When the military took power in 1973, they did so in the face of a decade and a half of economic stagnation, high inflation, and increased social unrest. Massive repression brought the social unrest under control and eliminated the urban guerrilla threat. Economic policy and performance soon became the regime's ultimate claim to legitimacy and justification for its harsh rule. The military and their civilian technocrats hoped to reverse Uruguay's economic stagnation, which had led to an absence of capital accumulation and investment, as well as to capital flight. The dissolution of the General Assembly and the banning of union organizations eliminated any possibilities for action by the opposition and thus made possible a new economic model. The long-term model sought by the military involved a profound change in the traditional roles of the public and private sectors and the response of the public sector to the influence of the external market.

The military's economic program sought to transform Uruguay into an international financial center by lifting restrictions on the exchange rate ensuring the free convertibility of the peso and foreign remittances, thus further "dollarizing" the economy facilitating the opening of branches of foreign banks and enacting a law to promote foreign investment. More attention was paid to the international market. The reduction of import duties, promotion of nontraditional exports, integration of trade with Argentina and Brazil, and liberalization of the agricultural and livestock markets were key goals. Although proposals were made to reduce state interventionism, the state participated actively in the preparation of the new program.

The principal architect of the program was Harvard-trained Alejandro Végh Villegas, who had served as minister of economy and finance from 1974 to 1976. Végh hoped to dismantle the protectionist structure of the economy free the banking and financial communities from the restraints under which they operated cut the budget, especially social spending reduce state employment and sell off most of the state enterprises. However, some of the nationalist and populist military leaders opposed his plan for mass reductions in government employment and divestiture of such state enterprises as ANCAP. Végh succeeded somewhat in his budgetary and monetary objectives and managed to reduce some tariffs. Between 1975 and 1980, his strict monetary policy reduced inflation from 100 percent in 1972 to 40 to 67 percent in 1980, and by 1982 it was only 20 percent. He managed this by strict control of the social service side of the budget and by a policy of depressed real wages, which fell by 50 percent during the 1970s.

Between 1974 and 1980, the gross domestic product ( GDP--see Glossary) grew, although unevenly. Beginning in 1980, however, the situation changed as the military's economic program began to unravel. High interest rates and recession in the United States did not help matters. Between 1981 and 1983, GDP fell some 20 percent, and unemployment rose tbeb to 17 percent. The foreign debt burden, exacerbated by the quadrupling of oil prices in 1974, grew exponentially and stood at about US$3 billion by 1984.

Industry and agriculture, whose accumulation of debt in dollars had been encouraged by official policies, were adversely affected by the government's elimination in November 1982 of its "crawling peg" system (a minidevaluation monetary policy) in effect since 1978. The progressively overvalued currency had limited the ability of domestic producers to raise prices to compete with cheaper imports. The resulting collapse of the Uruguayan new peso (for value of the Uruguayan new peso--see Glossary) bankrupted thousands of individuals and businesses. Industry was in better shape, although it had unused capacity and no substantial diversification had taken place. The financial sector, which was largely foreign owned, was consolidated and expanded at the same time. As the situation deteriorated, the state, in order to save the banking system, purchased noncollectible debt portfolios of ranchers, industrialists, and importers, which were held by private banks. This adversely affected the fiscal deficit and increased the foreign debt, which grew sevenfold between 1973 and 1984 (see Restructuring under the Military Regime, 1973-85 , ch. 3).

The failure of the regime's economic model, combined with its stifling of political opposition, prompted thousands of Uruguay's best professionals to go into exile. By late 1983, Végh returned from an ambassadorship in the United States to once again become minister of economy and finance. As the most important technocrat to serve the military regime, he had returned to help smooth out the expected transition to civilian rule. He failed, however, to turn over a revived economy to a democratic government. The lack of success of the military's economic policies and their failure to achieve legitimacy or consensus led to a watering down of their own plan to reinstitute a civilian government under military tutelage.

Data as of December 1990