Bridging the Gaps: Paraguay’s Path to Sustainable Poverty Reduction and Equity

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A comprehensive research by the World Bank delves into the country's journey in reducing poverty over the past two decades, highlighting both impressive gains and persistent challenges. Paraguay managed to halve its poverty rate from 51.4% in 2003 to 24.7% in 2022, with extreme poverty reduced to 5.6%. This progress largely resulted from a period of strong economic growth from 2003 to 2013, supported by redistribution policies that helped narrow income inequality. However, the pace of poverty reduction has slowed since 2014, coinciding with reduced labor income growth and a series of economic setbacks, including high inflation, the COVID-19 pandemic, and prolonged droughts impacting the agricultural sector. Although the recent economic recovery brought a slight decrease in poverty rates in 2023, poverty remains concentrated in rural areas and among vulnerable groups such as young people, women, and Indigenous populations, underscoring structural barriers to sustained progress.

Geographic and Demographic Disparities Persist One of the primary findings highlights significant geographic and demographic disparities in poverty levels across the country. Rural poverty remains high, and Indigenous communities face disproportionately high poverty rates, which limits their access to quality education, jobs, and social services. Many of those living in poverty are young people and informal workers, with women of productive age and Indigenous groups particularly vulnerable. The report shows that women, especially in the 20–29 age range, are more likely to be affected by poverty, often due to limited economic opportunities, family responsibilities, and cultural norms that prioritize domestic roles over economic engagement. Paraguay’s education system, which is crucial for building human capital, is marked by deep-rooted disparities. Children in rural and Indigenous communities generally face lower access to education, and students who speak Guaraní or Indigenous languages tend to perform lower on standardized tests due to language barriers. The World Bank's assessment emphasizes that these education gaps emerge early in life and widen over time, affecting youth employment prospects and perpetuating cycles of poverty. A large share of Paraguay's young population falls into the NEET (Not in Employment, Education, or Training) category, with women particularly overrepresented in this group. This situation underscores the need for targeted policies that address the educational and employment needs of Paraguay's youth, especially as the country moves toward an aging demographic profile by 2050.

Informal Work Dominates the Labor Market The high prevalence of informal work remains a defining characteristic of Paraguay’s labor market, posing substantial challenges to income stability and poverty reduction. As of 2022, around 63% of workers were employed informally, with even higher rates in rural areas. Informal employment, often lacking social protections and benefits, exposes workers to greater financial instability. Job quality remains a critical issue, as Paraguay ranks near the bottom in the region's Job Quality Index, driven by the limited availability of health and pension benefits and low job security. While economic growth has historically driven poverty reduction, it has not translated into the creation of high-quality jobs across sectors. Public sector employment, which offers more stability, has seen slower growth due to fiscal constraints, while the private sector, particularly agriculture, continues to rely heavily on informal labor. This reliance on low-productivity, informal jobs reflects a deeper issue with Paraguay's economic structure, which remains dependent on small-scale agriculture and limited diversification into high-value sectors. The agricultural sector, dominated by export-oriented commodity production, contributes to national productivity but generates few jobs. Small-scale farmers, particularly in rural areas, continue to face poverty and vulnerability, often affected by climate shocks that disrupt their livelihoods.

Climate Change Exacerbates Vulnerability Climate change poses a serious threat to poverty reduction efforts, as climate shocks like droughts and floods disproportionately impact Paraguay’s lower-income populations who rely on agriculture. According to the report, around 25% of Paraguay's population is vulnerable to flooding, and 40% faces risks from extreme heat. These shocks compound existing vulnerabilities and highlight the urgency of strengthening Paraguay’s resilience through adaptive policies, such as disaster preparedness, climate risk financing, and infrastructure investment tailored to the needs of vulnerable communities. Without proactive measures, climate-related risks could increase poverty rates, particularly in rural areas where households depend on subsistence farming.

Limited Fiscal System Reduces Impact The fiscal system in Paraguay also limits the effectiveness of poverty reduction efforts. Paraguay’s tax revenue as a share of GDP is among the lowest in Latin America, and its fiscal policies have limited redistributive impact. Most taxes are indirect, which tends to be regressive, and though direct transfers have been somewhat effective in reducing poverty, the reach of social programs remains limited. Inefficiencies in public spending and leakages to higher-income groups further reduce the resources available for poverty alleviation. A more progressive fiscal policy could strengthen the redistributive capacity of the tax system and improve social investments in health, education, and infrastructure critical for poverty reduction.

A Multifaceted Approach for Sustainable Progress The report concludes with a call for a multifaceted approach to addressing Paraguay’s structural barriers to poverty reduction. Recommendations include enhancing education quality and access, particularly for Indigenous and rural communities, creating more high-quality jobs through economic diversification, making the tax system more progressive, and building resilience to climate shocks. Targeted social protection for informal workers and policies that address gender and age-based vulnerabilities could also help reduce poverty. Paraguay has demonstrated resilience and progress, but addressing these complex structural issues will require coordinated and sustained efforts across government, communities, and international partners to promote inclusive growth and a more equitable future.

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