In Paraguay, a smuggler's paradise brings a thriving economy. This landlocked country depends on officially-approved corruption

Swiss watches, Japanese stereos, American tennis shoes, Italian scarves - no matter which way you turn here, there's something enticing to buy. High-quality goods line the shelves of dozens of ``mom 'n pop'' stores and are laid out on row after row of sidewalk stands. Youths thread their way through streets crowded with shoppers and offer their wares.

Prices are low and sales tax nonexistent. All the goods are contraband.

This part of the world, where Argentina, Paraguay, and Brazil meet, is best known for the spectacular Igua,cu waterfalls and the Itaipu hydroelectric dam, the world's largest. But thanks to Ciudad Presidente Stroessner, it's also a smuggler's paradise.

The city - named after the strong man who has ruled Paraguay since 1954, Gen. Alfredo Stroessner - is the most visible part of an economy that depends to an astonishing degree on smuggling and officially-sanctioned corruption.

Economists say that smuggling accounts for half the country's economic output.

``Many diplomats like to say that Paraguay is not a country but an international society for illicit purposes,'' a Latin American diplomat says.

Tom Whigham, a University of Georgia history professor, says that smuggling has been a logical development for a small landlocked country dwarfed by economic powerhouses - Brazil and Argentina.

But he adds that General Stroessner has allowed smuggling and corruption to flourish as a way of buying off potentially restive military or civilian challengers. ``Stroessner always says that smuggling is the price of peace,'' Professor Whigham says.

Much of the smuggling passes through Ciudad Presidente Stroessner, which has expanded rapidly to about 80,000 current residents.

Most of the smuggled goods either come from or go to Brazil because of its import quotas, high tariffs, and huge gap between the government-established and free-market exchange rates.

Brazil's government estimates that $1 billion of electronic equipment alone was smuggled from Paraguay in 1987. It also estimates that Brazilian farmers smuggled 450,000 tons of soybeans into Paraguay in 1987 that were then reexported. The soybeans, which show up as Paraguayan exports, brought $735 million.

Similarly, Brazilian coffee producers exported an estimated half million 132-pound bags through Paraguay in 1986. The value: $450 million.

``By illegally exporting the soybeans and coffee through Paraguay, Brazilian farmers avoid paying taxes and get paid in dollars at the black market rate, which is currently worth 50 percent more than the Brazilian government rate,'' the Latin American diplomat says. ``There is no doubt that Brazilian government policies encourage the smuggling.''

The diplomat says that the soybeans are trucked from Brazil across a dry, deserted border to Concepci'on, a city north of Asunci'on.

``There's a whole infrastructure in Concepci'on for soybeans, even though there's no soybean production in the Concepci'on area,'' the diplomat says. ``The soybeans are obviously coming from Brazil. We checked and discovered that the owners of the soybean silos and related companies are owned by Paraguayan generals. Obviously, very important Paraguayan officials are involved in this.''

Martin Chiola, a top member of the ruling Colorado Party says that ``the party and the government have never supported institutionalized corruption. We're trying to stamp them out. Sure, it exists. There are some generals involved in the contraband trade, but I don't have any proof, and I don't justify this kind of activity.''

Aldo Zuccolillo, a wealthy businessman who was once a close friend of Stroessner but is now one of the regime's leading critics, says that the aging general parcels out smuggling franchises to senior military and Colorado Party officials.

``One general gets the profits from smuggling flour from Argentina, another is in charge of smuggling electronic equipment to Brazil, and so on,'' Mr. Zuccolillo says.

Adds a foreign diplomat: ``As long as Stroessner's people are getting their piece of the pie, they won't conspire against him. It's a way of buying people off. It must be a good strategy since it has worked for 34 years.''

But this strategy is now drawing protests from foreign governments as smugglers branch into criminal activities.

The Brazilian government has begun pressing Stroessner to clamp down on government officials who sanction the brisk business of buying cars stolen in Brazil.

Julio C'esar Martinessi, a lawyer working for 49 Brazilian insurance companies, says that 90,000 of the 264,000 vehicles in Paraguay were stolen in Brazil and driven across the border.

``In small towns in Paraguay, you can get ownership papers and license plates just by paying a small fee, no questions asked,'' he says.

The Brazilian government says it believes that car thieves have hooked up with cocaine and marijuana traffickers, and brought the drugs into Brazil when they returned home.

Cocaine trafficking through Paraguay has begun to worry the United States, which last December reopened an office of the Drug Enforcement Agency here that had been closed in 1981.

US officials say they believe that top officials in the military protect the cocaine traffickers in return for payoffs.