Something else that should be pointed is that large regions of the country were owned by the Lopez family. They treated the government as their private business, awarding each other huge tracts of lands. You can't expect a country whose government is so corrupt to prosper.
Moreover, much has been said about the populational decline of the Paraguayan people and it's always understood wrong. The allied troops didn't advance killing innocent civilians. There was no genocide or holocaust. The allied armies only reached towns in 1869, more than four years after the war started and what they found were countless bodies and starved civilians roaming the countryside.
What happened? Well, Solano Lopez had the brilliant idea of ordering civilians of leaving their lands and towns, to prevent anyone from falling into allied hands. What happened when you have tens of thousands leaving their lands? People starve, because there is no one in the fields producing food. It gets worse when you find out that whoever remained behind, or was too weak to withdraw, was killed by Lopez's soldiers.
When the Brazilians found the Paraguayan civilians in 1869, they were horrified. When they captured the first Paraguayan town on January 1, 1869, which was the capital, it has been emptied, except for a few foreigners who remained behind. The Brazilians kept marching north, where they finally reached other Paraguayan towns. During the journey, they met with masses of living skeletons, mostly women and children, roaming the countryside. The Brazilians fed the civilians they found and sent them to Asunción, but there was a moment in which so many were in need, that both civilians and Brazilian soldiers starved. There wasn't food for everyone.