Order Code RL34180
Paraguay: Background
and U.S. Relations
September 20, 2007
Nelson Olhero
Research Associate
Foreign Affairs, Defense and Trade Division
Mark P. Sullivan
Specialist in Latin American Affairs
Foreign Affairs, Defense and Trade Division

Paraguay: Background and U.S. Relations
Summary
The demise of the long-ruling Stroessner military dictatorship in 1989 initiated
a political transition in Paraguay that has been difficult at times. Current President
Nicanor Duarte Frutos has implemented some reforms that have addressed corruption
and contributed to economic growth. Yet, due in large part to the country’s
authoritarian past, Paraguay’s state institutions remain weak while corruption
remains ingrained in the political culture, impeding democratic consolidation and
economic development.
The April 2008 presidential elections could serve as a test of the strength of
Paraguay’s democracy since the Colorado Party faces the possibility of losing its
dominance after 60 years in power. At this juncture, the opposition is divided
between support for former Catholic priest Fernando Lugo and former General Lino
Oviedo. U.S.-Paraguayan relations have been strong, with extensive cooperation on
counterterrorism and counternarcotics efforts. For additional information, see CRS
Report RL33620, Mercosur: Evolution and Implications for U.S. Trade Policy and
CRS Report RS21049, Latin America: Terrorism Issues. This report will be updated
as events warrant.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Political Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Corruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2008 Presidential Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Economic Situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Relations with the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
U.S. Aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Counternarcotics Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
TBA and Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Paraguay: Background and U.S. Relations
Introduction
Paraguay – a landlocked South American country bordering Argentina, Bolivia
and Brazil – has a population of 6.5 million predominately concentrated in and
around the capital city of Asunción. The majority of the population is of mixed
Spanish and Guaraní Indian descent. Both Spanish and Guaraní are the official
languages, with over 90% of the population fluent in Guaraní. Paraguay’s per capita
income in 2005 was $1,280, one of the lowest in South America, and over 40% of
the population live in poverty.
Political Situation1
The current political context in Paraguay has been shaped by the country’s
turbulent political history. In the late 19th century, a two-party system emerged with
the formation of the Colorado Party and the Liberal Party, but the Colorado Party
soon became the dominant political force, ruling between 1887 and 1904. Paraguay
was defeated in the War of the Triple Alliance (1864-1870) against Argentina, Brazil
and Uruguay and lost 25% of its territory and over half of its population. This defeat
led to an extensive period of political instability, with three civil wars in the first half
of the 20th century and a war with Bolivia between 1932-1935, the Chaco War, that
further weakened political institutions and hindered economic development. The
Liberals ruled from 1904 until 1940, until the military assumed control with a
succession of authoritarian leaders.
The Colorado Party returned to power in 1946, and has remained in power until
the present day, making it the longest-ruling political party in the world. In the late
1940s, the party began to assume greater control over state institutions and the
bureaucracy to the point where party membership was a prerequisite for civil service
positions and promotion in the military, further perpetuating the Colorado Party’s
dominance.
General Alfredo Stroessner, who was a member of the Colorado Party, staged
a coup in 1954, and consolidated power in a repressive military dictatorship that
lasted 35 years. The key to the Stroessner regime’s longevity was an alliance among
1 Sources for the historical information in this section include Diego Abente Brun, “Uruguay
and Paraguay: An Arduous Transition,” in Jan Knippers Black (ed.), Latin America: Its
Problems and Its Promise
, Cambridge MA, Westview Press, 2005; and Paul C. Sondrol,
“Paraguay: Precarious Democracy” in Howard J. Wiarda and Harvey F. Kline (eds.), Latin
American Politics and Development
, Boulder Colorado, Westview Press, 2000.

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the military, dominant economic groups, and the Colorado Party. The military regime
was characterized by strong political repression, the personalization of authority,
ultra-nationalist and anti-communist rhetoric, and widespread corruption. With
democratic advances occurring in other South American countries, Stroessner
ultimately was overthrown in a 1989 coup and fled to Brazil, where he lived until his
death in 2006. In 2004, a Truth and Justice Commission ultimately was set up to
investigate human rights abuses that occurred under the Stroessner regime.
The overthrow of the Stroessner regime initiated a process of democratization,
with the enactment of a new constitution in 1992 and competitive elections held for
the first time in 1993. Despite the democratic transition, however, many
characteristics of the country’s extensive period of military rule have persevered.
Although opposition parties have held a majority in Congress, the dominance of the
Colorado Party has remained intact, including its control over the state apparatus.
The political culture has remained a product of the country’s authoritarian past with
pervasive corruption and clientelism. Nascent democratic institutions have been weak
and almost every post-Stroessner President has faced some legal troubles.
In 1996, Army Commander General Lino Oviedo revolted after President Juan
Carlos Wasmosy ordered him to step down. Oviedo resigned, but attempted to run
in the 1998 presidential elections as the Colorado Party’s candidate. Oviedo’s
candidacy was nullified after the Supreme Court upheld his conviction and ratified
a 10-year prison term for his barracks revolt. Oviedo’s running mate, Raúl Cubas,
was elected President in 1998 and defied the Supreme Court by freeing Oviedo from
prison as one of his first acts in office. This action led to the initiation of
impeachment proceedings against the President, and intensified the rivalry between
Vice President Luis Maria Argaña and President Cubas and Oviedo. Argaña was
assassinated in March 1999 and blame was placed on both Cubas and Oviedo,
sparking widespread demonstrations and violence in Asunción. President Cubas was
forced to resign, and both he and Oviedo fled the country. As a result, Luis Gonzalez
Macchi, the president of the Senate, completed the presidential term and attempted
to establish a government of national unity, but constant infighting within the
coalition led to a weak government that was marred by corruption and inefficiency.2
Nicanor Duarte Frutos of the Colorado Party (National Republican Association
or ANR) was elected president on April 27, 2003, defeating Julio César Franco of the
opposition Authentic Radical Liberal Party (PLRA, related to the original Liberal
Party) as well as three other candidates in an election that observers judged to be free
and fair. The Colorado Party also captured 37 seats in the 80-member Chamber of
Deputies, the largest block, and 16 of 45 seats in the Senate, while the largest
opposition party, the PLRA, won 21 seats in the lower house and 12 seats in the
Senate. Three smaller parties won the remaining seats. During the campaign, Duarte
portrayed himself as a strong leader, and he promised to implement widespread
institutional reforms, prioritize the fight against corruption and establish a transparent
government. As discussed below, President Duarte has enacted reforms that tackle
tax evasion and corruption. Since his election, however, the President’s popularity
has declined because of public concerns about rising crime and unemployment. As
2 Brun, p. 576.

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a result, he has resorted to more populist rhetoric as a means of retaining support for
the Colorado Party.
Corruption
Observers maintain that corruption remains a major impediment to the
emergence of stronger democratic institutions and sustainable economic development
in Paraguay. President Duarte’s measures to combat corruption have included
increased penalties for tax evasion and other measures to increase tax revenue,
greater oversight of government spending, and a crackdown on the trade of
contraband and counterfeit goods. He also removed members of the Supreme Court
after corruption allegations surfaced against them. These measures have been
partially successful, as evident in Transparency International’s 2006 corruption
perceptions index in which Paraguay ranked 111 out of 163 countries.3 This ranking
was an improvement from 2004 when the country was classified among the six most
corrupt countries in the world and the second most corrupt in the Western
Hemisphere.4 The opposition, however, has claimed that anti-corruption efforts have
not been far-reaching enough because they have not addressed the clientelism that is
pervasive in Paraguayan politics or the dominance of the Colorado Party in
governmental institutions.
2008 Presidential Elections
President Duarte sought to overturn the constitutional ban on consecutive re-
election so that he could run in the April 2008 presidential election. The opposition
strongly contested the President’s move, however, and he abandoned his re-election
efforts. Duarte supports former education minister Blanca Ovelar as the Colorado
Party’s presidential candidate. Ovelar will compete against current Vice President
Luis Castiglioni for the party’s nomination, as well as candidates representing other
factions. A party primary is expected to be held in December 2007.
At this juncture, it appears that the opposition’s support is divided between two
potential candidates: Fernando Lugo, the former Roman Catholic Bishop of an
impoverished rural diocese, and former General Lino Oviedo, the leader of a failed
1996 coup who was released from prison in early September. Until Oviedo’s release,
Lugo had been the frontrunner in the polls, and his candidacy was endorsed by
several left-wing labor unions and social organizations and parties. This included the
endorsement of the PLRA, the main opposition party. Lugo’s political discourse
emphasizes empowering the poor and putting an end to endemic corruption, which
he views as emanating from decades of Colorado Party dominance. A complicating
factor for Lugo’s candidacy, however, is that the judiciary has not yet ruled if he is
eligible to run. Paraguay’s constitution prohibits members of the clergy from running
for public office, and the Vatican has rejected Lugo’s resignation and petition for
laicization.
3 Transparency International, Corruptions Perceptions Index 2006.
4 “Glimmer of Success in Paraguay’s Corruption Battle,” Financial Times, August 14, 2006.

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Oviedo, who had returned to Paraguay in 2004 to serve his 10-year prison
sentence, was granted conditional release on September 6, 2007, and indicated his
desire to be a presidential candidate if court rulings permit him. Oviedo is the
founder and leader of the National Union of Ethical Citizens (UNACE), a political
party which he ran from prison. In the aftermath of Oviedo’s release, a poll showed
Oviedo with 31.5% support compared to 27.5% for Lugo and 27.2% for the Colorado
Party candidate. Some observers, including many in the opposition, believe that
President Duarte orchestrated Oviedo’s release in order to split the opposition and
improve the Colorado Party’s chances of retaining power. In the aftermath of
Oviedo’s release, Lugo announced a new electoral coalition known as the Patriotic
Alliance for Change (APC).5
Economic Situation
The Paraguayan economy, which remains heavily dependent upon its traditional
agricultural exports of soybeans, cotton, and meat, grew by 4% in 2006. Economic
growth is forecast to reach 3.7% in 2007. Paraguay lacks significant mineral and
petroleum resources, but possesses vast hydroelectric resources, including the
world’s largest hydroelectric generation facility, the Itaipú Dam, built and operated
jointly with Brazil. Remittances from Paraguayans living abroad have significantly
contributed to sustained economic growth. According to the Inter-American
Development Bank, remittances totaled some $650 million in 2006.
Paraguay experienced an economic recession for several years in the aftermath
of a succession of bank failures from 1996 -1998 that wiped out half of Paraguay’s
locally owned banks. When elected in 2003, President Duarte inherited a
government that had defaulted on $138 million in debt, primarily as a result of low
tax revenue.6 Under President Duarte, the economy rebounded, due in part to the
implementation of reforms that include anti-corruption initiatives, which have
increased revenue, strengthened institutions, and created a more favorable
environment for foreign investment.
Paraguay is heavily influenced by the economic conditions of its larger
neighbors, Argentina and Brazil, which are fellow members of the Common Market
of the South (Mercosur).7 As one of the smaller countries of Mercosur, Paraguay has
complained that its exports face significant restrictions entering Argentina and Brazil.
Paraguay’s industrial sector is still largely underdeveloped, with much of the
population still employed in subsistence agriculture. Economic growth tends to be
limited by Paraguay’s imports of manufactured goods, as well capital goods that are
5 “Poll Shows Oviedo Favourite in Paraguay,” LatinNews Daily, September 17, 2007;
“Elections Blown Wide Open as Oviedo Freed,” Latin American Weekly Report, September
13, 2007.
6 Michael Thomas Derham, “Against All Odds,” LatinFinance, March 1, 2005.
7 Mercosur has the goal of implementing a common market among its members, but to date
only a limited customs union has been achieved.

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necessary to supply the industrial and investment requirements of the economy.8
This has led to a widening of the country’s trade deficit, estimated at $1.1 billion in
2006.
Paraguay’s informal sector is very large, estimated at about half of the country’s
gross domestic product, and is estimated to employ over 40% of wage-earning
workers.9 A significant part of the country’s commercial sector consists of importing
goods from the United States and Asia for re-export into neighboring countries.
Most of these imported goods are not declared at customs, preventing the government
from obtaining substantial tax revenue. Counterfeit trade and smuggling are
prevalent in the country’s border regions.
Relations with the United States
Paraguay and the United States have good relations, cooperating extensively on
counternarcotics and counterterrorism efforts. The United States strongly supports
the consolidation of Paraguay’s democracy and continued economic reforms.
President Duarte is viewed by many observers as very pro-U.S. and became the first
Paraguayan head of state to be received at the Oval Office. The United States is
Paraguay’s eighth largest trading partner, with trade increasing over the last four
years. U.S. imports from Paraguay totaled about $58 million in 2006 while in the
same year, the value of U.S. exports to Paraguay was over $910 million, according
to Department of Commerce trade statistics. The protection of intellectual property
rights (IPR) has been a U.S. concern, especially piracy, counterfeiting, and
contraband. The Duarte government has made significant efforts to improve IPR
protection, but the United States Trade Representative maintains that the country
continues to have problems due to its porous border and ineffective prosecutions.
U.S. Aid
The United States provided about $13.3 million in aid to Paraguay in FY2006
and an estimated $11.7 million in FY2007. For FY2008, the Administration has
requested $9.7 million in assistance, including $1.3 million to support child survival
and health, $4.7 million in development assistance and nearly $3 million for a Peace
Corps program. Development assistance includes support for projects that promote
export diversification and private investment, as well as projects that aim to combat
corruption and strengthen institutions. In past years, Paraguay had faced restrictions
in terms of receiving Economic Support Funds (ESF) and International Military
Education and Training (IMET) assistance because the Paraguayan government has
not signed a bilateral immunity (Article 98) agreement that would give U.S. soldiers
immunity from International Criminal Court prosecution. In the fall of 2006,
8 Luis Carlos Nino, “Inflation Increases Slightly as Paraguay’s Trade Deficit Widens,”
Global Insight Analysis, June 4, 2007.
9 Richard Lapper and Adam Thompson, “Cash-Starved City in Paraguay Fights War on
Counterfeit Goods,” Financial Times
, September 9, 2005; and “Latin America and
Caribbean, A Barrier for Development,” States New Service, May 23, 2007.

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however, President Bush waived the Article 98 restrictions for IMET and ESF for
Paraguay.10
In addition to regular foreign assistance funding, Paraguay signed a $34.65
million Threshold Program Agreement with the Millennium Challenge Corporation
in May 2006, with the funds targeted specifically at programs to combat corruption.
Paraguay also signed an agreement with the United States in 2006 under the Tropical
Forest Conservation Act that provides Paraguay with $7.4 million in debt relief in
exchange for the Paraguayan government’s commitment to conserve and restore
tropical forests in the southeastern region.
Counternarcotics Cooperation
Paraguay is a major transit country for illegal drugs destined primarily for
neighboring South American states and Europe. The Chaco region in the
northwestern part of the country is a major transshipment point of illegal drugs, along
with the tri-border area (TBA) with neighboring Argentina and Brazil. A 1987 U.S.-
Paraguay bilateral counternarcotics agreement was extended in 2006. U.S.
counternarcotics efforts in Paraguay have focused on providing training, equipment
and technical assistance in order to strengthen the capacity of the country’s National
Anti-Drug Secretariat (SENAD), along with initiatives to help combat money
laundering and corruption. The United States is assisting in the completion of a
helicopter pad and support facilities that would increase SENAD’s capacity to disrupt
trafficking networks. According to the State Department’s March 2007 International
Narcotics Control Strategy Report,
SENAD arrested several major Brazilian drug
traffickers and in 2006, carried out drug seizures that inflicted an estimated financial
loss of $39 million to narcotics traffickers.
TBA and Terrorism
The United States is particularly concerned about illicit activities in the TBA,
where money laundering, drug trafficking, arms smuggling, and trade in counterfeit
and contraband goods are prevalent. Such activities thrive in the tri-border region due
to porous borders, a lack of surveillance, weak law enforcement and pervasive
corruption by local officials, especially in the Paraguayan border city of Ciudad del
Este. The United States has worked closely with the governments of the TBA
countries on counterterrorism issues through the “3+1” regional cooperation
mechanism, which serves as a forum for discussions, and the United States has
provided anti-terrorism and anti-money-laundering support to Paraguay.
For a number of years, the United States has had concerns that the radical
Lebanon-based Hezbollah and the Sunni Muslim Palestinian group Hamas have used
the TBA for raising funds among its sizable Muslim communities by participating
in illicit activities and soliciting donations. Nevertheless, according to the State
Department’s annual terrorism report for 2006 (issued in April 2007), there is no
10 For background, see CRS Report RL33337, Article 98 Agreements and Sanctions on U.S.
Foreign Aid to Latin America
, by Clare M. Ribando.

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corroborated information that these or other Islamic extremist groups have an
operational presence in the TBA.
The State Department’s terrorism report states that Paraguay did not exercise
effective immigration or customs control on its borders, and that although Paraguay
is generally cooperative on counterterrorism efforts, its judicial system remains
severely hampered by a lack of strong anti-money-laundering and counterterrorism
legislation. In May 2007, Paraguay’s Chamber of Deputies approved a bill that
would incorporate a clause on terrorism in the country’s penal code, making terrorist
association and the financing of terrorist activity punishable crimes. In August 2007,
however, Paraguay’s Senate delayed the bill because of concerns that its definition
of a terrorist act could lead to legitimate social protests being labeled criminal acts.