Ciudad Del Este is a smuggling town. It’s on the eastern edge of Paraguay, about a five-hour drive from Asuncion. It sits on the border with Brazil and Argentina. It’s the “three-frontier town.”

Here’s the thing about Ciudad Del Este. There’s no tax in Paraguay, so the city has become the largest inland trading post in South America. You can sell anything you want at cost from Asia. Electronics are the big market… laptops, cell phones, and digital cameras. Brazil and Argentina have high import and value-added taxes. So bandits come from Brazil and Argentina, buy cheap merchandise in Ciudad Del Este, and smuggle it back.

Huge quantities of cocaine and marijuana flow through this town into Brazil. The same is true of real Paraguayan passports and guns. (I was asking for an AK-47 not because I needed one, but I was curious to see how easy it would be to buy one here.)

You can buy anything in Ciudad Del Este’s huge, open-air market. I spent the afternoon wandering around, browsing fake DVDs, Rolexes, shoes, clothes, computers, perfumes. I could have bought a Sony Vaio laptop for under $1,000… a dozen socks for a dollar… or a 30 milliliter bottle of designer perfume for $23. The market is dirty and loud. It goes on for blocks and blocks. I never found the edge.

Ciudad Del Este has huge populations of Koreans, Taiwanese, Lebanese, Syrians, and Chinese. They run import-export businesses. The Russian, Nigerian, and Chinese mafias all operate here.

It’s also a safe house for Arab terrorists. The State Department says Ciudad Del Este is a significant source of funding for both Hezbollah and Hamas. In 2001, CNN said this town is “a terrorist paradise.”

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I drove back and forth between Brazil and Paraguay five times. I didn’t need a passport… a visa… money… identification… nothing. When I checked in at the airport in Asuncion, they had no computers behind the check-in counter. They filled in my boarding pass by hand.

The scene in Ciudad Del Este is pure raucous capitalism… and I couldn’t wait to see where the taxi driver took us to buy guns. I was hoping for an illegal warehouse or some cinderblock shack in the shantytown, but he went to a fishing and hunting store. We looked at Glocks, Turkish rifles and other guns, but they were more expensive than the same guns in the U.S.

“We have to bring these in across a lot of borders,” explained the woman behind the counter…

Paraguay is a landlocked country with low taxes. So it serves as a “trampoline” for merchandise into other countries. That should make Paraguay a very attractive place for capital. According to one person I met, Ciudad Del Este is the second-largest free-trade area in the world, after only Hong Kong. It generates 60% of Paraguay’s GDP.

But corruption is the problem. Every time large firms try to start a project, the local bureaucrats steal everything… including the machinery. Also, most of the capital leaves Paraguay with the Asian and Lebanese traders… and with the smugglers. It doesn’t stay in Paraguay. So 40% of Paraguayans live in terrible poverty.

This year, Paraguay has a new government… for the first time in 61 years. If the new administration can clean up corruption and resist the temptation to raise taxes, Paraguay could be a fantastic place to invest over the next 10 years.

In my next DailyWealth column, I’ll show you how…

Good investing,

TomSource: You’ve Never Considered the Next Great Emerging Market