NS4540 Winter Term 2019 Paraguayan Economy Europa brazil economy

Overview Robert Looney, “Is the Surprising Boom Sustainable? Milken Institute Review April, 2017 Despite its past problems, Paraguay, along with Bolivia stand out as the two bright spots in the IMF’s October 2016 outlook In recent years the country has seen a sudden surge in economic performance. Growth Accelerated from 0.2% (1996-2002) to 4.6% (2003-2016) For 2003-16 well ahead of 3.1% for Latin America as a whole

Recent Growth

Causes of Higher Growth I Easier to say what didn’t cause the growth acceleration Not a classic Rostow take-off precipitated by a sudden surge in investment Investment as a share of GDP fell from 18.4% in 1996-2002 to 16.2% during 2003-16 There has been no sudden acceleration in the country’s TFP, the main component of many economic upturns Paraguay’s score on the WEF Competitive Index has shown only slight improvement Not caused by sudden improvement in governance Country has back slid in key governance indicators such as control over corruption, and the rule of law Nor have any sweeping economic reforms taken place Although trade freedom has improved in recent years

Causes of Higher Growth II Nor can the sudden acceleration in growth be explained by short-term factors often associated with boom/bust cycles Paraguay has no oil or other key minerals No run-up in debt and government expenditures Paraguay is the model for fiscal prudence One final possibility is outsourcing for Brazilian firms, but this has only come on the scene in recent years

Soy Model I Instead, Paraguay’s growth has been largely rooted in agriculture Over last several decades Paraguay as expanded to become the world’s fourth largest producer of soy Massive transformation of agricultural sector from traditional activities to large scale commercial farming Called the “Soy Model” Should be strong demand for soy in the future, so the country’s future would appear bright Question though is this model sustainable? Most forecasts expect soy demand to double by 2050, so no problem on the demand side.

Soy Model II While soy production has not generated many linkages with other sectors, expanded banking, communications, and construction have be positively effected Different story on the supply side Until 1970s Paraguay’s agriculture consisted of traditional crops – cattle, cotton, tobacco, Yerba mate Largely produced on small independent farms With the introduction of soy, fundamental changes took place. Many of the new farms were established by Brazilian farmer-settlers Began assimilating and displacing smaller farms

Soy Model III Paraguay now has the most unequal land distribution in Latin America Eighty percent of fertile land is owned by one percent of the landowners Eighty three percent of small farms control six percent of the land. Estimates show that small farms are actually more efficient Many of those displaced have drifted into urban poverty Brazilian farmers claim they bought-up or displaced small scale farmers who did not have the resources or political support to survive in the new environment Small farmers claim they were forced of the land Insurgent group the Paraguayan People’s Army (EPP) has taken up the displaced farmer cause with attacks on the large plantations

Assessment Even assuming these conflicts can be contained There is limited land for future expansion for soy cultivation Increasing yield per acre is problematic under the current system of factory farming Land reform a possible solution but a non starter with the government Other option for sustaining growth is to expand Paraguay as a site for outsourcing Cheap labor is making them the “China of Latin America” for assembly operations To continue down this road, government will have to address the country’s deficient infrastructure and school system,