Paraguayan President-elect Fernando Lugo is slated to take power Aug. 15. As Paraguay's first leftist president in 61 years, Lugo will have a great deal on his plate and great battles on the horizon. The most formidable of these challenges will be a renegotiation of Paraguay's relationship with Brazil — a process that could fundamentally redefine the geopolitics of South America. Lugo means to change the status quo after the conservative Colorado party's 61 unbroken years of rule in Paraguay. Though major land redistribution issues are on his agenda, Lugo will not necessarily follow in the footsteps of the regional leftist leaders — like Venezuelan President Hugo Chavez
— who have pursued populism to the point of impoverishing their states. So far, Lugo has eschewed regional power politics in favor of focusing on domestic issues — but Lugo's key policy goal of renegotiating the price at which Paraguay sells electricity to Brazil has implications for all of South America. Paraguay's location between regional powers Argentina and Brazil, along with its historical relationship to both countries, makes Paraguay a pivotal state in the geopolitical balance of South America. How Lugo establishes a relationship with Brazil will thus be critically important for the regional balance of power. Though the Paraguay of today is destitute and highly marginalized, it has not always been so. Paraguay in the mid-1880s was a prosperous and rapidly developing nation. Between 1844 and 1865, Paraguay made several major steps toward sustained development, including building its own railroad, creating a national school system, opening a newspaper and importing skilled labor from Europe.
But there was one thing that Paraguay lacked: sea access. In an attempt to rectify this situation, Paraguay declare war against Brazil (which had just invaded Uruguay) in 1864 and ended up in a fight against an alliance of Brazil, Argentina and Uruguay over the delta of the Rio Plata. After nearly falling to Paraguay's forces, the alliance rallied and conquered huge stretches of Paraguay, and the casualties (combined with a subsequent domestic guerrilla struggle) accounted for more than half of Paraguay's total population, and 90 percent of its pre-war male population. Paraguay did not recover from the demographic devastation until the 1990s. In the meantime, Paraguay's territory was split between the victors and the remaining rump was left as a buffer state — along with Bolivia and Uruguay — between the rising local superpowers of Brazil and Argentina. Though Argentina shares a border with Brazil, the two large powers historically have insisted upon the independence of those three states and have intervened militarily to shake each other's influence. In the half century following the war with Paraguay, Argentina was clearly the superior power to Brazil, with an advanced industrial base and heavy trade ties to Europe. Over time, however, the balance of power has shifted steadily in Brazil's favor, and Brazilian influence has been heavily present in the Paraguayan economy and politics. But that relationship is exactly what the incoming Paraguayan leader has threatened to turn on its head. And the issue that will bring Paraguay into direct conflict with its neighbor is the Itaipú dam. Paraguay's main source of income and only real commodity is electricity (despite its size, Paraguay is one of the largest electricity exporters in the world). Paraguay generates more than 50 billion kilowatt hours of electricity per year, of which it consumes only 6 percent. About 24 percent of that electricity is generated at the Itaipú dam, the largest dam in the world (soon to be outpaced by China's Three Gorges Dam). The dam is run as a joint venture with Brazil and lies on the Parana River on the border with Brazil. The terms governing the joint Paraguayan-Brazilian company Itaipú Binacional that runs the dam were set in a 1973 treaty. Under the agreement, Brazil and Paraguay split the electricity from the dam in half. Paraguay, however, only uses 16 percent of its electricity share and it sells the rest to Brazil. Brazilian energy company Centrais Electricas Brasileiras (Eletrobras) purchases Paraguay's share of the electricity for about $100 million per year, and then sells it on the domestic market for about 10 times that much. With so much money on the line, it should come as no surprise that Brazil has so far been unwilling to negotiate. But this is not only a huge cash cow for Brazil; the electricity comprises an essential 20 percent of Brazil's total electricity needs. Most of Itaipu's electricity supplies Brazil's industrialized southeast, including Sao Paolo. If Lugo seriously challenges the stability of Brazil's electricity supply (most likely by refusing to sell Paraguay's share of electricity to Brazil), Brazil will have no choice but to act against Paraguay. Lugo's election resulted from a leftist alliance that allowed the socialist and liberal parties to challenge the Colorado party. Because Lugo was elected as a part of a diverse coalition, he does not have a consolidated power base or the mandate for change that other leftist leaders in Latin America have enjoyed. The outgoing Colorado party is not only the largest party in Paraguay's congress and well-represented in the military (especially the upper ranks), it is also heavily connected to Brazil. The constraints on Lugo (and Brazil's relative strength) mean that Brazil will be setting the terms of the negotiations. But getting more money for its electricity is essential for Paraguay, and Lugo will not go down without a fight. The implications of a confrontation between Paraguay and Brazil are far-reaching. Fundamentally, Paraguay has already drifted firmly into Brazil's political sphere. But as Lugo's decision to push Brazil on the issue of the dam directly threatens the area of the states' bilateral relationship that could hurt Brazil the most, Brazil could not choose to ignore such a challenge. But while this tool is sure to get Brazil's attention, it is tantamount to poking a sleeping dragon in the eye with a toothpick. It will force Brazil to be extremely aggressive and authoritative with the buffer states in general and Paraguay in particular. However, in reacting to Lugo's challenge, Brazil could provoke Argentina to offer itself as an alternative partner to Paraguay in a number of sectors. But while Brazil is sure to become more engaged, Argentina's participation in this game is not a certainty. With Argentina focused on domestic issues — particularly rising debt, skyrocketing inflation
and growing political unrest — it likely does not have the wherewithal to respond. If Argentina cannot become an alternative partner for Paraguay, Brazil's power will be firmly cemented in the buffer states — bringing its influence unequivocally to the border of Argentina. This fact promises to initiate a shift in the balance of power in South America that will start Brazil along the path from "mere" regional superpower to regional hegemonic status.