Economic growth is among the strongest in Latin America but is also very volatile, mainly because of the importance of agriculture in the economy and the concentration of exports in primary agricultural products and their derivatives. Despite this volatility, an inflation-targeting regime has managed to bring inflation volatility down, and the fiscal framework is sound, with low levels of debt and one of the lowest public deficits in the Latin America region. Productivity has grown steadily in the past decade, despite investment levels remaining below those of the region and the OECD by about 4% of GDP in the past decade. Structural transformation is progressing, with employment in agriculture falling by 10 percentage points over the past ten years. However, as employment shifts in part to low productivity activities in the service sector, labour reallocation contributes less to growth than it would otherwise.
Living standards have improved, but inequality remains a major challenge. Economic growth and macroeconomic stabilisation have contributed to raising the living standards of Paraguayans and to lowering the poverty rate from 45% in 2007 to 27% in 2015. Solid job creation has contributed to improving incomes. The expansion of free health care provision has contributed to improved accessibility of service. Income inequality is among the highest in the benchmark group and there are marked inequalities in non-monetary dimensions, including access to social insurance or water and sanitation, especially between urban and rural areas. Vulnerability is also a factor of inequality: perceived insecurity is relatively high in the country, and homicides are concentrated in a few departments, in particular in border areas.
The current economic expansion has put increasing pressure on the rich environmental endowment of the country. Paraguay has one of the cleanest energy mixes in the region, which has allowed it to maintain low carbon intensity and manage air pollution, and is endowed with diverse ecosystems and abundant resources for primary production. However, deforestation is one of the most critical environmental issues in the country, driven by increased land use for agriculture and livestock development.
Governance institutions are still undergoing fundamental transformations and further institutional strengthening is necessary to increase trust and ensure the rule of law. The Paraguayan democracy is still in a consolidation phase. Trust in major institutions is lower than in benchmark countries, especially in the case of the judiciary. Citizens’ support for and satisfaction with democracy, as expressed in surveys, are also low compared to other Latin American countries. They have increased in the past decade however, showing resilience in the face of episodes of political instability. High levels of perceived corruption hinder trust in public institutions, constrain business opportunities, and erode social capital. A comprehensive integrity system is being developed, with focus on transparency, but ensuring its effectiveness remains a big challenge.
Financing flows for development are low in Paraguay compared to both the benchmarking countries and the OECD despite recent improvements in both public and private flows. Given the country’s prudent fiscal stance and low reliance on public debt, public finance for development comes mostly from fiscal space. Government expenditure is relatively low, at 25% of GDP compared to 34% in Latin America and 45% in OECD countries. This is the consequence of low tax revenues and high non-discretionary expenditure, representing almost half of total public expenditure. At 5.5% of GDP, private flows are also relatively low. Foreign direct investment (FDI) flows have increased, but, at 1.16% of GDP, remain small.
