PRESIDENT STROESSNER CITY, PARAGUAY -- By mid-morning, the sun-baked streets here are already littered with wrappers, soda cans and plastic bags. By noon, gaggles of box-laden shoppers have begun to flock back across the Parana River bridge to adjoining Brazil and Argentina, or on to more distant points.

By evening, merchants exhausted by yet another intense selling spree apportion the day's take -- some for the vendors, some for the Paraguayan state, and a bundle for the contrabandistas.

Looking for U.S. potato chips? Japanese cordless phones? Danish pipe tobacco? South Korean dolls? West German cutlery? A rubber raft made in Taiwan? It is all here. Some of it filters through to the rest of Paraguay to feed, clothe and entertain this nation of 3.5 million.

But there is more whiskey, perfume, electronic equipment, cameras, cosmetics, watches, and apparel being hawked in the cobbled alleys of this out-of-the-way port than Paraguay could consume in years. Most of it just passes through.

According to diplomats and opposition politicians, the traffic is directed by the Western Hemisphere's longest-ruling head of state, Gen. Alfredo Stroessner, who taxes a portion of the trade for government coffers and lets his friends cash in on the rest.

Many Paraguayans benefit. Goods sell at bargain-basement prices that seem to allow this country to live beyond its means. Foreigners, too, find the discounts worth the journey. In fact, Paraguayan authorities like to think of themselves as providing an international service. As Roberto Simbron, a customs official, put it in an interview: "Paraguay is serving as a kind of trampoline for the world."

While contraband exists along most international frontiers and in virtually all countries of the world, it has grown in Paraguay into a national staple. Stroessner's regime has countenanced and abetted it, to the extent that Paraguay's economy now thrives more on illicit commerce than on above-board trade.

The under-the-table business runs both ways across the border. There are contraband imports, which keep Paraguayan shelves stocked and nourish an expanding tourist trade. And there are contraband exports -- largely soybeans, cotton, timber, beef and leather -- on which traders have access to more favorable exchange rates.

"In other parts of the world, contraband is fundamentally a clandestine activity, full of risks," said Ricardo Rodriguez Silvero, a Paraguayan economist who has studied the problem. "In our country, contraband has taken on massive form in the full light of day. It is common at the frontiers to observe trucks crossing filled with contraband merchandise. Everyone knows that contraband represents a substantial part of our external trade."

Just how much, no one can really say. Customs officials contend that no more than 20 percent of Paraguay's total trade is illegal. Independent economists put the figure at more than half.

To get some indication of the magnitude, economists have compared Paraguay's official trade statistics with those published by the country's main trading partner, Brazil. It seems Brazil's Central Bank keeps a more faithful record of what goes back and forth.

The Brazilian bank listed $333 million in exports to Paraguay in 1984, while the Paraguayan bank showed imports from Brazil that year of only $168 million. The next year, Brazil reported exports of $299 million, and the Paraguayans recorded imports of $160 million.

Some Paraguayan authorities say the contraband figures are inflated, the problem exaggerated. But others worry that smuggling is weakening the economy, tarnishing Paraguay's image abroad and undermining moral standards at home.

Draft legislation calling for tougher anticontraband sanctions is on its way from the executive branch to Congress, although many view the measure as having more symbolic value than dissuasive force. The threat of a 12-year jail term, on the books for years, has done little to discourage illegal trade.

"It is evident that the fight against contraband cannot be reduced simply to renewing a law or giving more reach to repressive and penal actions," said the Paraguayan newspaper Ultima Hora in an editorial last month. "The confrontation with this evil must take deeper forms and measures."

At the time of Paraguay's independence in 1811, traders were already evading customs duties. One contributor to the new nations was actually listed on official rolls as a contrabandista.

For generations, trafficking stayed relatively small-scale, involving mostly imports of food and clothing. In recent times, high tariffs and import barriers erected around neighboring Brazil and Argentina have propelled people there to do their shopping in Paraguay.

Border officials often look the other way as hordes travel across the border for less expensive and more available goods. Brazilian growers, too, have capitalized on the permissiveness, shipping hundreds of thousands of tons of soybeans into Paraguay for reexport at a more attractive exchange rate.

Immigrants from Taiwan, South Korea, Hong Kong and the Middle East have played a leading role in developing some trade lines, especially in electronic goods. They now operate the bigger stores in this border town, while the Paraguayans sell from street stands several rows deep.

Since construction of the giant Itaipu Dam near here in the early 1980s -- a project that gave rise to this city -- pressure to cover a sudden decline in investment funds also has spurred contraband activity.

Some Paraguayan authorities argue that the rights and wrongs of smuggling are as blurred as Paraguay's largely unpatrolled frontier. "What is contraband for one is not contraband for someone else," said customs director Fulgencio Tomas Santos in an interview by the river harbor in Asuncion. "Contraband can sometimes be beneficial."

It certainly has been enriching. Those who have studied the system say it is founded on a network of institutionalized corruption. By these accounts, Stroessner, to assure loyalty, has distributed different smuggling routes as franchises to his senior military commanders and Colorado Party bosses -- whose ostentatious lifestyles far exceed the buying power of their modest official salaries.

Rarely is this network exposed, but readers of El Diario got a glimpse of it last month. The Paraguayan daily attacked a ruling Colorado Party chief in the border town of Pedro Juan Caballero for protecting importers of contraband cigarettes during a visit by Industry and Commerce Ministry inspectors. The story was widely interpreted not as a harbinger of any crackdown but as a sign of pique on the part of Nicolas Bo, the daily's owner. He also operates a cigarette factory and does not appreciate contraband competition.

Lately, the Paraguayan government has taken a few steps to curb the flow of some contraband goods and to legalize a share of the rest.

According to Paraguayan officials, such items as low-priced whiskey, jeans and radios, which tourists think have been smuggled, are really not in this country illegally. They were imported at cut-rate tariffs introduced two years ago under a system designed to lure foreign buyers and make duties more affordable for traders. The reduced tariffs have been credited with boosting customs revenues.

In this border port, the government is trying to create a kind of free-trade zone that would also give an air of legitimacy to the trade. A flat 30 percent tax is now supposed to be applied on the wholesale value of all items. To facilitate the flow of merchandise and tourists here -- and to the mammoth Iguazu Falls nearby -- construction has begun on a $100 million international airport.

Many Paraguayans say even the new low tariffs frequently go unpaid. "I'll tell you the main difference between the dictatorships in Chile and Paraguay," said Aldo Zuccolillo, publisher of the banned paper ABC Color. "The regime in Chile has an ideology at least, but here the dictatorship is purely commercial. Its anticommunist line is just a flag raised to cover up the corruption."

Foreign governments are alarmed at some of the more sinister offshoots of the institutionalized lawlessness. One growing racket involves the sale of Paraguayan passports, a business that diplomats say is promoted by both the Foreign Ministry and Interior Ministry. "I've interviewed people with Paraguayan passports, including one with an official passport, who could not speak a word of Spanish," said a foreign envoy.

Another concern centers on evidence of an expanding cocaine trade. Ether, acetone and other chemicals used to refine coca paste into pure cocaine have turned up in larger quantities, suggesting that Paraguay is evolving from simply a transshipment point for cocaine deliveries to a base for processing coca, much of it grown in Bolivia. The U.S. Drug Enforcement Agency has decided to reopen the office in Asuncion that it closed a decade ago.

Paraguay's small industrial sector, which must compete against much of the contraband trade, has appealed to the government to control smuggling. The businessmen argue that contraband stifles domestic industry and creates a false sense of prosperity. But no one expects to see a sudden end to the black marketeering.