How quickly a country’s prospects can change. A few years ago, Paraguay was riding what appeared to many to be a never-ending commodity boom. This expansion was no ordinary price-driven, cyclical boom, doomed to be followed by bust, proponents gushed, but rather a long-run expansion of soybean and beef production that dramatically altered the economy.

Long mired in dismal economic performance, the country had finally drawn on its comparative advantages in three factors — abundant fertile land, cheap water transport and inexpensive hydropower — to become the world’s fourth-largest soybean producer in 2019. Soy now typically accounts for around half of Paraguay's exports.

The country’s livestock sector also underwent a significant commercial transformation. Indeed, Paraguay is now one of the world’s top-ten beef exporters — not insignificant for a country with a population of less than seven million. And while there were warning signs of growing pains in the lightning-fast soy and livestock expansions, they all seemed manageable in a rapidly growing economy.

But one problem is beyond any single country’s capacity to manage: climate change. And Paraguay’s economic phoenix seems headed for a hard landing. Predictions are for ambient temperatures to rise and for adverse weather events to increase in intensity in decades to come, undermining Paraguay’s role as a great food exporter.

Climate Woes

Paraguay has faced climate disruption in the form of cyclical La Niña periods before. While the current one has been more prolonged than usual, the drought effects are not unprecedented. This time around, however, the drought has been accompanied by record heatwaves that are thought to be aggravated by a combination of deforestation and climate change. And the heat plus drought has profoundly affected both agriculture and the river-dependent transport sector.

Paraguay’s 2021-22 soybean season was the worst recorded since 2011-12. According to the U.S. Department of Agriculture, yields fell from 3.2 tons per hectare in 2019-20 to a wretched 1.2 tons in 2021-22. All told, soybean production collapsed from 10.6 million tons to 4.2 million in 2021-22. As a result, GDP was lower in 2022 than in it was in 2014.

Now, climate change is beyond Paraguay’s control, but deforestation isn’t. Yet the rate of deforestation, which is closely tied to the cattle-ranching expansion in the drier western region of Chaco, is one of the highest in the world. According to Global Forest Watch, Paraguay lost 16 million hectares of trees from 2001 to 2021, the second highest figure in Latin America, which adds up to a loss of 27 percent of the country’s total tree cover. This stripping of the land has also contributed to the greater incidence of extreme wildfires (grasses burn faster than trees) and has intensified drought cycles (exposed land holds onto less water). of this type are now an ever-present threat.

River Woes

The lack of rains in the upper reaches of the Paraguay River (South America’s second longest) and in the Brazilian and Paraguayan Pantanal (wetlands) are associated with La Niña and Amazon deforestation, producing extremely low water levels on the Paraguayan stretch of the river. It led to the paralysis of river-borne cargo traffic between Argentina and Paraguay for several months. A very big deal: 80 percent of landlocked Paraguay’s goods trade is by river.

La Niña has also affected a significant source of Paraguays foreign exchange, fees from the two gigantic hydroelectric plants Itaipu and Yacyreta on the Parana River that are jointly owned with Brazil and Argentina, respectively. Payments from Itaipu fell sharply during the drought due to lower water throughput to the turbines. And half of Paraguay’s Itaipu revenue goes to states and cities, which depend heavily on it to fund basic services.

What to Do

Given the sobering climate reality, Paraguay is in dire need of an adaptation strategy. A logical place to start would be to reduce the country’s dependence on agriculture. The IMF has drawn attention to various perennial structural problems that may seriously hamper this effort. They include

• Tax rates that are lower than comparable countries — and more to the point, too low to fund aggressive infrastructure improvement. 
• A tolerance of corruption that undermines government efficiency and public trust in initiatives for change. Paraguay ranks 137th out of 180 countries on Transparency International’s Corruption Perception Index, tied with Russia and behind Egypt.
• Significant gaps in education, human capital, transport infrastructure and financing for small- and medium-size businesses that impede economic growth.

 Probably the most realistic hope for hardening the economy against climate change is to diversify by opening the door wide to foreign direct investment in manufacturing. Which, alas, brings us back to corruption. In January the U.S. Department of State announced financial sanctions against both Paraguay’s current vice president and a former president, based on, of all things, receiving bribes from Hezbollah the Iranian-backed militia at war with Israel. This is hardly the sort of publicity likely to attract capital from big multinationals seeking “friend-shoring” sources for their manufacturing supply chains.

With the U.S. mainly out of the picture, Paraguay’s president Abdo played his best hope for a trump card, demanding that Taiwan invest $1 billion in his country or he would consider switching diplomatic recognition to China. (Paraguay is one of only 14 countries with diplomatic ties to the island.)

Playing Taiwan off China might seem a plausible strategy since China has the resources and experience in using massive direct investment as means of projecting influence. But cozying up to China is not a game for amateurs, as many of the countries that have welcomed Chinese investment under the latter’s Belt and Road Initiative have discovered. Case in point: Sri Lanka, which accepted $12 billion in investment from China with little to show for it but a lot of debt.

Told Ya So (Alas)

In a commentary published at the height of the soy boom in 2017, I wrote that, by measures of institutional competence and social stability, “the closer one looks at the soy revolution, the less there is to see.” With hindsight, it seems plain that the agricultural boom was not a direct route to the promised land, but did offer Paraguay a bit of running room to build a modern diversified economy. Climate change is making that goal ever more elusive.