Asunción: The capital of Paraguay is the world's least expensive city

Its roaring trade in counterfeit goods conceals a dark yet fascinating history

Getting a true bargain in the cheapest city on Earth is not as easy as you might think. It all started so well. After only 20 minutes in Asunción, the capital of Paraguay, I'd already found a fantastic café in the heart of the centre which served an empanada, bursting with ham and cheese and the size of a travel pillow, for the equivalent of 55p.

But later that evening, as I chatted to hordes of partying Paraguayans in a nightspot called the Bambuddha, I told a group about my supposedly thrifty find. At first they were startled. Then they laughed. Within half an hour the news of my empanada had spread through the entire club. An old man approached me and wordlessly put a hand on my shoulder in sympathy. The barmaids, who until moments ago had happily floated around the floor – with waist-length hair, tight starched shirts and hips that swung like saloon bar doors – stopped to interrogate me. "You paid 60,000 guaranies for an empanada?" squealed one girl. "I'm so sorry – that is so embarrassing. You've just eaten the most expensive empanada in Paraguay!"

Asunción is a mark-down metropolis. It's not just cheap. It's smirk-inducingly, caution-capsizingly, restraint-collapsingly cheap. In fact it's officially the cheapest capital city on earth. Mercer Consulting, which compiles an annual list, has placed it as the least expensive city to live in for the fifth year running.

With 141 places separating Asunció from Moscow, the world leading wallet-shredder (London is in second place), the prices really are extraordinary. Excellent imported wine from Chile and Argentina is less than two pounds a bottle; the most expensive hotel in town has room rates of barely £60; the rent on a downtown apartment is £75 a month; and empanadas are seemingly almost free if you know what you're doing.

In view of these facts, the question is obvious: why isn't everyone flocking to Asunció for the ultimate cut-price city break?

"If only there was a guide book, then surely people would come here," bemoans Raúl, a 22-year-old graduate who, along with his friends, has decided to escape the serenity of downtown and take me to the suburbs, where all manner of baroque grotesqueries are being constructed for the Paraguayan elite.

There's even an exact replica of Scarlett O'Hara's Tara plantation from Gone With The Wind close to the complex of Western shopping malls where the traditional Paraguayan staples of sopa paraguaya (corn meal and pig fat cake) and tereré (an extremely addictive type of cold herbal tea drunk through a metal straw from a container made from ox horn) are firmly shunted aside to make way for the international staples of Guinness and caipirinha.

Raúl is one of the few young Paraguayans who wants to stay in his country. Isolation and rampant corruption have made most of his friends flee to Spain or the United States. "You might think it's cheap", Raúl tells me, "but if you're earning the average salary [about £110 per month] then life here isn't cheap at all." Raúl's feelings are echoed by his friends. "There's no tourism here so prices have never been inflated for tourists from Europe. But it's not the same if you live here. There is so much corruption in the government. Just go downtown and see how many counterfeit goods you can pick up. We have such a bad reputation for it but nobody's going to stop because we can't afford to buy the real thing."

If, as Keith Waterhouse once said, Brighton looks like a city that is helping the police with its enquiries, then the centre of Asunció looks like a city that is stumbling into the dawn air after an early release from a lengthy spell in remand. Many of the buildings seem to be suffering from eczema, with huge white flakes slowly dropping off walls onto the street hawkers below who benignly sell everything from counterfeit Paraguayan football shirts (£3) to badly bootlegged copies of Lily Allen's album (90p if you can be bothered haggling).

For anyone used to the quick-fire urbanity experienced in other South American capitals then the undeniable charm of Asunció* will seem like a somnambulant afternoon in the park. Parks are, incidentally, a great way to slow your pulse to Paraguayan time. The city is littered with immaculate areas of shaded greenery, the best of which is the Plaza de los Heroes.

Here lies a reminder of Paraguay's bloody past, when lives were considered as cheap as empanadas are to tourists today.

The Tomb of the Lost Heroes is a bizarre white-domed chapel based on Les Invalides in Paris. Complete with resident footsoldiers, it is a shrine to President Francisco Lopez, an admirer of Napoleon who decided to invade Brazil in 1864. The bloodshed in the resulting six-year long Triple Alliance War (so called as Brazil was backed up by the armies of Argentina and Uruguay) cost the lives of a preposterous 80 per cent of Paraguayan men. It was one of the most bloody wars in modern global history; by the end children aged as young as 12 were being enlisted as cannon-fodder. Implausibly, Lopez's face still adorns the 1,000-guarani note today – testament in the eyes of many Paraguayans to a time where the heroism of their men gained them a reputation for bravery infinitely preferable to today's image of the country as a haven for smuggling and corruption.

Over on Plaza Independencia is a reminder of Paraguay's more recent tyrannies. Don Alfredo Stroessner kept Paraguay in a state of fear and martial law for 34 years until finally being exiled to Brazil in 1989 (where he died last year at the age of 93). His statue sits, hacked into pieces, encased in concrete. You can just about make out half of his face: benign and corpulent, it is the visage of a man who dined out once too often at his country's expense.

Stroessner may be gone, but if you do crave a bit of Latin police-state chic then Paraguay still delivers in the realms of male fashion. Mirror shades, gravity-defying bouffants, beige turtlenecks and flapping suede jackets are rife. The fashion for the well-dressed Asunción male appears to be "off-duty Brooklyn cop circa 1975". You expect Telly Savalas to walk past you at any minute. Taxis are plentiful (and predictably cheap) but a painful reminder of Paraguay's decline in infrastructure is evident in the old train station. Trains ground to a halt here about 15 years ago, but the old station, complete with dog-tooth railings and turrets, shows just how ahead of its larger neighbours the country was in the early years following independence from Spain in 1811. Paraguay was the first country in South America to have railways, foundries, newspapers and military academies. The likes of Lopez and Stroessner have done their best to ensure that the country they ruled is only the standard-bearer for bootleg football shirts today.

The exceptional cheapness of Asunció is great news for potential tourists from the West, but hardly a cause for celebration for locals, a situation confirmed by the current series of strikes and protests against current President Nicanor Duarte Frutos, the leader of the Colorado Party that has ruled the country for more than 60 years.

Recently, mornings in Asunció have seen the narrow roads come to life with the sounds of fireworks and trotting hooves. Trade unions in Paraguay are big fans of the horse and cart (still widely used as a means of transportation in this country) as a tool in their industrial action. Determined, yet mostly peaceful, parades weave through the capital's streets; the accompanying horses are decorated from head to hoof in the colours of the unions. Every day they march down to Plaza de la Independencia, home of the dismembered Stroessner statue, to protest against the government.

It's only when you get out of Asunción that you can really get an impression of Paraguay's vast emptiness. With a population of only six million in a country bigger than Germany, Paraguay is road-trip country. Tarmac pours through a savannah landscape of fields, with soil the colour of copper hair-dye and Horlicks. Pylons are strung like sagging hammocks along the gently undulating roadside whilst the distant hills are little more than pregnant bumps amid the grazing acres. This is a land of cheerful vintage red trucks whose engines wheeze like a pack of bronchial dogs. Clusters of them rest outside of echoing cream-tiled lunchrooms populated by drivers and gauchos, all contentedly devouring plates piled high with beef steak. Tiny, brightly coloured shacks pepper the long stretches in-between towns; strings of buildings where the sun never relents and time is effortlessly, greedily consumed by the asphalt and the speedometer.

The hub of Paraguay's global reputation for smuggling and fakery is focused on Ciudad del Este, a commerce zone conveniently located bang on the border next to Brazil, in the far east of the country, and with a black market in smuggled goods – ranging from whisky to laptops – estimated at five times the value of the national economy. Though trading in the desirables of the first world, the town's atmosphere is mired firmly in the worst excesses of the third. Belching minivans carry hordes of Paraguayans over the Friendship Bridge border crossing with Brazil. Nobody seems to be in any mood to stick around the grimy shopfronts spewing boxes of counterfeit "Calvin Kleins", "iMacs" and "Levi's" onto the cracked and rubbish strewn pavements. Prices are predictably cheap: a bottle of premium quality Caña (the rum-like national spirit of Paraguay) coming in at well under two pounds. Armed robbery, gangsterism and other crime plague the town.

Fausto, a Paraguayan owner of a roadside café/diner in the town, is one of many who believe that it won't be long before the notoriously benign character of the average Paraguayan finally changes in the face of the ever increasing crime rate.

"We are such a docile nation of people, so different to the Brazilians and the Argentinians. People always vote for the Colorado Party as they promise so much in the months before the election and the opposition is so divided. It's the most obvious political trick and our country falls for it every time. We have this inferiority complex that goes back to the Triple Alliance War. We see all these huge mansions getting built for the politicians uptown and shopping malls opening and yet nothing real has changed. Trade union protests won't change anything; we need something more fundamental."

Far away from the border, in the deep south of Paraguay, is, for me, the highlight of this strange country. Here lie the remains of a collection of Jesuit villages. Built in the first half of the 18th century, they were an attempt to build utopian communities, where hundreds of indigenous Guarani would live together working to produce crops and religious artefacts without ever knowing the concept of money. All this was to be carried out under the supervision of Spanish missionaries who ruled with a conflicting mixture of benevolence and the lash.

This experiment in social engineering won many plaudits in the developed world, with the philosopher Montesquieu seeing it as a manifestation of the moral utopia described by in Plato's Republic. Guarani Indians were easy recruits to the system; they received safety against rampaging slave traders from Brazil and, although they were treated as infants, they were able to produce reproductions of European ecclesiastical ephemera and musical instruments including flutes, harpsichords and organs.

The most impressive of these communities is Trinidad, now a Unesco heritage site. I strolled around the substantial remains of this former community of 4,000 people for an entire morning with the only disturbance coming from a couple of children playing hide and seek among the cappuccino-coloured sandstone houses, workshops and bakeries, all of which are now roofless and centred around a lushly grassy plaza, these days mostly home to parrots. The highlight is an enormous cathedral complete with surviving basilica, crypt and pulpit, but minus roof which collapsed in 1800.

Sensing that the Jesuits were forming what was akin to a state within a state, the Spanish expelled them in 1768, with communities such as Trinidad collapsing soon afterwards and lying abandoned and totally ignored until well into the 20th century. What remains today is an eerie, but moving and quite overpowering testament to the grand design, but ultimate folly, of a time when the West believed that total dependency was the only way that people such as the Guarani could be "civilised" and communities such as Trinidad were seen as futuristic examples of enforced social progress.

Any disturbance to the ruins, to the gaping hollow of the Chaco wilderness, or even to the mellifluous charm of Asunció* seems impossible – but it may in fact not be so far away. Oil prospecting is taking place in the Chaco. The vast subterranean water network that lies underneath the soil of the country adds to the vast Itapu dam in the far east of the country (the largest on earth) in giving Paraguay a strong card in any future battles over the control of water supplies in the Americas.

"We have so much potential, but nobody ever thinks beyond their next slice of sopa paraguaya around here," bemoans one local as I climb to board a (15p) bus across town. In the cheapest city on Earth, it's hard to disagree.

Traveller's guide

GETTING THERE

The writer travelled with South American Experience (www.southamericanexperience.co.uk; 0845 277 3366), which can tailor trips in Paraguay from £585 per person, including transfers, four nights' B&B, three nights' full board on a river cruise, and sightseeing. International flights are not included but can be arranged.

There are no direct flights between the UK and Paraguay. Asunció is served by TAM Airlines (020-8897 0005; www.tam.com.br) from Heathrow, via Sao Paulo.

To reduce the impact on the environment, you can buy an "offset" from Equiclimate (0845 456 0170; www.ebico.co.uk) or Pure (020-7382 7815; www.puretrust.org.uk).

GETTING AROUND

Intertours (00 595 21 211 747; www.intertoursparaguay.com), can provide English-speaking guides and tailor trips around Paraguay.

STAYING THERE

Hotel Granados Park, downtown Asunción (00 595 21 497 921; www.granadospark.com.py). B&B from US$110. (£55). Chaco Hotel, downtown Asunción (00 595 21 492 066; www.hotelchaco.com.py). Doubles from US$68 (£34).

MORE INFORMATION

The FCO (0845 850 2829; www.fco.gov.uk) advises: "Recently there have been reports of armed robberies in Asunción and other parts of the country... Although foreigners are not specifically targeted, you are advised to remain alert at all times."

Paraguay Tourism: 00 595 21 494 110; www.senatur.gov.py; www.lata.org