III. Economic Trends and Outlook Major Trends and Outlook Paraguay, with a population of 4.4 million, an annual growth rate of around three percent, and total land area of 154,047 square miles, has a predominantly agricultural economy with a thriving commercial sector. That sector is engaged in the importation of goods from the Far East and the United States for re-export to neighboring countries. Although the country has a vast hydroelectric potential, it lacks significant mineral or petroleum resources. The Paraguayan economy, with its established export industries of soybeans, cotton, cattle, timber, electricity, and the lucrative business of re-exporting products made elsewhere, is particularly vulnerable to the vagaries of weather and the fortunes and misfortunes of the Argentinean and Brazilian economies. The Paraguayan economic system is based on a free market economy with a large subsistence sector (including sizable urban informal underemployment) and a larger underground re-export sector. The country had a gross domestic product close to seven billion dollars in 1993. Agricultural activities represented 26.4 percent of GDP. Over 200,000 families depend on subsistence farming activities and maintain marginal ties to the larger productive sector of the economy. The underground economy, whose activities are not included in the national accounts, is estimated to generate transactions running between three to seven billion dollars per year. The bulk of underground activities is concentrated around the unregistered sale of imported goods, including computers, sound equipment, cameras, liquor and cigarettes across the border to Argentina and Brazil. Therefore, a sizable amount of goods imported by Paraguay is re-exported to neighboring countries. In 1993, a rebound in cotton production and a record soybean crop buoyed the economy. Rural income increased and consequently aggregate demand rose. Gross domestic product rebounded from a meager 1.8 percent increase (and a negative 1.3 percent GDP per capita) in 1992 to a 3.7 percent growth rate. Inflationary pressures accelerated and the year closed with a 20.4 percent rate. Paraguay registered a balance of payment surplus of 89 million dollars, and official foreign exchange reserves increased to 700 million dollars. Foreign official debt declined slightly to 1.2 billion dollars. To control inflation the government implemented in April a number of economic measures, including a stringent monetary policy, foreign exchange market intervention to prevent sharp fluctuations in the value of the Guarani, a voluntary price freeze, and a tight rein on government expenditures that has generated a sizable budget surplus. Monthly inflation rate declined from 3.1 percent in January to 0.5 percent in May 1994. Official foreign exchange reserves increased to USD 966 million dollars in mid June while the exchange rate stabilized at around 1,920 Guaranies per USD. Recent government estimates project economic growth in the range of three to four percent for 1994. The projected target is based on an increase in soybean production combined with higher international prices for soybeans and cotton. The Wasmosy government has pledged to strengthen the market-based economic reforms initiated since 1989. To attain this objective the government pledged to: (1) keep government expenditures in line with revenues; (2) combat inflation; (3) eliminate restrictions on capital flows; (4) reform and deregulate the financial sector; (5) keep customs duties low and uniform; (6) encourage Production and exports; (7) privatize state-owned enterprises; and (8) fight official corruption. Principal Growth Sectors The table below shows the composition of official GDP by key economic sectors. Official accounts do not include activities of the informal sectors. 1993 - Gross Domestic Product Share of Percentage GDP Growth rate -------- ----------- Agricultural sector 26.4 4.4 Manufacturing 15.4 2.0 Construction/transport/comm. 10.2 4.3 Commerce and finance 26.5 3.5 Government/other services 21.5 4.3 ------ ---- GDP 100.0 3.7 In 1993, crop agriculture, livestock and forestry accounted for over a quarter of Paraguay's real GDP and the bulk of exports. Crop agriculture represented about 60 percent of the sector and 16 percent of GDP. Value added in manufacturing constituted 15.4 percent of national output and grew by only two percent in 1993. This sector is largely oriented to produce for the domestic market and is concentrated in the production of light consumer goods. Activity in formal commerce and finance together with transport and communication represented about one-third of gross domestic product, and grew at an average of 3.5 to 4.0 percent in 1993. The most dynamic activities in the economy were electricity (11 percent growth), crop agriculture (5.3 percent growth) and construction with five percent growth. Government Role in the Economy The government plays a major role in the Paraguayan economy. The total public sector budget represents close to 50 percent of the gross domestic product. Of the 3.3 billion dollar government budget for 1994 fiscal year, forty percent was assigned to the central government and the remaining sixty percent corresponded to the decentralized agencies and state-owned enterprises. The administration of president Wasmosy has vowed to privatize state enterprises engaged in the production of goods and services to rationalize resources. Nevertheless, privatization has stalled due to opposition from many parts of the society long accustomed to a large public sector. The proposed total public sector investment budget for fiscal year 1994 amounted to 340 million dollars, representing around five percent of GDP. Balance of Payments Situation Paraguay had a balance of payments surplus of 89 million dollars in 1993, Representing 1.3 percent of gross domestic product. This surplus represents a reversal from the 1992 results when the balance of payments showed a deficit of 351 million dollars. In 1993, the balance of payments registered a current account deficit of 632 million dollars. The current account deficit was financed by long-term capital inflows of 226 million dollar and error and omissions of 478 million dollars. Error and omissions reflect, in part, large short-term inflows of speculative financial resources and the activities of the informal external sector. Trade and Investment Barriers There are no trade barriers to U.S. exports. Paraguay's relatively open market economy allows the free importation of most goods and services. Government policy is to encourage free trade and capital flow, particularly with traditional trade partners like the united states. U.S.-made products and consumer goods are widely accepted and have a good reputation for quality. New U.S. products appear every day in Paraguayan shops. There are no restrictions on foreign investment, except for activities reserved for the state monopolies on cement, electricity, water, and telephone. These remain closed to both national and foreign private investment. Foreign investors enjoy the same legal rights as national investors. The government established a number of fiscal incentives to promote investment, both domestic and foreign. Labor Force The Paraguayan labor force was roughly estimated at 1,700,000 in 1993. The labor force increases by approximately 50,000 new entrants annually. The government estimates unemployment in the Asuncion metropolitan area to be 10.4 percent. With a natural population growing at rates near 3 percent annually, one of the most serious challenges facing the government is the creation of enough jobs to meet the increasing labor supply. Historically, excess Paraguayan labor has emigrated to Argentina and Brazil in search of employment. In recent years, the Argentine economic recovery has attracted thousands of Paraguayans to Buenos Aires, bringing temporary relief to Paraguay's surplus labor problem. Recent argentine statements of intent to impose stricter controls on economic migrants, however, may exacerbate this problem. The National Service for Professional Promotion (SNNP) is the government agency responsible for promoting and developing the labor force. Technical degrees and professional training are also available at several universities, technical institutes, and other non-government entities that provide training in several areas. Wages Paraguay's minimum wage is one of Latin America's highest (currently USD 175.00 per month). However, the Ministry of Justice and Labor recognized that less than 30 percent of the total labor force actually receives the minimum wage. The minimum wage has been raised twice since the 1989 coup overthrowing General Alfredo Stroessner. Organized labor has provided the government with data demonstrating that, notwithstanding the two minimum wage increases, real wages have gradually deteriorated and purchasing power has declined 42 percent since 1989. Labor Disputes All labor disputes which cannot be resolved through negotiations between employers and employees must be resolved in labor courts. The labor courts, however, can require up to two years to resolve a conflict. The 1992 constitution prohibits binding arbitration, which was used during the Stroessner era to deny workers' claims. The nation's newly approved labor code recognizes employees' right to strike and employers' right to a lockout. The lawful exercises of these rights are subject to limitations to protect the general interest. Organized labor was repressed by the authoritarian Stroessner regime. Following the 1989 coup, independent labor began to grow at a rapid pace. Currently, roughly 10 percent of all Paraguayan workers belong to organized unions. Union representation exists at most places of work but, in general, is relatively weak except for the banking sector, which boasts the strongest and most independent union organization in the country. The 1992 constitution allows for the formation of public employee labor unions. This is currently the fastest growing area for Paraguayan labor. Major Competitors Some U.S. goods face strong competition from the Far East. Major sectors for U.S. exports include computers and peripherals, machinery, automobiles (especially four wheel drive vehicles), auto parts and consumer goods. The declining dollar has been helpful for processed food exports, which face strong competition from Brazil. Other sectors of interest include agricultural equipment and river barges. In the re-export market U.S. companies are strong in the areas of computers and peripherals, sporting goods, cigarettes, and photo equipment. Infrastructure Air transport: There are two international airports. One is located six miles from downtown Asuncion and the other in Ciudad del Este, at the border with Brazil. There are six other airfields, located in Itaipu, Concepcion, Vallemi, Pilar, Ayolas and Mariscal Estigarribia for aircraft such as the Douglas C47, C121 and smaller. Several international airlines offer flight service to the U.S., Europe, South and Central America, for worldwide connections. Water Transport: The Paraguay and Parana are the principal navigable rivers in the country. The most important link to the sea (the Atlantic Ocean) is provided by the river system formed by those two rivers. The Paraguay river runs north-south across the country to join the Parana river and continues to ports of Rosario, Zarate, Nueva Palmira, Buenos Aires and Montevideo. Together with the Rio de la Plata, this waterway handles most of Paraguay's foreign trade. Ports: Asuncion is the largest and most important port in the country. There are other smaller ports in Concepcion, Encarnacion, Pilar, Villeta, Villa Hayes, Rosario, Antequera, Alberdi, Humaita, Vallemi, and Bahia Negra. Roads: The road network consists of 28,000 kilometers of which only 2,700 kilometers have paved, all-weather surfaces. Around 500 kilometers are gravel roads, and the rest are unpaved roads susceptible to closure due to rains and flooding, in some areas up to 120 days per year. The road network, however, has been expanded in the last two decades. Governmental programs supported by the World Bank, IDB, Fonplata, and the Japanese government are upgrading and extending the road network and improving the integration of outlying regions as well as with neighboring countries. Railroads: The Paraguayan rail system covers around 370 kilometers, joining Asuncion with Encarnacion and from there with Argentina by a bridge over the Parana river. The railroad system is one of the oldest in Latin America and is a state-owned enterprise. The system, still operates the only existing wood-burning steam locomotive in regular service. Telecommunications: Policy and regulations for all Paraguayan telecommunications are established by the government-owned enterprise Antelco, which also provides telecommunication services. Antelco provides both domestic and international telephone, telex, telephoto, facsimile, and direct dialing services. Around 360 locations have telephone services. Service availability, however, is limited compared to the growing demand in the country. Postal service: The state-owned postal service delivers and ships all postal items domestically and internationally. Electricity: In partnership with Brazil, Paraguay has the largest hydroelectric plant in the world. The Itaipu dam with its 12,6 million kw of installed potential is soon to be followed by Yacyreta dam, built in partnership with Argentina. Electricity in Paraguay is provided by the state-owned agency Ande. Electric power supply characteristics are 220 volts, 50 hertz cycle, except for heavy industry, which uses 380 volts.