2009 Index of Economic Freedom

Quick Facts

Population:

• 6.0 million

GDP (PPP):

• $24.3 billion
• 4.3% growth
• 3.0% 5-year compound annual growth
• $4034 per capita

Unemployment:

• 5.6%

Inflation (CPI):

• 8.1%

FDI Inflow:

• $130.3 million

Paraguay's economic freedom score is 61, making its economy the 79th freest in the 2009 Index. Its score increased by 1 point from last year, reflecting improved investment freedom, business freedom, and, particularly, trade freedom. Paraguay is ranked 16th out of 29 countries in the South and Central America/Caribbean region, and its overall score is slightly above the world average.

Paraguay scores above the world average in over half of the 10 economic freedoms and especially well in fiscal freedom and government size. The average tariff has been lowered, but non-tariff barriers still limit trade freedom. Income and corporate tax rates are competitively low. Inflation is relatively high, but the market sets most prices. Foreign investors are guaranteed equal treatment.

Paraguay's business freedom, labor freedom, property rights, and freedom from corruption are weak. Regulations are enforced by an opaque bureaucracy. The labor market is burdened with rigid rules. Property rights are poorly protected. Confidential data concerning regulatory approvals are not safeguarded. Corruption is widespread and frequently tied to drug trafficking and money laundering.

Background Back to the top

Since the end of General Alfredo Stroessner's 35-year rule in 1989, Paraguayans have struggled to introduce democracy. Former Bishop Fernando Lugo, supported by the left-wing Patriotic Alliance for Change coalition, was elected president in April 2008, ending more than 50 years of domination by the conservative Colorado Party. Lugo vowed to support the indigenous population, redistribute land to the poor, and secure more revenue from the Itaipu Dam, a joint hydroelectric project with Brazil. Nearly half of all jobs are in agriculture (the major export earner), unemployment is high, and more than one-third of Paraguayans live below the poverty line. Improved security cooperation with neighboring countries and the United States has led to reduced smuggling and closer scrutiny of suspected Middle Eastern terrorist–supported groups operating in the tri-border area with Brazil and Argentina.

Business Freedom 61.7 Back to the top

The overall freedom to conduct a business is limited by Paraguay's regulatory environment. Starting a business takes an average of 35 days, compared to the world average of 38 days. Obtaining a business license takes more than the world average of 225 days. Closing a business can be a lengthy and difficult process.

Trade Freedom 83.6 Back to the top

Paraguay's weighted average tariff rate was 3.2 percent in 2006. Cumbersome customs procedures, import bans and restrictions, import taxes, import fees, weak enforcement of intellectual property rights, and burdensome labeling requirements add to the cost of trade. Ten points were deducted from Paraguay's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 96.6 Back to the top

Paraguay has very low tax rates. Both the top income tax rate and the top corporate tax rate are 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 12.0 percent.

Government Size 90.4 Back to the top

Total government expenditures, including consumption and transfer payments, are low. In the most recent year, government spending equaled 17.9 percent of GDP. State-owned enterprises are poorly managed, and privatization has been slow and uneven.

Monetary Freedom76.7 Back to the top

Inflation is relatively high, averaging 8.3 percent between 2005 and 2007. Most prices are set in the market, but the government controls the price of fuel and influences prices through state-owned enterprises and utilities, including electricity, telecommunications, transportation, and water. Five points were deducted from Paraguay's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom60.0 Back to the top

Paraguay guarantees equal treatment of foreign investors, and most sectors are open for private investment. The government maintains monopolies in rail, oil and gas, cement, electricity, water, and basic and long-distance land-line telephone services. Deterrents to investment include an arbitrary and non-transparent judicial process, corruption, and inadequate infrastructure. Residents and non-residents may hold foreign exchange accounts. Most payments and transfers are permitted, except for certain financial-sector transfers. Capital transactions are subject to minimal restrictions, and there are no restrictions on the repatriation of capital and profits. Foreign investors may not purchase land within 50 kilometers of the borders.

Financial Freedom60.0 Back to the top

Several domestic financial crises have led the government to restructure the banking sector and improve oversight. Credit to the private sector has grown since the 2002 credit crunch, and non-performing loans have gradually declined to less than 3 percent of total loans. The banking sector consists of 13 banks, 14 savings and loan companies, and 24 foreign-exchange companies. The presence of foreign banks is substantial. The two largest banks are foreign-owned, and foreign banks control 29 percent of assets and 40 percent of deposits. Capital markets are not fully developed, and a deeply ingrained tradition of family ownership limits the potential growth of capital markets.

Property Rights30.0 Back to the top

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. Acquiring title documents for land can take two years or more. Long recognized as a regional distribution and

Freedom From Corruption24.0 Back to the top

Corruption is perceived as widespread, but there have been noteworthy improvements. Paraguay ranks 138th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Paraguay has a legacy of institutional corruption after decades of dictatorship. The multibillion-dollar contraband trade that occurs on the borders with Argentina and Brazil also facilitates money laundering. Weak institutions impede anti-corruption efforts.

Labor Freedom27.0 Back to the top

Paraguay's restrictive labor regulations hinder employment and productivity growth. The non-salary cost of employing a worker is moderate, but the difficulty of laying off a worker is a disincentive to additional hiring. Regulations on the number of work hours remain rigid.