Policymakers across the Western Hemisphere often lament Latin America’s lack of regional integration. On average, countries in Latin America and the Caribbean conduct the least international trade as a share of gross domestic product (GDP) in the world. Broadly, this integration deficit results from underinvestment in infrastructure, inefficient trade architectures, and natural obstacles posed by vast geographies. In turn, a lack of regional integration inhibits competitiveness vis-à-vis advanced global value chains, further contributing to sluggish growth across Latin America and raising the possibility of another “lost decade” for the region.
Sandwiched between the two largest economies in South America, landlocked Paraguay is becoming an exception to the region’s stagnant integration story. Although rarely noted alongside other regional outliers, Paraguay is pursuing growth via outward-facing infrastructure projects. Yet, by overlooking integration efforts from this small but central economy, foreign policymakers preclude a holistic view of transnational flows of commodities and capital across the core of the South American continent. Patching this knowledge gap is necessary to not only evaluate local growth prospects, but also to effectively address broader issues of regional security and stability.
Marcha al este: Paraguay’s First Step to Integration
Paraguay’s present-day integration fits a longer history of shifting geopolitical positions vis-à-vis its Southern Cone neighbors. Without direct access to the sea, the Paraguayan political economy historically centered to the south as commerce on the Paraguay and Paraná Rivers navigated to the ports of Buenos Aires and Montevideo. Under Spanish colonial rule, Paraguay’s principal river ports of Asunción and Concepción grew largely under the gravitational pull of the Rio de la Plata political economy. Through the early twentieth century, European migrant flows passing through Buenos Aires continued north to Paraguay by river and railroad, reinforcing Paraguay’s commercial and cultural ties to the Rioplatense world.
Yet, a new frontier opened eastward by the mid-twentieth century. In Brazil, demographic and economic growth moved westward from southeastern population centers toward Mato Grosso and Paraná, the agro-states bordering Paraguay. From the capital Asunción, the Paraguayan government, backed by international capital, paved roads to the Brazilian border in its marcha al este. Over 300 kilometers to the east of Asunción, the border city of Ciudad del Este was established in the 1950s, followed by construction of Paraguay’s first bridge to Brazil in the 1960s and the binational Itaipu Dam in the 1970s and 1980s.
During the decades to follow, the resulting flow of capital and people across the Paraguay-Brazil border pivoted the Paraguayan political economy, and what was once a firm gaze toward Buenos Aires became “pendular” as Asunción swung toward Brasilia. This pivot steered the small Paraguayan economy through the second half of the twentieth century as Ciudad del Este became Paraguay’s second-largest city and Itaipu became the world’s most powerful hydroelectric dam. Across the eastern administrative departments of Alto Paraná, Caagauzú, and Canindeyú, forest turned to soy fields as Brazilian agribusiness crossed the border.
The pivot toward the Brazilian border powered the Paraguayan economy with soy production and electricity from the Itaipu dam. The Itaipu dam’s construction brought a positive shock to GDP while also shielding the economy from Latin America’s lost decade and introducing Asunción to international financial markets. On a larger scale, Paraguay’s proximity to the protectionist Brazilian economy moved local markets to seek comparative advantage by exporting consumer goods at low cost, primarily via a vast re-export trade based in Ciudad del Este. These conditions shaped the contours of Paraguay’s transition to democracy and subsequent entry into the Mercosur trade bloc as the twentieth century came to a close.
Look to the North: Paraguay’s Present-Day Integration
Today, another growth frontier is emerging in Paraguay’s sparsely populated north. The Paraguayan state is laying asphalt through the country’s vast Chaco region to form the central stretch of the Bioceanic Corridor, a nearly 2,000 kilometer highway to connect southwestern Brazil’s agroindustrial states to Chile’s Pacific ports. Given its expected role in expanding market access for Brazilian exports, the highway arguably represents the largest project since Itaipu in which the Paraguayan state is forging new infrastructure for regional logistics.
Paraguay’s bioceanic highway will connect to Porto Murtinho, Brazil via a new bridge at the northern river post of Carmelo Peralta. This bridge is one of several new crossings at international junctions. A brand-new bridge spans the Paraná River at Paraguay’s tri-border with Brazil and Argentina, and another over the Paraguay River near Asunción will facilitate movement between the capital and the Argentine border. Further downriver is a proposed bridge to connect the city of Pilar with the province of Formosa, Argentina—meaning that altogether, the number of Paraguay’s international bridges over its principal waterways will increase from two to five in just a few years.
Whereas the Bioceanic Corridor may serve primarily as a modality for Brazilian exports seeking outlets to the Pacific, other projects will improve connections between the Paraguayan north and existing population centers. From Asunción, the government is widening and repaving 550 kilometers of the Ruta Transchaco, the highway that connects the capital region to central Chaco hubs and the Bolivian border. While executed by Paraguay’s Ministry of Public Works, the major road projects underway are backed by international financial institutions such as the Development Bank of Latin America and Inter-American Development Bank, an indication of broader regional importance. Several of Paraguay’s infrastructure investments are also backed by FOCEM, a Mercosur mechanism that funnels contributions from the trade bloc’s larger members to infrastructure projects in the smaller member states.
Integration Infrastructure: Beneficiaries Local and Foreign
Despite its promise to facilitate greater regional connectivity, Paraguay’s present-day bet on integration is not certain to produce immediate benefits for local productivity or export diversification. Even for Paraguayan agroindustry in the Chaco, existing export channels via the Paraguay-Paraná River may remain more efficient than the new Bioceanic Corridor. Likewise, the new bridge in Asunción that will span the Paraguay River to virgin land held by private capital is unlikely, at least in the near future, to efficiently serve transport and productivity in the congested capital region.
Nor do Paraguay’s state-led integration efforts have a history of promoting local over regional economic growth. The centerpiece of Paraguay’s first step toward integration, Itaipu, for decades failed to spur complementary investment to incentivize industrialization across the Paraguayan interior. The dam added electricity exports to Paraguay’s matrix of extractivist activities, but it failed to spur significant diversification of Paraguay’s basic export basket, hindering overall output growth. Only in 2013, three decades after Itaipu’s completion, did Paraguay install its first 500-KV transmission line connecting the power station to the capital region. Similarly, as the mid-century Paraguayan state paved roads across the eastern half of the country, new routes prioritized newly-arrived brasiguayos and Brazilian agribusiness’ soy shipments to river ports over existing population centers. Partly as a result, Paraguay’s present-day integration projects fuel doubt over who they primarily serve—local development or Brazil’s expansive geopolitical and multinational interests. Familiar with past foreign imposition upon internal affairs, or at least a narrative of state entreguismo, cross-sections of Paraguayan society remain skeptical of today’s state-led integration.
Nonetheless, more of Paraguay’s productive centers are in need of greater connectivity to mitigate the risk of external shocks such as climate change. Severe droughts from 2019 to 2022 not only reduced agricultural yields, but also forced barge fleets that move Paraguayan commodities to market to lighten loads due to low Paraguay River levels. These events underscore the importance of complementary infrastructure that boosts resilience against external shocks. Not only is the waterway critical to Paraguay and up- and down-river trade partners, but also the United States and China, who both buy the region’s commodities in bulk. The formal involvement of the US Army Corps of Engineers in Paraguay-Paraná dredging studies signals the international dimensions of the waterway, especially as it becomes intersected by new corridors of transit and industry.
Ideally, investment in infrastructure will accelerate productivity gains in Paraguay’s agroindustrial sector and aid local insertion into regional value chains. At the eastern Brazilian border, where integration infrastructure has accumulated over decades, there are signs of success as Paraguay’s small but growing maquila industry produces auto parts for the large Brazilian market. Cheaper labor in Paraguay makes Brazilian industry more competitive, an example of how Paraguay’s regional insertion can facilitate greater regional integration into global markets.
Today’s public-sector investment in connectivity across the north could support foreign direct investment elsewhere in Paraguay. In the department of Concepción, Paraguay’s largest-ever private investment of a nearly $4 billion USD pulp mill is under construction on the banks of the Paraguay River. This project expects to export paper sourced from eucalyptus grown in local silvopastoral systems and from land across the Brazilian border, recalling nineteenth-century trade patterns in which Mato Grosso exported commodities down the Paraguay River via Concepción. Investors are also betting on new concrete and meatpacking plants in Concepción, which, after decades of neglect by the state, is proximate to the infrastructure and growth coming to the Paraguayan north.
Integration Infrastructure: Regional and US Security Implications
Beyond issues of local growth and productivity, Paraguay’s renewed regional integration encompasses broader security dimensions. As a relatively open market between the protectionist Brazilian and Argentine economies, Paraguay is a hub for illicit trade and an increasingly central narcotrafficking corridor. Mid-century infrastructure investment at the eastern Brazilian border fueled Paraguay’s expansive contraband economy, with goods from Asia, Brazil, and the United States imported to Ciudad del Este and then re-exported to the Brazilian market. Today, as new infrastructure facilitates regional logistics across once-remote swaths of the Paraguayan north, illicit trade is also likely to find additional footholds. The risk of illicit actors capitalizing upon Paraguay’s formal investment in connectivity should invite closer study from policymakers across the Western Hemisphere.
Following the 1994 Argentine Israeli Mutual Association bombing in Buenos Aires and the September 11, 2001 terror attacks, the United States and international security community partners placed greater attention on the porous tri-border area for its links to Hezbollah financing cells and money laundering networks. Since then, however, other transnational criminal organizations, such as the Brazilian cartel Primeiro Comando da Capital, have branched out from border strongholds into the Paraguayan interior as the drug trade becomes more sophisticated. In 2022, Paraguay’s largest-ever anti-narcotics operation exposed how Andean cocaine passes through remote northern departments, down the Paraguay River, and to European and Asian markets. Narco-violence, once confined to the Brazilian border, has since spread as far as Asunción, and the influence and proceeds of the sprawling illicit economy allegedly infiltrates top levels of the Paraguayan state.
The international security community would therefore benefit from a perspective of Paraguay that looks beyond the tri-border area, especially as new infrastructure investments materialize across the Chaco and Paraguayan north. Paraguay’s security apparatus, which includes the National Anti-Drug Secretariat and the Secretariat for the Prevention of Money Laundering, already faces institutional deficiencies. Yet, in confronting the expanded reach of transnational crime, Paraguayan authorities face not only a scarcity of resources but also a delicate balancing act between security and competitiveness. While Paraguay’s national customs agency promotes the installation of new anti-narcotics scanner technology (donated by longstanding partner Taiwan) at the country’s river ports, greater surveillance also raises costs across the supply chain, which is detrimental to a landlocked country that seeks to lower barriers to trade. Paraguay’s formal investments in connectivity may ultimately benefit both economic growth and transnational organized crime, creating dilemmas for local government and security policy in the Western Hemisphere.
When Washington’s foreign policy circles look at Paraguay, they focus on issues of corruption, weak institutions, and illicit activity at the tri-border. These issues will remain at the forefront of bilateral and multilateral agendas after a new Paraguayan government takes office in 2023. However, without greater awareness of Paraguay’s evolving role in regional integration, policymakers may fail to recognize how new axes of growth could also exacerbate existing challenges to regional security. Situated at the center of South America and between the continent’s largest markets, Paraguay’s potential to see deteriorating security poses risks well beyond national borders.
Investment in integration infrastructure is critical to Paraguay’s pursuit of market access, productivity, and growth. However, it is important to recognize that greater connectivity is likely to facilitate flows of illicit activity in areas vulnerable to insecurity. This situation should invite more studies on the relation between formal logistical networks and transnational illicit activity in Paraguay. Just as mid-twentieth century infrastructure investment at the eastern Brazilian border created conditions for Paraguay’s illicit economy to flourish, formal investment in northern transit corridors may also aid narcotrafficking in the present day. For US policymakers, a renewed look at Paraguay’s increasingly central place in the region is necessary to work effectively with local institutions and produce hemispheric security policy for the decade-plus ahead.
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Ricardo Hausmann and Bailey Klinger, Growth Diagnostic: Paraguay, Harvard University Center for International Development, August 2007, https://growthlab.cid.harvard.edu/files/growthlab/files/growth_diagnostic_paraguay.pdf.
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Carlos Aníbal Peris Castiglioni, “Desmitificando: Presencia del Estado en relación al crecimiento del narcotráfico en Paraguay [Demystifying: Presence of the State in Relation to the Growth of Narcotrafficking in Paraguay],” Revista jurídica: Investigación En Ciencias Jurídicas y Sociales, 2(12), (pp. 151–166), December 2022, https://ojs.ministeriopublico.gov.py/index.php/rjmp/article/view/270/424.
 Among today’s commonly cited exceptions are Chile and Uruguay, for their free-trade campaigns; Mexico, for its North American integration; and Panama and Costa Rica, for their logistics and technology hubs.
 The marcha al este, or “march to the east,” was the Paraguayan counterpart to Brazil’s “march to the west” under the state-led expansionist projects of president Getúlio Vargas’ Estado Novo.
 While these were the most visible pieces of Paraguay’s marcha al este, prior groundwork had strengthened bilateral ties. Brazilian president Getúlio Vargas’ 1941 visit to Asunción kickstarted broader economic, cultural, and military engagement. Brazil also granted Paraguay access to free zones at the Atlantic seaports of Santos and Paranaguá (Abente, 1988). An expansion of credit from Brazil to Paraguay, the opening of the first Brazilian bank branch in Asunción, and agreements to pursue joint dredging operations on the Paraguay River also followed Vargas’ visit in 1941 (Borda and Masi, 2011).
 Birch (1992) describes Paraguay’s 20th-century “pendulum politics” in greater detail.
 Paraguay’s thirty-five-year dictatorship under president Alfredo Stroessner ended in 1989, and in 1991 Paraguay became a founding member of Mercosur, which remains the principal mechanism for economic integration in the Southern Cone.
 Although the Chaco covers 60 percent of national territory, it holds just 3 percent of Paraguay’s population.
 As Masi (2017) notes, the construction of Itaipu also brought Brazil and Argentina to first engage in substantial talks over resource management, an important precedent for later negotiations around Mercosur and other integration mechanisms.
 Six bridges when counting the Puente Heroes del Chaco in Asunción, near the Argentine border.
 While Paraguayan producers are still to rely on the Hidrovía Paraguay-Paraná, exporters from Brazil’s agro-states of Mato Grosso and Mato Grosso do Sul will welcome new openings to Pacific export markets. However, there are some uncertainties surrounding cargo regimens and regulations between Brazil and Paraguay. For years, Paraguayan truckers have protested the use of Brazilian bi-train trucks on Paraguayan soil.
 Such is consistent with one of the four main axes of the government’s 2030 National Development Plan, “Proyección de Paraguay en el mundo,” which emphasizes greater intermodal connectivity between existing waterways and expanded land and air connections.
 Some argue that the Paraguayan state’s previous neglect of Concepción was politically motivated by the city’s status as an opposition stronghold following the 1947 Paraguayan civil war. Earlier in the 20th century, Concepción benefitted from the Mato Grosso livestock and forestry trade, which spurred investment in communications and infrastructure, as well as unrealized plans such as a railroad to Brazil. See Herken Krauer (1984).
 For example, Concepción is primed for multinational investments in industry and infrastructure and is also explicitly flagged by the US State Department as home to transnational criminal elements.
 Peris (2022) argues that the growth and diversification of the Paraguayan drug trade has not necessarily been mitigated by the presence of the state—national police, anti-narcotics agents, and prosecutors—in Paraguay’s “red zones” of Concepción, Amambay, and Canindeyú.