In many ways, Paraguay is a geopolitical anomaly. It is one of only two landlocked countries in South America, along with neighboring Bolivia. It is also the only South American country where more people speak the indigenous language, Guarani, than they do Spanish. Paraguay's history — from its colonial past through two volatile centuries following independence and into the prosperity and promise of today — is unlike that of any other country on the continent.
Paraguay's capital of Asuncion was founded in 1537 on the banks of the Parana River by the Spaniard Juan de Salazar y Espinosa. It is the longest continuously inhabited city in the Rio de la Plata basin, a hydrographic area that spans much of southeastern South America. After natives destroyed Buenos Aires, Asuncion became the center of Spanish colonial rule in the Rio de la Plata region. Though Buenos Aires' re-emergence would eventually make it Spain's choice for the seat of its 18th century viceroyalty in the basin, Asuncion would remain an important regional hub.
Asuncion is the longest continuously inhabited city in the Rio de la Plata basin and was a center of Spanish colonial rule. (Eugene Chausovsky/Stratfor)
After securing its independence from Spain in 1811, Paraguay grew into one of the strongest, most modern states in South America. One need only look to landmarks throughout the capital — such as the neoclassical Palacio de los Lopez and the richly decorated Catedral de Nuestra Senora de la Asuncion — to understand the degree of the country's post-independence prominence. However, the 1864 War of the Triple Alliance against Brazil, Argentina and Uruguay devastated Paraguay. The war was the deadliest in South American history, and it hit Paraguay especially hard. By some accounts, as many as eight in 10 adult Paraguayan men died. Brazil occupied Asuncion until 1876, and decades would pass before Paraguay recovered demographically and economically.
The first half of the 20th century, characterized by short and erratic periods of rule by more than 30 presidents, brought Paraguay no reprieve from political volatility. Then in 1954, a military coup led by Alfredo Stroessner and his right-wing Colorado Party finally stabilized the country's political system. This stability had a cost though, and Stroessner's 35-year tenure — the longest of any South American dictator during the Cold War and second in Latin America only to that of Cuba's Fidel Castro — was characterized by systematic repression and iron-fisted rule. In 1989, Stroessner himself was deposed by another military coup. Bullet holes can still be seen in lampposts near the Plaza de los Heroes, remnants of a quick but violent power grab. Finally, in 1993, Paraguay held the first free and fair elections in its history.
The neoclassical Palacio de los Lopez is a testament to the city's post-independence prominence. (Eugene Chausovsky/Stratfor)
Now, after more than two decades of civilian rule, Paraguay stands out in South America once again, but this time for positive reasons. While weakening prices on the global commodity market has caused a major economic slowdown throughout much of Latin America, Paraguay has flourished economically. It boasts one of only a few South American economies — and the only one of a Mercosur member — that has continued to grow in the face of global economic challenges. Its economy expanded by 3 percent in 2015, and economists are projecting a growth rate of 3.8 percent for 2016. And all this comes after Paraguay's economy averaged more than 3.3 percent annual growth over the past two decades.
A variety of factors are responsible for this growth, the most important of which are the government's business- and investment-friendly policies and the country's diversification from a commodity-based system. Paraguayans pay a flat 10 percent income tax, and the country's value-added tax is the lowest among Mercosur members and one of the lowest in all of Latin America. The low taxes, coupled with substantial growth in the manufacture of products such as textiles, pharmaceuticals and auto parts, have attracted foreign investment. Brazilian companies taking advantage of low labor costs and friendly tax rates have set up operations in Paraguay, and firms from Europe and Japan have increasingly expressed interest in following suit. Paraguay also has a massive illicit economy — a black market where money laundering and the smuggling of goods such as cigarettes and drugs probably adds billions of dollars to the country's gross domestic product.
Paraguay's proximity to South American giants Brazil and Argentina, the continent's two largest markets, and the relatively low wages of the Paraguayan workforce are major economic selling points. In Asuncion, a bustling metropolis of more than 2.3 million people, the economic dynamism and cultural intermingling that Paraguay's location fosters is evident. It is here that I began my trip. In Asuncion, I was just as likely to come upon Paraguayans sipping Argentine mate tea on a street corner as to see them eating at one of the many Brazilian churrascarias scattered throughout the city. Familiar Brazilian chains such as Itau Bank and Petrobras gas stations are dispersed among Argentine coffee shops. And, while Spanish is the lingua franca in Asuncion, most of the city's inhabitants seem to understand Portuguese without difficulty.
It is not uncommon to run across Brazilian banks and shops in Asuncion, a city which is influenced by both Argentina and Brazil. (Eugene Chausovsky/Stratfor)
Still, despite Asuncion's vibrant cultural life and the broader economic growth throughout the country, there are signs that all is not well in the capital. In Asuncion's central Catedral district, I observed beggars in the streets — many who camp out near street corners at night. Directly across from the sleek and modern National Congress building sits a large, makeshift slum of small wooden shacks, a place where sewage spills onto the street and foul smells fill the air. These sights, coupled with a heavy police presence throughout the city, left me with the impression that not everyone has been lifted from poverty by the country's rising tide of economic growth.
Despite Paraguay's economic success, urban slums show that not everyone has benefitted. (Eugene Chausovsky/Stratfor)
That said, considering Paraguay's difficult history, there is much to be impressed with, in terms of the country's political evolution and economic growth over the past 20 years. A recent weekday afternoon stroll I took down Antequera Street in Asuncion serves as a case in point. I was startled by the pop of what I thought to be gunshots just feet away. With the country's volatile history in mind, I froze and looked around. Seeing street life continuing as normal, I cautiously headed farther down the road, eventually encountering a group of union workers protesting in front of the Labor Ministry. A quarter century ago, this could well have been the scene of a violent uprising or another coup d'etat. But what sounded like gunshots were just fireworks being set off by the demonstrators. Moreover, the protesters were peacefully comingling with both security personnel and passers-by — a scene that would repeat every day for the rest of the week. For all of its lingering challenges, Paraguay has come a long way indeed.