A small nation looks for its role in the global script

The morning delivery trucks roar through the rutted streets in this jungle town, kicking up clouds of dust. In an alleyway, men in straw hats assemble pirated Ricky Martin CDs and chat in Guarani, the local Indian dialect, as a salesman stacks his street stand with bottles of French perfume.

The flow of commerce - both legitimate and illegal - continues in Ciudad del Este, a major contraband center on the river-threaded triple border with Brazil and Argentina.

But some here wonder how Paraguayans and others in small, struggling Latin American nations will make a living in the future. Paraguay highlights the challenges these tiny, already shadowy economies will face in adjusting to a proposed hemisphere-wide free-trade regime, while trying to resist the lures of drug trafficking and piracy.

In Paraguay, a landlocked agrarian country of 5 million, the so-called "re-export trade" - selling virtually duty-free goods eventually smuggled to richer neighbors - has been a vital economic activity for decades. But as neighbor countries have begun opening their economies, the re-export trade has dwindled.

"Right now I'm only making enough to cover my costs and feed myself," says Juan Jose Vargas, who owns three stalls selling Japanese electronics and other items. "Everybody here lives from commerce. There's too much competition."

Meanwhile, a rising drug trade has contributed to crime in the city of 150,000. In February, after a wave of holdups and killings, President Luis Gonzalez Macchi ordered the army to patrol streets. The soldiers haven't returned to their barracks.

Local leaders want to reinvent the city as a resort, and they envision an industrial park of Mexican-style maquiladoras, or assembly plants.

But with a collapsed economy, a wobbly democracy and ingrained corruption, foreign observers say Paraguay already has become a destabilizing pocket of lawlessness in the geographic heart of South America. Says Timothy Towell, former U.S. ambassador to Paraguay and now a Washington foreign policy consultant: "Now the little players have gotten into phony merchandise and the big guys into drug trafficking."

Foreign minister Jose Moreno Ruffinelli says Paraguay is seeking the support of Central American nations to press for provisions that would protect Latin America's small economies in any free-trade accords, including the sweeping Free Trade Area of the Americas, which moved ahead Sunday with a draft accord, to be finalized by 2005. The heads of state included a provision for excluding nations that turn their backs on democracy.

Paraguay's traditional smuggling-based economy began to decline as Brazil and Argentina started liberalizing their economies in the 1980s.

Then in 1995, Argentina, Paraguay, Uruguay, and Brazil signed the Mercosur agreement, creating the hemisphere's second-largest free-trade bloc.

Paraguay's strategy of serving as a regional duty-free center became largely obsolete, since many of the goods sold here became available regionally for comparable prices.

In 1995, Ciudad del Este's retail trade still pumped an estimated $4.2 billion into the national economy, according to Paraguay's Central Bank. The Upper Parana River Importers' Association estimated that number probably didn't top $1.5 billion last year.

Largely because of the re-export trade's collapse, Paraguay's economy has gone into a tailspin and has not grown significantly in the past three years.

In earlier boom times, Ciudad del Este was a bargain-hunter's El Dorado, with its

multi-story shopping malls rising above jungle canopies by the churning Parana River. Merchants from Taiwan and Lebanon founded flourishing import firms. With their wealth, they built mosques, Buddhist temples and malls with names like Shopping Lai Lai.

To lure shoppers back, authorities say they will halt crime and transform the city into a little Las Vegas, with casinos and a lively night life.

The city's boosters note that the Iguazu Falls - only a few kilometers away between Argentina and Brazil - attract more than a million visitors a year. Ciudad del Este will reinvent itself as a tourist town, says Charif Hammoud, president of the Upper Parana River Importers' Association.

The government plans maquiladoras here to supply neighbors with low-cost industrial goods. Labor is inexpensive, and energy, supplied by hydroelectric dams, is the cheapest in the hemisphere.

But nothing concrete has been done.

Meanwhile, the drug trade is making inroads. In its annual drug war report released last month, the U.S. State Department estimated that Paraguay moves more than 10 metric tons a year of mostly Bolivian cocaine, much of which is shipped via neighbors to Europe and the US. The drug trade has contributed to crime, though many in Ciudad del Este say the deployment of troops is a heavy-handed tactic recalling the decades of military rule.

As they have seen profits fall, vendors have turned to Asian knock-offs, fake brand-name merchandise and pirated entertainment.

"You can't put a stop to the fakes, because they are produced on such a massive scale," says Milner Amarilla, a National Police spokesman.

Brazilian smugglers on a shoe-string budget buy most of these goods.They travel here on buses, stock up on pirated CDs, fake Barbie dolls, and "Aike" tennis shoes, and hawk the items for a narrow profit in Brazil.

Though Brazilian police periodically conduct military-style operations to stem the flow of counterfeits, they cannot stop these thousands of "sack men" who cross the bridge connecting Ciudad del Este to the Brazilian city of Foz de Iguacu. If their goods exceed the $150 value that can be taken across, customs guards can be bribed or porters hired.

"Everybody knows that this is the best place to bring contraband into Brazil," says Edenilson de Souza, who had shopped in Ciudad del Este to resell in Rio de Janeiro. "There's just not very much control."

(c) Copyright 2001. The Christian Science Monitor