The day symbolized Paraguay’s conundrum: As Pena seeks to showcase the country’s potential on the global stage, its democratic institutions remain mired in local networks of patronage and corruption.

At the center of those networks is the Colorado Party, a political force that has lost the presidency just once in the 35 years since Paraguay emerged from its 35-year dictatorship under Alfredo Stroessner. Pena, however, is not a traditional Colorado Party politician. Rather, he is a young technocrat marketing Paraguay as a burgeoning destination for foreign investment, with the aim of decreasing its dependence on agriculture, primarily soy and beef exports. His ambition is backed by the country’s macroeconomic stability, its location nestled between the continent’s largest economies and its wealth of fertile land, powerful rivers and clean energy.

Despite its promise, however, the Paraguayan economy’s path to investment grade and sustainable growth is undermined by weak rule of law. Entrenched interests and illicit enterprises continue to permeate its political institutions, threatening to set back Pena’s agenda, Paraguay’s progress and wider regional security.

Vulnerable Institutions

When Pena easily won Paraguay’s April 2023 elections, the result surprised some observers, as it occurred just months after the U.S. had sanctioned his principal political patron, former President Horacio Cartes, for acts of significant corruption before, during and after his time in office.

Although Cartes left the presidency in 2018, he held onto political power by steering his political movement, Honor Colorado, to become the dominant faction of the big-tent Colorado Party. Ahead of the 2023 elections, Cartes hand-picked Pena, his former finance minister, to run for the presidency, while Cartes himself ran for leadership of the Colorado Party. Cartes’ election as party head, despite Washington’s corruption designations, ensured that Pena would struggle to establish his own political authority as president.

One of Paraguay’s wealthiest men, Cartes built his fortune supplying the Brazilian market with cigarettes, largely through contraband trade over the Paraguay-Brazil border. That wealth propelled him to the Paraguayan presidency in 2013: The U.S. Treasury Department’s Office of Foreign Assets Control, OFAC, alleges that Cartes, who had never voted in a presidential contest before his own election, paid party officials up to $10,000 each in exchange for their support, the first of his many corrupt practices to follow.

While Cartes was instrumental in elevating Pena to the presidency, he also embodies the special interests weighing down Pena’s ambitions to attract investment to Paraguay. In the wake of the vote to impeach Gonzalez from the Senate, a wide range of Paraguayan civil society and industry associations pushed back strongly, amid fears over an unchecked Cartes-controlled congressional majority. Particularly vulnerable is the judiciary, where corruption probes into political actors have repeatedly stalled, as well as the constitutional prohibition on presidential reelection, which Cartes unsuccessfully tried to amend prior to leaving office.

When asked about the Senate’s impeachment of Gonzalez, Pena deflected, saying that the decision was made by “another branch of the state,” while adding, “Clearly there are voices in favor and voices against.” Until Paraguay can guarantee democratic process and the rule of law, however, Pena’s pro-growth platform and pitch to foreign investors will struggle to gain ground. And as long as Pena remains without political capital of his own, he cannot credibly seek to strengthen institutions.

Continental Consequences

The consequences of Paraguay’s degraded democratic institutions extend beyond its landlocked borders. The country is no longer “an island surrounded by land,” as Paraguayan novelist Augusto Roa Bastos once described it. Instead, Paraguay is deepening its integration with the region, bringing both opportunity and risk to the continental Southern Cone.

At the tri-border with Brazil and Argentina, amid the markets and shopping malls of Paraguay’s Ciudad del Este, a new 830-yard cable bridge soars over the Parana River, half of which is illuminated by night with the blue and green of Brazil’s flag, the other half with Paraguay’s red and blue. To the north, another bridge will soon connect Brazil’s heavyweight agricultural states to a new highway across the Paraguayan Chaco that will eventually reach the Pacific coast of Chile.

Backed by multilateral lenders, the bridges are just one aspect of the new infrastructure stitching Paraguay to its neighbors. Between 2018 and 2023, Paraguay’s infrastructure financing from the CAF regional development bank multiplied five-fold to $2.4 billion. The Inter-American Development Bank recently approved a $100 million loan to strengthen Paraguayan supply chain logistics, and Paraguay’s Public Works Ministry anticipates hard infrastructure investment will represent 4 percent of GDP over the next five years, surpassing much of the region.

Behind this investment, both Pena and his predecessor, former President Mario Abdo Benitez, have promoted Paraguay as a continental hub for logistics. Using Mercosur summits and United Nations assemblies to call for greater economic integration, Paraguayan policymakers are seeking to diversify the country’s $40 billion, commodity-based economy.

Yet as Paraguay invests in connectivity, its illicit economies remain unchecked. Given its weak state institutions, the risks are acute, particularly as transnational criminal groups inch deeper into Paraguayan territory. The Primeiro Comando da Capital, or PCC, drug cartel—Latin America’s largest—already controls swaths of the Brazil-Paraguay border. Traffickers also transport Andean cocaine via unmonitored airstrips dotting the Chaco scrublands as well as the ports along the Paraguay River that service the world’s third-largest river barge fleet.

In December, in one sign of broader regional risk, authorities uncovered a vast arms-trafficking scheme in which Paraguayan suppliers imported over 45,000 weapons from Eastern Europe during the past decade, reselling the majority to Brazilian cartels. In January, Argentine Security Minister Patricia Bullrich opened a new intelligence center in the province of Misiones targeting traffickers and terrorists based at the tri-border with Paraguay. Further abroad, Colombian investigators are still probing the assassination of a top Paraguayan prosecutor near Cartagena in May 2022.

Paraguay’s Predicament

Paraguayan institutions face an uphill battle in the face of the country’s entrenched networks of political influence. The slope will become steeper if foreign criminal organizations, like the PCC, deepen their inroads in Paraguay, which will in turn be facilitated by the country’s vulnerable institutions in a vicious cycle.

And although Paraguay is pursuing regional integration to diversify its export basket and move up value chains, that integration is increasingly making the country a cost-efficient route for contraband, drugs and arms moving to larger markets. Ecuador serves as a cautionary tale of how port infrastructure and logistical advantages can expose a weak state apparatus to organized criminal groups from neighboring states. Similarly, unless it insulates its institutions from illicit actors, Paraguay will increasingly struggle to confront transnational organized crime.

This predicament should motivate policymakers across the hemisphere—including in Brasilia, Buenos Aires and Washington—to approach Paraguay not as a marginal actor, but as a central economy in need of strengthened state institutions. With a bolstered security apparatus and a crackdown on corruption, Paraguay could become Latin America’s next success story. For now, however, its future is as precarious as it is promising, and if the balance tips in favor of illicit actors, the consequences are certain to stretch across borders.

***Gregory Ross is a recipient of Fulbright and Boren research fellowships to Paraguay. He holds a master’s degree from the Johns Hopkins University School of Advanced International Studies (SAIS). The views expressed are the author’s own.