Characterization of inequality changes through microeconometric decomposition : Paraguay 1992-2005

The main economic variables have oscillated widely during the 1992 2005 period in Paraguay, in association with some macroeconomic and structural transformations, but also following general growth trends and business cycles in the South American region. This can be separated into three sub-periods; 1992 to 1998, 1999 to 2002 and 2003 to 2005. During the early eighties, the Paraguayan economy benefited from high public investment rates resulting from the construction of the Itaipu and Yacyreta hydro-electric power plants. The country made its own way of stability and growth during a period of hyperinflations and external debt crisis in many South American countries. Nevertheless, its economy fell into a growth crisis (still avoiding debt crisis and hyperinflation) during the second half of the eighties, once the construction period of the hydroelectric power plants came to an end. During the first half of the nineties, Paraguayan economy recovered from recession, now driven by agricultural production and a re-export business boom, based on special arrangements for duty rates for electric and electronic equipment imported to the MERCOSUR (Mercado Comun del Sur - regional free trade agreement established in 1991 by Argentina, Brazil, Paraguay and Uruguay) region via Paraguay. The agricultural success was based on a recovery of international cotton prices, combined with a successful cotton extension program for small farmers within the country and a quick and widespread expansion of mechanized soybean farming. The commercial success with electric and electronic components was based on re-export. Paraguayan import duty rates from outside MERCOSUR were so low, that Brazilian and Argentine enterprises would prefer to buy these products re-exported from Paraguay, rather than importing themselves from outside MERCOSUR, which would have meant higher duty rates. Before this background, Paraguayan GDP per capita grew until 1995 and then remained relatively stable until 1998. The per capita income1 Gini coefficient fell from 55.8 to 54.0. Mean per capita growth was 0.63% and poverty dropped from 38.2% to 32.1%.