IV. Political Environment Nature of bilateral relationship with the United States Despite a troubled history of authoritarian rule, Paraguay and the United States have maintained generally good relations, except for the worst years of the Stroessner dictatorship. U.S. Mediation efforts following the war of the Triple Alliance (1865-1869) and the Chaco war (1932-1935) ensured Paraguay's independence and territorial integrity and helped to build a firm affection for the united states among most Paraguayan. The friendship and ties between the two countries have grown stronger during Paraguay's new era of democracy. Since the February 1989 coup which ended the thirty-five year dictatorship of President Alfredo Stroessner, the United States has strongly supported Paraguay's transition to full democracy and the consolidation of its democratic institutions. To assist Paraguay in these efforts and to help modernize Paraguay's economy, the United States has provided modest development assistance through USAID and the Peace Corps. Additionally, the USG funds a small military training program for professionalizing the GOP armed forces, and since 1989 has provided material and training to the Paraguayan anti-narcotics police under the terms of a bilateral agreement. Recently, Paraguay and the United Sates signed a financial information exchange agreement to combat drug-related money laundering. Major Political Issues Affecting Business Climate Most observers agree that Paraguay must reform its judicial system before it will be able to attract significant foreign investment. The 1992 constitution mandated the creation of a council of magistrates to implement the merit-based selection of a new judiciary, but political infighting has stalled this process. At present, the Paraguayan judiciary continues to function with many judges who were appointed during the Stroessner era. Paraguay's economy is based on the export of primary agricultural products, principally cotton and soy. However, the agricultural sector has been neglected for many years. Now, growing discontent over this neglect and falling crop prices have politicized some Paraguayan peasants who have organized to demand new agricultural policies, price supports, and land reform. The privatization of state-owned enterprises is a key plank in the Wasmosy administration's program. The government's proposal to privatize five entities--the national airline (LAP), the telephone company (Antelco), the water company (Corposana), the cement company (INC), and the alcohol company (Capasa)--has run into opposition from some elements in both the Colorado and liberal parties who favor continued state participation in the economy and who also fear that privatization will mean a loss of jobs for state workers. One of the government's most daunting tasks is dealing with the informal economy which may account for 40 to 60 percent of the gross domestic product. The contraband trade distorts normal economic activity, complicates Paraguay's integration into the Mercosur, and contributes to a climate of corruption in the country. Brief Synopsis of Political System, Schedule for Elections, and Orientation of Major Political Parties Paraguay is a constitutional republic with a strong executive branch and an increasingly important bicameral legislature. The judicial branch is independent, but as noted above, its reform and renewal, as provided for in the 1992 constitution, have not been completed. Although a unitary state, Paraguay is divided into seventeen departments, each with its own elected governor and departmental board. The exact functions of the departments and their revenue sources are yet to be defined by legislation. The capital city of Asuncion is a separate administrative area, outside any department. The municipalities have had elected mayors and city councils since 1991. The President is head of government and cannot succeed himself. Paraguay's armed forces consist of an army, navy, and air force. The President is Commander-in-Chief. Certain elements within the armed forces continue to wield considerable influence. The Colorado party also holds substantial influence, but the combination of changes brought about by the political opening after the 1989 coup, the 1992 constitution and the election of an opposition-controlled congress in may 1993, has improved accountability. The Colorado party, which has been the party of government for nearly fifty years, claims to represent a majority of Paraguayans, but was in fact out polled by combined total of opposition votes in the 1993 election. The Colorados remain divided as the result of a bitterly disputed December 1992 presidential primary, and its dissident wing, which responds to defeated primary candidate Luis Maria Argana, votes with the opposition parties in congress. The liberal party (PLRA) is the largest opposition grouping. Led by former presidential candidate Domingo Laino, the liberals also suffer from factional disputes. The newest party is National Encounter (EN), an alliance of smaller parties and civic organizations whose main appeal is to the urban middle class. EN placed third in the 1993 elections. None of the parties is ideological, and each has elements influenced by populism, 19th century liberalism, and social democracy. The next scheduled national elections are in 1996 for mayors and municipal councils. Paraguayans will go to the polls to choose a new president, congress and departmental governors in may of 1998.