Paraguay's geographic location has had a large impact on its economic development. Being one of only two landlocked nations in all of South America, Paraguay has had to rely on its rivers for transportation and trade routes and has developed a sufficient network of roads, highways, railways, and airports to increase trade possibilities. The Paraguay and Parana Rivers provide direct routes to the Atlantic Ocean through Brazilian territory, and the U.S., Japan, Germany, Italy, and the Netherlands now use these routes for imports and exports. Paraguay has also turned to its rivers for a power source. In fact, due to its substantial hydroelectric power, the nation is on its way to becoming one of the world's largest producers of power. In addition to commerce and power production, Paraguay also relies on agriculture, but only one-fifth of the nation's land is arable and even less is actually farmed. Still, almost half of the nation's workforce is in agriculture and particularly subsistence farming (growing only enough to survive). The country is self-sufficient in food production, but the agricultural sector has suffered from unpredictable weather and climate conditions and changing world market prices.
Paraguay also relies heavily on Ciudad del Este, the world's third-largest retail center. This city is a border town on the Parana River (on the Brazilian border) and as a result is susceptible to heavy smuggling. Crime is also a serious problem there and the police force of Ciudad del Este is suspected of widespread corruption. Store-owners have hired guards to monitor their stores around the clock, and these guards outnumber police officers by more than 5 to 1. The mayor even has 4 bodyguards at all times. Theft is prevalent. Crime is a less extreme problem in Asunción.
Paraguay has strong commerce, power, agriculture, and retail sectors, but most of the economy's strengths tend to be focused in small areas. The retail sector is concentrated in Ciudad del Este, tourism is concentrated in the capital, and the power industry, trade, and transport are concentrated along the Paraguay and Parana Rivers. Despite these specific areas with strong, focused economic sectors, Paraguay is still one of South America's less-developed nations in an economic sense.
General Alfredo Stroessner, president from 1954 to 1989, encouraged private investment at both domestic and international levels, especially in commercial agriculture ventures. He emphasized cotton and soybean production through government favors in terms of land and money. Before the 1970s, public investment was low and focused mainly on the expansion of infrastructure and communications, but after the 1970s, several new state-owned businesses increased public sector spending and employment rates. During the 1970s and early 1980s, Paraguay offset its crippling foreign debt and trade deficit with international loans, but paying back these loans in the years to come weakened the national economy. The economic growth of the 1970s did not benefit the entire nation equitably, but did benefit the police and military, as well as the upper class involved in business, agro-industry, and industry. The military and the agro-industrial elite both had ties to the Colorado Party in power. The working class was held back by low wages and limitations placed on the activities of labor unions.
Foreign investment has played a substantial role in Paraguay's economic growth, particularly in the 1970s and 1980s. Joint ventures with Brazil and Argentina in building hydroelectric power plants gave Paraguay a surplus of power and made it a leading power producer. Also, the government tried to attract foreign investors through low income taxes and tax exemptions during this time.
The years of President Andres Rodriguez (1989-93) were marked by reforms implemented to ensure transition to a market economy. He abolished the multiple exchange rates , low-cost subsidies to state enterprises, and export taxes. He also privatized several state enterprises and broke up state monopolies in telephone, water, and energy. Ecuador's airline, Cielos de America, bought 80 percent of the national Paraguayan airline; the remaining 20 percent was reserved for employees. The trade deficit caused by the international loans of the early 1980s was severely exaggerated by inaccurate figures stemming from large-scale smuggling, until Rodriguez's reforms weakened the causes of smuggling.
The 1990s were marked by substantial foreign investment in the form of multinational corporations . Joint ventures using foreign capital to spur domestic development include hydroelectric power plants built with Argentina and Brazil, cotton mills and spinning plants built with Italy and Brazil, and foreign oil companies searching for possible drilling sites. The late 1990s have been a time of consolidation in the transition to a market economy, but the national economy is still underdeveloped in comparison to other Latin American nations.