. Five-year plans--only general policy
statements--were not typically adhered to or achieved and played a
minimal role in Paraguay's economic growth and development.
Compared with most Latin American countries, Paraguay had a small
public sector. Free enterprise dominated the economy, export
promotion was favored over import substitution, agriculture
continued to dominate industry, and the economy remained generally
open to international trade and market mechanisms.
In an economic sense, the 1970s constituted Paraguay's miracle
decade. Real GDP grew at over 8 percent a year and exceeded 10
percent from 1976 to 1981--a faster growth rate than in any other
economy in Latin America. Four coinciding developments accounted
for Paraguay's rapid growth in the 1970s. The first was the
completion of the road from Asunción to Puerto Presidente
Stroessner and to Brazilian seaports on the Atlantic, ending
traditional dependence on access through Argentina and opening the
east to many for the first time. The second was the signing of the
Treaty of Itaipú with Brazil in 1973. Beyond the obvious economic
benefits of such a massive project, Itaipú helped to create a new
mood of optimism in Paraguay about what a small, isolated country
could attain. The third event was land colonization, which resulted
from the availability of land, the existence of economic
opportunity, the increased price of crops, and the newly gained
accessibility of the eastern border region. Finally, the
skyrocketing price of soybeans and cotton led farmers to quadruple
the number of hectares planted with these two crops. As the 1970s
progressed, soybeans and cotton came to dominate the country's
employment, production, and exports.
These developments shared responsibility for establishing
thriving economic relations between Paraguay and the world's sixth
largest economy, Brazil. Contraband trade became the dominant
economic force on the border between the two countries, with Puerto
Presidente Stroessner serving as the hub of such smuggling
activities. Oblservers contended that contraband was accepted by
many Paraguayan government officials, some of whom were reputed to
have benefited handsomely. Many urban dwellers' shelves were
stocked with contraband luxury items.
The Paraguayan government's emphasis on industrial activity
increased noticeably in the 1970s. One of the most important
components of the new industrial push was Law 550, also referred to
as Law 550/75 or the Investment Promotion Law for Social and
Economic Development. Law 550 opened Paraguay's doors even further
to foreign investors by providing income-tax breaks, duty-free
capital imports, and additional incentives for companies that
invested in priority areas, especially the Chaco. Law 550 was
successful. Investments by companies in the United States, Europe,
and Japan comprised, according to some estimates, roughly a quarter
of new investment. Industrial policies also encouraged the planning
of more state-owned enterprises, including ones involved in
producing ethanol, cement, and steel.
Much of Paraguay's rural population, however, missed out on the
economic development. Back roads remained inadequate, preventing
peasants from bringing produce to markets. Social services, such as
schools and clinics, were severely lacking. Few people in the
countryside had access to potable water, electricity, bank credit,
or public transportation. As in other economies that underwent
rapid growth, income distribution was believed to have worsened in
Paraguay during the 1970s in both relative and absolute terms. By
far the greatest problem that the rural population faced, however,
was competition for land. Multinational agribusinesses, Brazilian
settlers, and waves of Paraguayan colonists rapidly increased the
competition for land in the eastern border region. Those peasants
who lacked proper titles to the lands they occupied were pushed to
more marginal areas; as a result, an increasing number of rural
clashes occurred, including some with the government.
In the beginning of the 1980s, the completion of the most
important parts of the Itaipú project and the drop in commodity
prices ended Paraguay's rapid economic growth. Real GDP declined by
2 percent in 1982 and by 3 percent in 1983. Paraguay's economic
performance was also set back by world recession, poor weather
conditions, and growing political and economic instability in
Brazil and Argentina. Inflation and unemployment increased. Weather
conditions improved in 1984, and the economy enjoyed a modest
recovery, growing by 3 percent in 1984 and by 4 percent in 1985.
But in 1986 one of the century's worst droughts stagnated the
economy, permitting no real growth. The economy recovered once
again in 1987 and 1988, growing between 3 and 4 percent annually.
Despite the economy's general expansion after 1983, however,
inflation threatened its modest gains, as did serious fiscal and
balance-of-payments deficits and the growing debt
(see Balance of Payments and Debt
, this ch.).
Data as of December 1988
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