Xinhua/eyevine/Redux

Paraguay Makeover

by robert looney
 

robert looney teaches economics at the Naval Postgraduate School in California.

Published April 14, 2017

 

Dollars to donuts, those paying attention to events in Latin America these days are focused on Ecuador’s elections, Venezuela’s plunge into chaos or Mexico’s deteriorating relationship with the United States. By the same token, it’s safe to say that landlocked Paraguay is not on their radar in spite of the fact that it has climbed to the top tier of economic performers. Once best known as a smuggler’s paradise and haven for fugitive Nazis and drug-runners, Paraguay presently stands out as one of only two bright spots (the other being mineral-rich Bolivia) in the latest IMF assessment of Latin America’s economic outlook.

Paraguay’s growth rate has risen from virtually nil (0.2 percent annually) in 1996-2002 to an average of 4.6 percent in 2003-16 – well ahead of the 3.1 percent growth experienced by Latin America and the Caribbean as a whole. Even more significant, the country’s growth accelerated to an impressive 5.9 percent in 2010-16, despite a contraction in the growth rate of its major trading partners, Brazil and Argentina.

Why the reversal of fortune in what has long been the backwater of the southern cone? The growth spurt is most certainly not the result of a classic “take-off” à la Walt Rostow, precipitated by a sudden surge in investment; investment as a share of GDP actually fell from 18 percent in 1996-2002 to 16 percent in 2003-16. Nor has there been a sudden acceleration in the country’s productivity, spurred by, say, fundamental economic reforms. Paraguay’s score on the World Economic Forum’s Economic Competitiveness Index has shown only slight improvement – up from a miserable 76th of 80 countries in 2002-03 to a slightly less miserable 117th out of 138 in 2016-17. In fact, Paraguay slid back in key governance indicators, such as control of corruption and the rule of law.

 
The actual source of the growth is both prosaic and unexpected: it has largely been rooted in the transformation of traditional agriculture to large-scale commercial soybean farming.
 

The list of nonstarters goes on. Paraguay hasn’t benefitted from a boom in energy prices since there hasn’t been one – and, in any event, Paraguay isn’t a significant exporter of mineral resources. The government hasn’t been stimulating consumption by running up an unsustainable debt. To the contrary, Paraguay has demonstrated remarkable fiscal prudence over the years in question. Paraguay has built a thriving outsourcing sector for manufacturers in neighboring countries. But neither the timing nor the magnitude of this development can explain the recent boom.

The actual source of the growth is both prosaic and unexpected: it has largely been rooted in the transformation of traditional agriculture to large-scale commercial soybean farming. Over the past several decades, Paraguay has followed Brazil and Argentina to become a major exporter of soy, a pattern that has been dubbed the “soy model” of agriculture-led economic growth. As a result, the country’s economic prospects seem bright – assuming, of course, that the soy model initiates institutional change that could sustain more balanced growth.

Demand for soy isn’t about to tail off. This relatively cheap high-protein bean, which can be used to anchor human nutrition or serve as supercharged animal feed, will likely remain a key to improving living standards across the world for decades to come. In fact, the World Wildlife Fund predicts demand for soy will nearly double by 2050.

The real issue is whether the soy boom stimulates broader development. It has already given the banking, communications and construction sectors shots in the arm. However, it is doubtful that soybeans alone can overcome the inertia of an economy that has lagged far behind its neighbors.

 
The soy revolution did not increase land productivity. Rather, it expanded acreage under cultivation in the sparsely populated eastern part of the country, which is largely cultivated by affluent Brazilian farmer-settlers. 
 

Paraguay’s traditional crops consist of cattle, cotton, tobacco and yerba mate (the primary ingredient in the eponymous drink). While the cattle ranches were usually large, other ag products mainly came from small farms. Then, with the introduction of soy, the rural economy entered a period of rapid change. The soy revolution did not increase land productivity. Rather, it expanded acreage under cultivation in the sparsely populated eastern part of the country, which is largely cultivated by affluent Brazilian farmer-settlers, known as the Brasiguayos.

This change was not an unalloyed benefit. Going back to colonial times, agricultural land in Paraguay has been unequally distributed. The expansion of the soy agribusiness further exacerbated this problem, to the point where Paraguay now has the most unequal land distribution in Latin America: around 80 percent of fertile land is in the hands of the top 1 percent of landowners. Ironically, detailed studies of productivity in Paraguay suggest that the widening gap in farm size has little to do with economies of scale: the smaller farms are actually more efficient than the larger ones.

Farm labor displaced by machines has drifted to the country’s rapidly growing urban slums. Those remaining in rural areas have become active in the small but growing Marxist-Leninist Paraguayan People’s Army (the EPP), a landless peasant movement intent on attacking the large Brasiguayos soy producers.

The Brasiguayos claim they displaced small-scale Paraguayan farmers who simply did not have the financial and technical resources to make the transition to soy. The displaced farmers, however, insist the Brazilians acquired land illegally through coercion or extortion. Some charge that they were forced to abandon their farms after contamination from nearby soy fertilizers and pesticides made the land useless for traditional crops. In addition to purloining private land, they contend the Brasiguayos corrupted state officials into selling off large swaths of state-owned land.

 
The bloom is off the bean: there is limited acreage for future expansion of soy cultivation. Furthermore, increasing yield per acre is  problematic under the current system of capital-intensive factory farming.
 

Even assuming these conflicts can be contained, the bloom is off the bean: there is limited acreage for future expansion of soy cultivation. Furthermore, increasing yield per acre is problematic under the current system of capital-intensive factory farming. One obvious solution might be land reform that shifts acreage from large farms to smaller, more efficient units producing diverse crops. However, barring a revolution, the current dominance of Brasiguayos agribusinesses makes significant agricultural reforms unlikely.

Another option might be to supplement Paraguay’s soy income by expanding its role as an outsourcing appendage to Brazilian manufacturers. Over the past five years, a series of Paraguayan free trade zones have been created that beckon with low taxes, cheap labor and inexpensive energy. Thanks to these zones, Paraguay has enjoyed a modest outsourcing boom, largely involving Brazilian firms that contract for the manufacture of select components.

Given rising labor costs in Asian economies (notably China) that serve this outsourcing role in global manufacturing supply chains, Paraguayan firms are – for the time being at least – able to compete. Paraguay’s second city and old smuggling center, Ciudad del Este, is fast becoming a major location for South American assembly operations. However, to enable the sector to take the place of soy as Paraguay’s longer-term engine of growth, Paraguayan authorities will need to address the country’s inadequate infrastructure – everything from roads to electricity distribution – as well as its not-ready-for-prime-time school system.

In theory, this could be done using a combination of foreign capital and the new wealth generated by agriculture. But by measures of institutional competence and social stability, Paraguay remains a hard sell. The closer one looks at the soy revolution, the less there is to see.