According to the 1992 Constitution, Paraguay is a representative democracy that embraces separation of powers. The government has 3 branches: the legislative, the executive, and the judiciary. The legislative branch, called the Congress, is comprised of the Senate (with at least 45 members) and the Chamber of Deputies (with at least 80 members). Members of Congress are popularly elected from Paraguay's 17 departments (states) for 5-year terms that coincide with the president's 5-year term. The president is chief executive and Commander in Chief of both the armed forces and the police. Emergency powers to declare a state of exception (suspending the constitution) in times of war or unrest belong to both the president and Congress.
The judiciary includes a Supreme Court of 9 Supreme Court Justices, who are appointed by the president and the Senate for 5-year terms, which are renewable. Judges cannot be removed after 2 consecutive terms until they reach retirement age. The Supreme Court controls its own budget and heads a system of lower courts and magistrates.
On the local level, each of the 17 departments popularly elects a governor and a departmental board, as well as local mayors. The Electoral Code ensures that everyone over 18 years of age votes, and congressional seats are filled by a proportional representation system (a proportional representation system ensures that one area of the nation is not over-represented or under-represented in comparison to another in terms of population).
The Paraguayan government has played a large role in the nation's economy, most notably in the last half of the 20th century. In the 1960s, the government used incentives to encourage the settlement of undeveloped or unused rural areas, to alleviate overcrowding in the Asunción metropolis, and to stave off Brazilian territorial advance (Brazil and Paraguay have a history of border disputes) in the area. Most of the land sold during this agrarian reform was to people with connections to the ruling Colorado Party. These landowners produced large quantities of soybeans for profitable international agro-industries. Also when the Colorado Party replaced the Liberals in power in 1954, officials directed government favors and funds to soybean and cotton producers, which developed a strong system of clientelism. While the Colorado Party is responsible for the birth of heavy cotton and soybean production, which spurred growth in the agricultural sector and now account for two-thirds of all agricultural exports, it also encouraged the widespread exploitation of peasant labor. The party's clientelistic focus on the elite widened the gap between the small upper class and the poor masses. The Colorado Party, which has strong military ties, has dominated Paraguayan politics and government for the last half of the 20th century.
Beginning in the 1970s, the Stroessner government (1954-89) used low income taxes and tax exemptions to attract foreign capital and foreign investment. The government handed out state subsidies for farming as well. The Rodriguez government (1989-93) continued to encourage foreign investment while implementing market reforms, beginning in 1989. Rodriguez put an end to the multiple exchange rates, expensive subsidies for state enterprises, and export taxes. The government also privatized several important state-run companies.
The Stroessner government placed strict controls on labor unions and maintained low minimum wages. As a result of Paraguayan labor laws, the U.S. placed trade restrictions on Paraguay but continued to trade with the country as a part of its Cold War policy. Labor union activism was low in Paraguay until the very late 1980s, when unions began to garner more political influence. As several labor unions emerged, particularly the Unitary Workers Central, the United States and Paraguay reinstated the Generalized System of Preferences (GSP). The GSP is a trade incentive package making trade between developed nations and developing nations profitable for each party. The 1990s spurred the Paraguayan Workers Confederation and the National Workers Central, and these 3 unions are now strong political interest groups in Paraguay. The new Constitution of 1992 embraced workers' rights, protecting the right to strike and the freedom of association.
The 1990s have been a decade of fast political changes including: an attempted coup, President Cubas's implication in the assassination of his vice president Luis María Argaña, Senate head Luis Gonzalez Macchi stepping up to assume the presidency, and the election of liberal vice president Julio Cesar Franco. Despite this political instability, the 1990s were a decade of heavy government involvement in economics. Paraguay liberalized and deregulated much of its economy, eliminating foreign exchange controls, reducing tariffs , establishing tax incentives and exemptions to stimulate foreign investment, creating a stock market, and restructuring the tax system. Paraguay has South America's least burdensome tax system. There is no personal income tax, business taxes are limited, and there is a value-added tax (VAT) of 10 percent. Investors in their first 5 years are eligible for tax exemptions of 95 percent and the duty -free import of capital goods . Corporate taxes are 30 percent but reinvested profit is only taxed 10 percent, which also encourages long-term investment and growth.
Today, there are 2 main political parties, each of which is an alliance: the Colorado Party (formally called the National Republican Association/Colorado Party) and the Democratic Alliance, which includes the EN (Encuentro Nacional) and the PLRA (Partido Liberal Radical Auténtico), a left-wing radical party. Both the Colorado Party and the Democratic Alliance formally support social equality and oppose the exploitation of the working class. The focus on working class economic issues has been magnified in the 1990s, as labor unions and organizations have gained power.