Paraguay - Country Economic Memorandum : From Landlocked to Land of Opportunity (English)

Table of Contents

• Box 1. Paraguay’s Jobs Ladder 17
• Box 2. What could be the impact of green trade regulations on Paraguay? 19
• Box 3. Has Paraguay suffered from Dutch Disease? 22
• Box 4. Adjusting for the effect of commodity prices on factor utilization, total factor productivity growth has been low in Paraguay 24
• Box 5. A capable state is fundamental to spur Paraguay’s transformation and growth 31
• Box 6. To what extent has being landlocked affected Paraguay’s development? 33
• Box 7. There is a dearth of structured information on firms in Paraguay 39
• Box 8. Stringent enforcement of competition policy could boost the productivity of Paraguayan firms 57
• Box 9. Can the services sector drive growth and development in Paraguay? 67
• Box 10. How did Costa Rica become a leader in ecotourism? 84
• Box 11. Agriculture management is split across different entities in Paraguay 96
• Acknowledgments 3
• Acronyms 10
• Chapter 1 — Looking back to look forward: how can Paraguay accelerate its transition to a high income economy? 12
• The current growth model has yielded prosperity, but gains have slowed 12
• Why does Paraguay need to boost its resilience to external shocks? 20
• Why does Paraguay need to boost productivity growth? 22
• How have growth dynamics constrained the creation of good quality jobs? 27
• How can Paraguay boost the productivity, resilience, and sustainability of growth? 29
• Annex 1 — Selection of comparator countries 36
• Annex 2 — Determinants of total factor productivity growth 37
• Chapter 2 — Productivity and informality: two sides of the same coin 38
• Introduction 38
• Why does productivity matter? 40
• What are the correlates of formality and productivity in Paraguay? 43
• How does Paraguay fare on the three margins of firm‑level productivity? 49
• Which challenges are the most binding constraints for growth, according to firms? 55
• How can public policies support a more productive private sector in Paraguay? 60
• Chapter 3 — Can services drive growth and development in Paraguay? 66
• Why services? 66
• Services generate half of value added and jobs, but contribute little to productivity and exports 67
• Constraints in expanding the contribution of services to growth and development 72
• Gaps in connectivity and skills prevent greater adoption of ICT by workers and firms 73
• Institutional, infrastructure and skills gaps constrain the potential of (eco)tourism 76
• How can Paraguay unlock the potential of services for faster, more resilient, and sustainable growth? 81
• Chapter 4 — How can the government support the competitivity and resilience of the agriculture sector? 87
• Agriculture is a key source of growth and poverty reduction… 87
• ….but also a source of economic and social vulnerabilities. 90
• Public spending in the agriculture sector has been low in comparison to its importance 94
• Public agriculture spending prioritizes productivity and resilience, but efficiency of execution can be better 100
• How can the government of Paraguay increase the competitiveness and resilience of the agriculture sector? 103
• References 107
• Figure 1. Paraguay’s growth has been driven by its successful use of natural resources... 13
• Figure 2. …and underpinned by a strong macro and fiscal framework since the early 2000s. 13
• Figure 3. Paraguay has tried to lure investment through low tax rates… 14
• Figure 4. …but FDI has trailed peers. 14
• Figure 5. Paraguay’s average growth has slowed since  013… 15
• Figure 6. …leading the pace of poverty reduction to stall at about a fifth of the population. 15
• Figure 7. Despite improvements, educational and health outcomes still remain behind compared to peers… 16
• Figure 8. …which may reflect lower public spending in these areas, and inefficiency in spending. 16
• Figure 9. Informal employment is more prevalent in Paraguay compared to peers… 17
• Figure 10. …especially for younger and older workers. 17
• Figure 11. Formalization has increased, but only 3 out of 10 workers are formal… 18
• Figure 12. …despite the difference in earnings between formal and informal workers. 18
• Figure 13. At least 5 percent of Paraguay’s exports would be affected by the new EU deforestation‑free regulation 19
• Figure 14. The volatility of Paraguay’s growth has diminished, but remains higher than peers… 20
• Figure 15. …due to its high dependence on natural resources. 20
• Figure 16. The structure of the Paraguayan economy has evolved more slowly… 21
• Figure 17. …compared to the average upper middle‑income economy. 21
• Figure 18. The commodity boom led to a strong expansion in private consumption… 21
• Figure 19. …which supported growth in the non‑tradable services sector. 21
• Figure 20. The REER appreciated during the commodity boom… 22
• Figure 21. …but did not depress non‑commodity export growth. 22
• Figure 22. The high capital‑output ratio in 2002 indicated excess capacity in the economy, but in 2013 it had turned into scarcity 23
• Figure 23. Better utilization of existing capital initially drove large TFP gains over 2002-2013 23
• Figure 24. Between 2013 and 2019, capital per worker has increased but TFP has decelerated… 24
• Figure 25. …as fixed investment has mostly gone into structures rather than productive assets. 24
• Figure 26. Conventional estimates of TFP growth for Paraguay indicate an acceleration over 2002-2013, followed by a deceleration 25
• Figure 27. Adjusting for factor utilization, TFP’s contribution to overall growth in Paraguay is even lower 25
• Figure 28. Public investment has increased, but at a slower pace than peers 26
• Figure 29. Credit to the private sector is lower than all peers 26
• Figure 30. Workers have been moving out of primary agriculture into more productive sectors… 28
• Figure 31. …but this process has slowed in the last decade. 28
• Figure 32. In Paraguay, agriculture labor productivity growth has outpaced manufacturing and tradable services… 29
• Figure 33. ...contrary to the pattern seen in the average upper middle‑income country. 29
• Figure 34. Paraguay ranks poorly on all determinants of productivity growth, especially on innovation 30
• Figure 35. Paraguay remains behind on indicators of government effectiveness, control of corruption, and rule of law 31
• Figure 36. Trust in government is low throughout the region, including in Paraguay 31
• Figure 37. Paraguay faces higher trade costs than some coastal countries 34
• Figure 38. Paraguay performs on par with the region on logistics capacity, but there is room to improve 34
• Figure 39. Paraguay’s formal firms are less productive than firms in several other Latin American countries 41
• Figure 40. Controlling for differences in sector and size, more productive firms pay higher wages 41
• Figure 41. Controlling for differences in sector and size, more productive micro and small firms also pay higher wages — regardless of whether they are formal or informal 42
• Figure 42. Among micro and small businesses, formal firms are more productive than similar informal firms 43
• Figure 43. Formal firms are valued more highly by their owners than informal firms 43
• Figure 44. Informality and self‑employment tend to fall as income per capita rises 44
• Figure 45. Education, gender, and access to finance are predictors of firm formalization status 45
• Figure 46. Pervasive informality in Paraguay may reflect the lack of access to good jobs in formal firms 45
• Figure 47. Size and firm capabilities matter for firm productivity 47
• Figure 48. Many informal firms believe that obtaining a tax ID would not expand their customer base 48
• Figure 49. Boosting productivity can occur in three ways, supported by a healthy operating environment for businesses 49
• Figure 50. The dispersion of productivity suggests that resources are not allocated efficiently 50
• Figure 51. Employment is not concentrated in the most productive formal firms 50
• Figure 52. Paraguayan firms rank better in terms of managerial capabilities, although they show lower levels of digital preparedness and innovation 52
• Figure 53. Formal firms have better digital and financial practices than informal firms 53
• Figure 54. Firm capabilities are correlated with productivity 53
• Figure 55. The creation of new registered firms in Paraguay lags other countries in the region 54
• Figure 56. Employment grows faster in formal firms especially when they are young 55
• Figure 57. Formal firms perceive corruption and competition from informal firms as the most prominent constraints affecting their operations 56
• Figure 58. Competition from informal enterprises is a challenge for formal enterprises, regardless of their productivity levels 57
• Figure 59. Paraguay is perceived to have a less level playing field for firms compared to peers… 58
• Figure 60. …especially when it comes to the services sector. 58
• Figure 61. Access to finance and practices of competitors are the two major complaints of micro and small firms, regardless of formality status 59
• Figure 62. Limited skills in the workforce and corruption may be more binding constraints for the most productive firms 60
• Figure 63. Policy interventions to support firms may affect productivity through more than one channel 61
• Figure 64. Non‑tradable service activities have driven growth in the services sector… 68
• Figure 65. …and created the most jobs, absorbing mostly low‑skilled workers. 68
• Figure 66. Most of the jobs created in services are informal… 69
• Figure 67. …and pay less than the manufacturing sector, with some exceptions. 69
• Figure 68. The share of services in total value added is lower in Paraguay than in peers… 69
• Figure 69. …but the share of services in total employment is higher. 69
• Figure 70. Services labor productivity has remained low compared to peers… 70
• Figure 71. …but some tradable services are more productive than manufacturing. 70
• Figure 72. Paraguay’s services exports lag peers… 70
• Figure 73. Exports of ICT, finance, insurance and business services are minimal 70
• Figure 74. Services exports are a small fraction of Paraguay’s total exports… 71
• Figure 75. …but contribute more indirectly. 71
• Figure 76. Services imports have also expanded… 72
• Figure 77. …mostly through the commercial presence of suppliers. 72
• Figure 78. Only a tenth of the population have access to fixed broadband Internet services 74
• Figure 79. Fixed broadband Internet prices are high relative to most peers and to the UN target 74
• Figure 81. There is room to grow the use of digital payments… 75
• Figure 82. …and to improve digital skills of the workforce. 75
• Figure 80. Digital services trade could be more open 75
• Figure 83. The contribution of tourism to Paraguay’s economy is currently very low…. 78
• Figure 84. …and has not increased over the past two decades. 78
• Figure 85. Overall spending on tourism is low in Paraguay… 78
• Figure 86. …as is expenditure per tourist arrival. 78
• Figure 87. Services FDI has been a major contributor to overall FDI… 80
• Figure 88. …but not in the hotels and restaurants subsector. 80
• Figure 89. Overall growth is highly correlated with agriculture and agroindustry… 88
• Figure 90. …which is heavily concentrated in two commodities — soy and beef. 88
• Figure 91. Agriculture productivity has grown rapidly in Paraguay in the last two decades… 89
• Figure 92. …as the adoption of new technologies boosted soybean yields. 89
• Figure 93. Yields per hectare have risen for newer commercial crops such as rice and maize… 90
• Figure 94. …whereas they have mostly stagnated for subsistence crops. 90
• Figure 95. Rainfall in two months of the year is highly and positively correlated with agricultural output growth 91
• Figure 96. Rural poverty has stagnated at around 34 percent… 91
• Figure 97. …and is higher in regions that are more dependent on family agriculture. 91
• Figure 98. Labor market indicators in rural areas typically worsen after droughts and frosts 92
• Figure 99. Relative export prices of beef and rice have fallen Ratio of Paraguay’s median export price to median global export price 92
• Figure 100. The conversion of native forests to pasture and crop has mostly occurred in Western Region of Paraguay over the past two decades 93
• Figure 101. Paraguay spends very little public funds directly on the agriculture sector… 95
• Figure 102. especially relative to the sector’s importance in the economy. 95
• Figure 103. Reliance on external financing has increased 96
• Figure 104. Institutions supporting quality enhancement, innovation and sustainability receive fewer resources 96
• Figure 105. Most of the agriculture budget goes to recurrent expenses… 98
• Figure 106. …mostly to finance wages and current transfers. 98
• Figure 107. Public spending on the sector is relatively balanced between producer and general services support 98
• Figure 108. On average, direct support in Paraguay is lower compared to the rest of the region. 98
• Figure 109. Direct support is targeted to subsidize financing for the purchase of machinery and equipment… 99
• Figure 110. …while general services are spent more on knowledge transfers. 99
• Figure 111. Only 9 percent of Paraguay’s rural population had borrowed from a financial institution in 2021 100
• Figure 112. The efficiency of overall public agriculture spending has been declining… 102
• Figure 113. …although it has improved since 2015 for investment projects. 102
• Table 1. Policy recommendations to incentivize productivity growth and the formalization of firms 65
• Table 2. Paraguay scores particularly poorly on infrastructure and developing key tourism assets 79
• Table 3. How can Paraguay improve the capabilities of its key asset — its people? 81
• Table 4. Pro‑competitive reforms in four services sectors could boost GDP growth 83
• Table 5. Policy recommendations to boost tourism and related services exports from Paraguay 86
• Table 6. MAG’s Strategic Agriculture Frameworks prioritize competitiveness 100
• Table 7. Most public agricultural investment projects focus on family farming, and had low budget execution rates on average over the past decade 101
• Table 8. Most investment programs are relevant for both productivity and resilience, but not very efficiently executed 102
• Table 9. Budget execution rates vary from 64-85 percent across public agriculture agencies 103
• Table 10. Recommendations to increase the competitiveness and resilience of Paraguayan agriculture 106