Para-legal: How a Complicated History Led to Paraguay Becoming a Hub for Illicit Trade

With a population of only 6.9 million people and one of the smallest economies in South America, Paraguay is often overlooked in discussions of Latin American affairs. But the country’s location in the heart of South America has made it a key center of regional trade. In recent decades, much of this trade has taken place in the border city of Ciudad del Este. Home to the Western Hemisphere’s largest illicit market and located on Paraguay’s border with Brazil and Argentina, Ciudad del Este is well known throughout South America as a smuggler’s haven. Paraguayan authorities make practically no attempt to enforce customs regulations, so electronics, counterfeit goods, and pirated software move freely across the Friendship Bridge that connects the city to Foz do Iguacu in Brazil. Thousands of Brazilians make the trip to Paraguay each day to smuggle a wide range of goods back home—most notably, illicit drugs.

Today, Paraguay is the world’s fourth largest producer of marijuana. However, its citizens appear to have little demand for the drug. Less than one percent of Paraguayans claim to use it. Most of the country’s supply is instead distributed to Brazilian gangs in and around Ciudad del Este, who then smuggle it across the border to sell to suppliers throughout Brazil. A small percentage of Paraguay’s marijuana is also shipped to nearby Argentina, Bolivia, Chile, and Uruguay.

The cocaine trade also runs rampant in Paraguay. Though the drug is not produced domestically, cocaine made in Andean nations frequently finds its way over the country’s northwestern border with Bolivia. Some is also flown directly from Colombia to the northern city of Pedro Juan Caballero and then trafficked to the North. It is estimated that some 10 to 40 metric tons of the drug are shipped from Paraguay to the US and Europe every year. Most smugglers use what is known as the “rip-off method,” hiding drugs within legal shipments to make it difficult for officials to catch them.

Despite the country’s central role in the South American drug trade, the Paraguayan government has historically done little to combat the trafficking. Whereas violent clashes between drug cartels and government forces in Mexico and Colombia regularly make international headlines, the Paraguayan government has turned a blind eye toward many of the criminal activities that occur within its borders. However, this approach is not a simple acquiescence to smugglers in the name of peace, but rather is due to complex historical factors that date back as far as the Paraguayan War.

Though today Paraguay has little global influence, throughout much of the 19th century the country seemed to be emerging as one of the most powerful nations in South America. Its self-sufficiency and industrializing economy made the small nation’s future appear bright. But in 1864, news of Brazilian aggression against Paraguayan allies in Uruguay reached Paraguayan President Francisco Solano Lopez. Solano Lopez, who had dreams of becoming the Napoleon of South America, quickly declared war. With the strongest army in South America, Solano Lopez had every reason to believe he would triumph. But when Paraguay’s army marched through neutral Argentina to invade Uruguay, Argentina joined the war on the side of Brazil. Soon after, Uruguay fell to Brazil, and Solano Lopez’s soldiers rapidly found themselves hopelessly outnumbered, but Solano Lopez refused to surrender. Near the war’s end, boys as young as six donned fake beards and marched into battle, while those without weapons were told to make themselves useful by throwing dirt into enemies’ eyes.

Upon surrendering in 1870, Paraguay was forced to cede 55,000 square miles of land, comprising almost half of its territory, to Brazil and Argentina. Its pre-war population of 525,000 people was reduced to around 221,000, only 28,000 of whom were men. This demographic imbalance—the country had lost ninety percent of its male population—stunted Paraguay’s development. Although the sex ratio today is generally stable, the country’s population still sits below 7 million. Furthermore, the near annihilation of Paraguay’s working-age population led to the rapid decline of industry. What could have been one of the wealthiest nations in South America was instead crippled by extreme poverty for the better part of a century.

Unsurprisingly, the difficulties associated with governing such a war-ravaged nation led to decades of political turmoil. In 1936, disgruntled veterans of the Chaco War with Bolivia led the February Revolution against the ruling Liberal Party, marking the beginning of an era of military dictatorships that lasted until 1989. The most famous of these dictators, Alfredo Stroessner, came to power in 1954. His push for development in the eastern region of the country to strengthen ties with Brazil resulted in the founding of the small town of Puerto Flor de Lis in 1956. The town would later be known as Puerto Presidente Stroessner, and eventually as Ciudad del Este.

Talk of how to exploit the town’s nearby waters began soon thereafter, and work on the Itaipu Dam, to be shared between Paraguay and Brazil, began in 1974. As workers from both countries arrived to work on what was at the time the largest hydroelectric dam in the world, Ciudad del Este and Foz do Iguacu rapidly urbanized. Now, with a population base that supports trade on a large scale, the city is a popular point for “commercial triangulation.” After goods are shipped into Paraguay, which to this day charges low import taxes, they are smuggled across the border to Brazil and Argentina. As Ciudad del Este established its reputation as a center for smuggling, illicit traders of all kinds trickled in.

For decades, the Paraguayan government turned a blind eye to this prosperous black market. With money finally pouring into a country that spent most of a century recovering from an economically crippling war, a thriving illegal market represented a much-needed source of income. With around two-thirds of Ciudad del Este’s 300,000 residents believed to be involved in the illicit economy, a government crackdown would have meant political suicide. But the political calculus changed in June of 2016, when Paraguayan drug lord Jorge Rafaat Toumani was killed by First Capital Command, a prominent Brazilian gang. Suddenly, a power vacuum emerged in a trade that had been controlled by the same man for decades. Though First Capital Command quickly emerged as the dominant gang in Ciudad del Este, other groups from Brazil, Paraguay, and Bolivia all fought for control. In response to the increasing violence in the region, Paraguay’s National Anti-Drug Secretariat (SENAD) expanded its operations in Alto Parana, the region in which Ciudad del Este is located. The government seized more than twice as much marijuana in the first eight months of 2017 as it did in all of 2016.

But despite the government’s increased effort, Ciudad del Este’s gang violence made international headlines in April when First Capital Command broke into the headquarters of private security company Prosegur and stole $11 million in cash. Media outlets from across the globe clamored over this “heist of the century,” in which dozens of gang members set off explosives, lit cars on fire, and escaped back to Brazil by speedboat. With just a $9 million budget and 300 staff members, SENAD was forced to look across the Parana River for reinforcements from Brazil. In August, an agreement was reached with the Federal Police of Brazil to combat drug trafficking near the border area. As part of the deal, each country committed to increase mobilization against border crime each year, and Brazil agreed to lend Paraguay the technologies it needs to do so effectively. Both Paraguay and Brazil are optimistic that bilateral cooperation will drastically reduce Ciudad del Este’s crime rate, especially as the Paraguayan government plans to increase SENAD’s enforcement capacity over the next few years.

Fortunately for the authorities, a nongovernmental factor is also helping to reduce illicit trade: the decline of commercial triangulation. On the Argentinian side of the border, the department store Duty Free Puerto Iguazu has been attracting customers with low prices and well-known brands. In recent years, Brazilians have increasingly been going to the Argentinian town of Puerto Iguazu rather than to Ciudad del Este for cheap goods. Though not directly affecting the drug trade, a reduction in the movement of goods across the Friendship Bridge makes it more difficult for drugs to be camouflaged and reduces the overall value of Ciudad del Este as an illicit trade center.

Back in the 1990s, illegal trade in Ciudad del Este dwarfed Paraguay’s total GDP. Today, the illicit economy is worth just 59 percent of Paraguay’s legitimate economy. Though it’s difficult to precisely measure the size of Ciudad del Este’s illicit market, its potential decline may bring about additional problems for the nation at large. With a majority of the population of Ciudad del Este somehow involved in the illicit market, restructuring the local economy will be a difficult challenge. Fortunately, Ciudad del Este’s proximity to Brazil and Argentina gives it significant advantages over other Paraguayan cities. The large Brazilian population in the city combined with Paraguay’s tax incentives for foreign businesses could bring opportunities for skilled and unskilled workers alike to the region. Already, since 2014, the number of factories in Paraguay has increased threefold. Furthermore, the city’s proximity to the Itaipu Dam—which provides Paraguay with 76 percent of its energy—creates unique job opportunities and ensures that the city will remain relevant even without an illicit economy.

Though it remains to be seen whether devoting more anti-smuggling resources and cooperating with Brazil will be effective in curbing Ciudad del Este’s illicit economy, it is crucial for the city to closely monitor criminal activities and provide economic resources to compensate for the loss of illicit income. With policies attentive to the history of the city, Ciudad del Este can safely transition away from a primarily illicit economy. With its government engaging in unprecedented intervention in one of the largest illicit economies in the Western Hemisphere, Paraguay has the opportunity to show that even the most entrenched criminal histories can be rewritten.