Agriculture in Paraguay
Team Leader: Julie Flesch
Analysts: Madelaine Douglas, Matthew Kupferschmidt, Katrina McCallum, River Sommerhalder, Jesse Waugh, and Kamalaya Yang
Despite a challenging external environment, Paraguay is displaying strong economic growth within a relatively stable political environment. The country is an agricultural hotspot with the potential to become a global breadbasket. A further examination of the political, economic and security climate is essential to contextualize the risks facing any foreign investors seeking to enter the agricultural sector.
Political and Social Structure
Paraguay is a constitutional democracy with a presidential system of government. Previously a highly centralized system of government, a new constitution was ratified in 1992 to establish a separation of powers between the legislative, executive and judiciary branches of government.
While Paraguay’s political stability is impeded by corruption, contraband and weak judicial security, it stands out as one of the most stable countries within the region. The current president of Paraguay, Horacio Cartes, took office in August 2013 promising to pursue ambitious domestic reforms and to combat corruption. Paraguay’s two main political parties, the Colorado party and the PLRA, are experiencing internal divisions heading towards the 2018 election.
With respect to its demographics, Paraguay has one of the most ethnically, culturally, and socially homogeneous populations in South America. While the country has a history of European and Middle Eastern descent, the majority of the population is of Spanish and Gurani descent and most citizens speak both languages. Further, despite low levels of support for democracy, there appears to be a basic consensus between citizens and political elites regarding the basic rules of the democratic system. One of the fundamental problems facing the consolidation of democracy in Paraguay is that high levels of poverty often undermine active democratic citizenship and create enhanced opportunities for corruption and social conflict.
Foreign Relations and Security
A pressing domestic and transnational issue for Paraguay is the volume of illegal activity occurring within the country. Their borderlands, in particular, are a location for “money laundering, smuggling, arms and illegal narcotics trafficking, and fundraising for violent extremist organizations.” The country is a major producer of illegal cannabis and a transshipment stop for Andean cocaine on the way to Southern Cone markets and Europe. This situation is exacerbated by weak border controls, heavy corruption, and prevalent money-laundering activities paired with weak laws to counter them.
There have been no major terrorist attacks to note in Paraguay in the last five years. There have, however, been small domestic groups, most notably the Paraguayan People’s Army (EPP), involved in low level kidnappings and the attacking of certain governmental institutions. Paraguay has taken steps to counter the EPP and is continuing to work with the US state department of States Anti-Terrorism Assistance program which contributes to the government’s ability to fund counterterrorism efforts. The US has raised concerns about the rise in Hezbollah’s influence in Latin America and the potential for the Latin American to become an incubator for Islamic terrorism.
Economy
Paraguay’s small, but open economy depends heavily on agricultural commodities such as soybeans, cotton and meat. While recent global downturns in commodity prices have hit Latin America hard, Paraguay has become a hotspot for economic growth in the region. Most recently, Paraguay’s GDP growth rate was 4.1% in 2016. Forecasts for 2017 predict between a 3.6% and a 3.9% GDP growth rate by the end of the year. The country’s GDP growth rate has been noted as erratic and volatile, with a difference in growth rates of over 5% five times since 2008. While GDP growth is slowing, and despite the challenging economic conditions facing its regional partners, Paraguay’s economy continues to outpace its larger neighbours.
Characterized as a upper-middle-income country by the World Bank, Paraguay still remains a relatively poor country. High income inequality and highly concentrated land distribution have left rural areas the most poverty-stricken. Plans have been made with the World Bank to reduce extreme poverty levels in the country to 9% from the current 22.6%.
Paraguay has made significant investments in investment projects to improve its economy such as road infrastructure, government public sector reforms, and rural development. Additionally, a manufacturing boom over the past decade has spurred growth in other sectors and has contributed to greater economic diversification. As a result, Paraguay has seen substantial growth in industries such as textiles, pharmaceuticals and auto parts.
Agriculture Industry
Agriculture in Paraguay has long been a major part of the country’s economy. It accounts for 28% of Paraguay’s GDP and provides for 45% of the population who depend on agriculture for subsistence. Despite using less than 6% of the country’s arable land, the agriculture sector has expanded explosively in the past fifty years. Advancements in agriculture from the 1960s to the present have created a foundation for the country to develop its economic situation in modern society
Paraguay is the world’s fourth largest soy exporter and the crop covers 80% of the country’s agricultural land. The result of this activity is rampant deforestation and intensive land use, effects that have prompted environmentalists to press for more sustainable production of the crop. Environmental regulations will be an important consideration for any prospective investors in the agricultural sector.
Further, as a landlocked country, Paraguay does not control the ports through which it exports and is heavily reliant on its neighbours, Brazil, Uruguay and Argentina to facilitate trade. Brazil and Argentina together account for 40% of Paraguay’s export market, meaning the fate of Paraguay’s agricultural industry is closely tied to the outlook for both of these economies.
Agrofertil has emerged as a leading corporation in the agriculture sector providing credit, crop protection products, agricultural inputs and argonomic services to farmers in Paraguay. Since its formation in 1993, it has steadily become the 6th largest producer of soy and the 4th largest exporter. FMO, a Dutch bank, recently provided Agrofertil with $10 million USD to fund capital investments and resources for farmers. Agrofertil says that 80% of its crop input sales are financed for payment upon harvest and the loan is going to benefit small and medium-size agricultural firms. Agrofertil serves a client base of approximately 1800 farmers, most of which are small to medium in size.
Finance and Investment
Foreign Direct Investment (FDI) has increased between the years 2015 and 2016 from two to six percent. Investment in Paraguay is dominated by a few major countries, including the United States, Brazil, Spain, the Netherland and Panama, who collectively account for 61% of total FDI. Recently the Paraguayan government has been pushing for an investment climate that is more attractive to private investors by providing a flat business tax rate of 10%. Additionally, wages are quite low and foreign companies are often attracted by the prospect of cutting their labour costs.
Apart from foreign direct investment, the country has raised over $500 million USD on the global bond market and invested a great deal back in the agriculture sector. This investment has contributed to increased growth and should provide Paraguay with the necessary capital to continue this into the future. Despite strong growth in the economy, investors still perceive Paraguay as a potentially risky investment. Paraguay scores mid-range to low on most competitive indicators and judicial insecurity makes copyright infringement a major concern for investors.
In conclusion, Paraguay has become a bright spot for economic growth in South America. Buoyed by its robust agricultural sector, business-friendly government policies and low costs of labour, the country has experienced significant growth in recent years. The outcome of the 2018 election and the country’s ability to sustain growth amidst regional chaos will be important factors in any decisions to invest in Paraguay’s agricultural industry.
Key words: Paraguay, agriculture, Horacio Cartes, poverty, economic growth, commodities, corruption, election, foreign direct investment
