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Part 1: Dr. Francia
Totally isolated inside South America for centuries, Paraguay was in its early history the stage for an experiment in autarchic development directed by the Order of the Jesuits (the subject of the movie "The Mission"). However, the Jesuits were expelled from Spain and all of its colonies by a directive of King Carlos the Third in 1767.
Following its independence in 1811, Paraguay was isolated economically by the government of Dr. Francia (1814-1840), who was elected as "Supreme Dictator" by the people's congresses of 1814 and 1816. ("Francia" means literally "France" in Spanish. The name apparently reflects the Brazilian and French descent of the dictator's father.)
With the support of small peasants and town artisans, Dr. Francia expelled from the country the owners of private large landed properties. These were the usual followers of free trade ideology, whose economic interests, as we'll see in greater detail later, consisted in exporting plantation products and importing luxuries from the cities. Paraguayan land owners were poorer than their counterparts near coastal regions, particularly in Buenos Aires and Brazil, since all the authorities along the rivers leading to the ocean took advantage of their location to collect the heaviest possible load of transportation taxes. The last conspiracy of the Paraguayan land owners to regain their position was put down in 1821 (by means of dramatic and exemplary executions of all those involved), and with it the "free trade" mechanism for organizing the economy.
In its place, an internal market was created by small peasants and artisans, and to this day 19th-century Paraguay remains the only country in Latin America and probably the whole of today's Third World to have developed one on its own. All the land was declared the property of the state, and everybody had an obligation to work. Peasants worked the farms and pastures, and artisans pursued their crafts. Formally, the state had a budget, but the exchange of goods was largely product-for-product barter (though old Spanish gold and silver coins were accepted as well), with the producers full owners of the fruits of their labor.
With this system in place, the country achieved self-sufficiency and even an over-production of food supply in the 1830s. At the same time, crime was suppressed by the most severe punishments: the hands of thieves were literally cut off in the act. The absence of both unemployment and crime made Paraguay probably the only country in the entire world at the time with such a complete set of positive characteristics.
To prevent any temptations that might disturb the country's peace, Dr. Francia throughout his reign detained all newspapers arriving from abroad in his office. He also prevented any information from leaking out of the country, though he did allow occasional travelers to enter and leave under his personal license. Unfortunately, the fear that such travelers might twist their information about the country abroad proved well founded, as is shown in books written in Europe by the Swiss writers Rengger and Longchamp and the Scottish Robertson brothers.
The exercise of such ideological control by the Francia regime was made possible in large part due to a virtual total paralysis of trade. All exports and imports were carried out under the authority of Dr. Francia's personal licenses through a border post with Brazil that was not opened during the entire period of the Francia government. The imports were very few, and had to do with the State's strategic needs, most importantly, defense. This dictatorship, however, primeval as it may seem today, had the total support of the Paraguayan population, including the country's still significant aboriginal population, the Guarani Indians, the previous generation of which had been educated by the Jesuits.
Besides his role as a harsh and unorthodox statesman, Dr. Francia also proved to be an unusually honest leader. He left to the state's treasury about 30,000 pesos of his salary, which had been uncollected at the time of his death in 1840. According to scarce testimony, his funeral was attended by about 40,000 weeping devotees. These were working people who had benefited from his regime and improved their situation. His ashes, however, were "mysteriously" extracted from the cathedral where they had been deposited in 1847, and dumped into the river. An explanation of this "mystery," however, may be deduced from what follows next.
Part 2: The Lopez Family and the Triple Alliance War
Dr. Francia left the State's governing power to the military. In 1844 Carlos Antonio Lopez, until then an unknown lawyer, was appointed as the new head of state, a post for which he was ratified several times by the National Assembly, which was constituted without parties. A few changes, however, had to be introduced. The only symbol identifying the country had been the flag. Now, a state emblem was adopted, as well as a constitution and a national currency. Slavery was abolished. It had formally existed under Dr. Francia's government, but was of scant economic importance and never marked by the characteristics of brutality customary in the neighboring Empire of Brazil and the Caribbean.
All of the changes introduced were based on an assumed need to make Paraguay a part of the world--an entity Dr. Francia didn't give a damn about, as long as it didn't touch his country. By the late 1830s, an over-production of food apparently was left to rot in the fields, instead of being exported. The surplus had to be directed somewhere, but trade, though an obvious option, turned out, as we'll see, to be a fatal choice. It was put on one track only: the country began to export, but the imports remained strictly controlled. Thus, the accumulation went on.
The country then began hiring foreign technicians to develop different branches of the economy. After that, it sent its own youth to study abroad, including, among the first, Francisco Solano Lopez, the President's eldest son. All of these efforts led to the industrialization of Paraguay in the 1850s. Latin America's first foundry was established in the country in 1854, as were national railways and ship-building docks. (Railways and ship-building docks also existed in Cuba, but these were properties of the Spanish; the island itself was still a colony.) Paraguay had previously purchased ships manufactured abroad, but, with its own ship-building docks, it could now put afloat both wooden ships and, later, ships built of iron.
The most important point today about Paraguay's industrialization, however, is that it was accomplished entirely with the country's own money: it had no inflation, no debt, and no deficit, but, instead, a steady surplus and a currency in a continuous state of appreciation. It had achieved its economic growth without ever taking a loan from abroad, while surrounding Latin American countries were suffering from what was already considered at the time a "normal" combination of debt and inflation, on the one hand, and, on the other, increased crime rates due to a chronically ailing economy. (An exchange crisis provoked by external debt caused the first Emperor of Brazil to resign from the throne in 1830, following which regional wars threatened to tear the country apart.) Paraguay's exports consisted mostly of natural resources and agricultural products: notably, wood, "mate" [maatea], tea, and tobacco. It is noteworthy, however, that all of these items-- agricultural products for consumption, and wood for furniture and construction--were used to satisfy national needs first.