By Mid-1986, The Contadora Group's search for a negotiated peace in Central America had reached a seemingly insurmountable impasse. Negotiations were deadlocked over the issues of arms limitations, democratization, and US support for the Nicaraguan counter-revolutionaries (contrarevolucionarios or contras). The United States and its closest Central American allies - Costa Rica, Honduras and El Salvador - demanded that Nicaragua reduce the size of its armed forces and install a democratic political system before they would end support for the contras Nicaragua's Sandinistas, in turn, refused to disarm until the United States and its Central American neighbors halted their support for the contras, they also rejected all proposals for direct negotiations with the contras.

When James Baker, US Secretary of the Treasury, took the rostrum at the IMF-World Bank annual meeting in Seoul, in October 1985, and told 9,000 delegates from 149 countries that the debt crisis could only be solved by an even closer cooperation of all parties concerned, more money from commercial banks, an enhanced role for the World Bank, and more growth in the developing world, everybody sighed with relief.

The Baker declaration was significant as it had taken three years of muddling through crises for the Reagan Administration to recognize the debt crisis for what it is: a long term economic and political barrier to development that is slowly strangling world economic growth.

Dependency Theory has become a major paradigm for understanding Latin American politics. Based on the premises that the study of politics must begin with analysis of underlying socio-economic structures, and that these structures cannot be understood without considering a country's role in the world economy, dependency theory provides a cogent analytical framework that has been upheld in numerous empirical studies. The model of politics presented by dependency theorists is a bleak one: because economic dependence polarizes society between a small class of wealthy elites and a large mass of impoverished workers and peasants, politics in dependent societies is reduced, essentially, to class struggle between these highly mismatched forces. Except under unusual circumstances, authoritarianism is the inevitable result.

The Policy of “Responsible Pragmatism,” initiated in 1974 by President Ernesto Geisel, ended Brazil's automatic alignment with the United States and sought out non-ideological ties with Third World and socialist countries instead. This change in policy led Brazil to recognize both the People's Republic of China (in 1974) and the Republic of Angola (in 1975) as well as to improve links with other socialist nations. Resumption of relations with Cuba, however, was rejected by the military regime on grounds that the socialist island did not offer either the energy resources or substantial markets needed by Brazil, two considerations which had gone far to ease the concern of military hardliners over ideological issues.

The Continuing Latin American Debt crisis and the huge United States trade deficit inevitably mean that trade politics are on the rise again in the hemisphere. In 1986, on the eve of the proposed new GATT (General Agreement on Trade and Tariffs) round, President Reagan announced a duty on Canadian lumber, which, coupled with a Canadian duty against US corn less than a month later, derailed the broad bilateral free trade negotiations begun in 1985. The US and Brazil continued to argue the merits of a Brazilian market reserve law in microcomputers and software; and Mexico concluded its first bilateral trade pact with the US in decades during 1985, desperately embracing trade liberalization with the same zeal that made it the US model for “solving the debt crisis” in 1984.

Since the 1950s, the development strategy of Paraguay has relied on export-led growth. To accomplish this the government placed great emphasis on price and exchange rate stability, first achieved in the late 1950s. Counting on limited resources, the country attempted to attract foreign investment while its own investment programs were directed primarily toward increasing domestic infrastructure, with road construction as a top priority. The latter opened up the eastern frontier region and provided an alternative outlet to the sea via the Brazilian highway system. Historically, Paraguay has counted on the Paraná River and on Argentinian ports for its access to the Atlantic.