PARAGUAY
Rank: 99 Regional Rank: 22 of 29
araguay’s economy is 56.8 percent free, according to our 2007 assessment, which makes it the world’s 99th freest economy. Its overall score is 1.4 percentage points higher than last year, partially reflecting new methodological detail. Paraguay is ranked 22nd out of 29 countries in the Americas, and its overall score is lower than the regional average.
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The economy is 56.8% free
100
80
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Paraguay enjoys high levels of fiscal freedom, monetary freedom, and freedom from government. Income and corporate tax rates are extremely low, and overall tax revenue is low as a percentage of GDP. Government spending is also low. Even though the government has initiated a program of privatization, it still receives a large amount of income from state-owned businesses. Inflation is moderate, most prices are freely set by the market, and price intervention is minimal. Paraguay has weak business freedom, labor freedom, property rights, and freedom from corruption. Opening a business is difficult, commercial regulations are extensive, and enforcement is the prerogative of an opaque bureaucracy. The labor market is similarly constrained by regulation and bureaucracy to the extent that Paraguay has one of the world’s 20 most restricted labor systems. The rule of law is significantly influenced by the government, and corruption is rampant. BACKGROUND: Since 1989, Paraguay has consolidated its democracy, though not without occasional violence, including the assassination of a vice president in 1999. President Nicanor Duarte Frutos, elected in 2003, launched fiscal and judicial reforms and has enjoyed broad support; but nearly half of the labor force still works in agriculture—the major export earner—and 36 percent of Paraguayans live below the poverty line. Better security cooperation with neighboring countries has resulted in a reduction in smuggling and better scrutiny of suspected Middle Eastern terrorist-support groups.
60
40
Americas Average = 62.3 World Average = 60.6
20
0
1995
2007
QUICK FACTS
Population: 6 million GDP (PPP): $29.0 billion 4.1% growth in 2004 1.3% 5-yr. comp. ann. growth $4,813 per capita Unemployment: 16.2% (2004 estimate) Inflation (CPI): 4.3% FDI (net inflow): $113.4 million Official Development Assistance: Multilateral: $10 million Bilateral: $91 million (18% from the U.S.) External Debt: $3.4 billion Exports: $3.4 billion Primarily soybeans, feed, cotton, meat, edible oils, electricity, wood, leather Imports: $3.5 billion Primarily road vehicles, consumer goods, tobacco, petroleum products, electrical machinery
How Do We Measure Economic Freedom? See Chapter 3 (page 37) for an explanation of the methodology or visit the Index Web site at heritage.org/index.
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PARAGUAY’S TEN ECONOMIC FREEDOMS
Business Freedom Trade Freedom Fiscal Freedom Fdm fm Government Monetary Freedom Investment Freedom Financial Freedom Property Rights Fdm fm Corruption Labor Freedom 47 67.4 97.8 79.8 78.4 50 60 30 21 36.7
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Consequently, an additional 5 percent is deducted from Paraguay’s monetary freedom score to account for these policies.
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50 100
INVESTMENT FREEDOM — 50%
Paraguay guarantees equal treatment to foreign investors, as well as full repatriation of capital and profits. Foreigners may not purchase land along the country’s borders, and foreign investment is deterred by legal insecurity, shortages of skilled labor, deficient infrastructure, and the absence of cheap and reliable transport. Both residents and non-residents may hold foreign exchange accounts. Most payments and transfers are permitted, although financial enterprises require central bank authorization to transfer earnings. Capital transactions are subject to minimal restrictions.
100 = most free,
= world average
BUSINESS FREEDOM — 47%
Starting a business takes an average of 74 days, compared to the world average of 48 days. To maximize entrepreneurship and job creation, it should be easier to start a company. Obtaining a business license can be difficult, and closing a business is difficult. Regulations are sometimes inconsistent and lack transparency. The overall freedom to start, operate, and close a business is seriously restricted by the national regulatory environment.
FINANCIAL FREEDOM — 60%
Although several domestic financial crises, including a number of bank closures, have hurt the financial sector and have led the government to restructure the banking sector and improve oversight, supervision of the financial system falls short of international standards. The central bank is not entirely independent. The state development bank, Banco Nacional de Fomento (BNF), is charged with channeling loans from international financial institutions to local banks and other financial institutions but is burdened with numerous non-performing loans. The two largest banks are foreign-owned. Any financial transaction may be conducted in foreign currency. Most companies protect themselves against risk through international reinsurance companies. Capital markets are negligible, and trading on the small stock market is slight.
TRADE FREEDOM — 67.4%
Paraguay’s weighted average tariff rate was 6.3 percent in 2004. Cumbersome and time-consuming customs procedures, import taxes, import fees, and burdensome labeling requirements add to the cost of trade. Import restrictions and prohibitions are imposed for economic development and balance-of-payments purposes or to protect domestic industry. Consequently, an additional 20 percent is deducted from Paraguay’s trade freedom score to account for these non-tariff barriers.
FISCAL FREEDOM — 97.8%
Paraguay has very low income tax rates. A top income tax rate of 10 percent was introduced in 2006, and the corporate income tax rate is also 10 percent. Other taxes include a value-added tax (VAT) and a property tax. In the most recent year, overall tax revenue as a percentage of GDP was 11.2 percent.
PROPERTY RIGHTS — 30%
Because of widespread judicial corruption, protection of property is extremely weak. Commercial and civil codes cover bankruptcy and give priority for claims first to employees, then to the state, and finally to private creditors.
FREEDOM FROM CORRUPTION — 21% FREEDOM FROM GOVERNMENT — 79.8%
Total government expenditures in Paraguay, including consumption and transfer payments, are low. In the most recent year, government spending equaled 21.1 percent of GDP, and the government received 29.5 percent of its revenues from state-owned enterprises and government ownership of property. Privatization has been slow and uneven. Corruption is perceived as widespread. Paraguay ranks 144th out of 158 countries in Transparency International’s Corruption Perceptions Index for 2005.
LABOR FREEDOM — 36.7%
The labor market operates under highly restrictive regulations that hinder overall productivity growth. The non-salary cost of employing a worker is moderate, but dismissing a redundant employee is costly. Regulations on increasing or contracting the number of work hours are not flexible. Paraguay’s labor freedom is one of the 20 lowest in the world.
MONETARY FREEDOM — 78.4%
Inflation in Paraguay is relatively high, averaging 6.9 percent between 2003 and 2005. Relatively high and unstable prices explain most of the monetary freedom score. Most prices are freely set in the market, but the government controls the price of fuel and is able to influence prices through state-owned enterprises and utilities, including electricity, telecommunications, transportation, and water.
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2007 Index of Economic Freedom