Montevideo's harbor

URUGUAY IS A WEALTHY COUNTRY by Latin American standards, although its economic development has been sluggish since the 1950s. In 1990 the country had a gross domestic product ( GDP--see Glossary) of approximately US$9.2 billion, or US$2,970 per capita, placing it among the highest-income countries in Latin America. Uruguay's small population (just over 3 million) and low population growth (0.7 percent per year) enabled its people to maintain a reasonable standard of living during the 1980s, despite the nation's unsteady economic performance. Like many other countries in the region, Uruguay faced a large external debt and an appreciable public-sector deficit, both of which impeded the growth of the economy. Other major limitations on growth were the continued dependence on a few agricultural products and one of South America's lowest levels of foreign and domestic investment.

Uruguay's economy developed rapidly during the first three decades of the twentieth century because of expanding beef and wool exportation. Rising trade income led to the creation of an advanced welfare state in which the government redistributed wealth and protected workers. After agricultural exports leveled off in the 1950s, the government's role in the economy expanded. With agriculture stalled and manufacturing potential limited by the small size of the domestic market, the public sector became the source of most new jobs in Uruguay. The economy operated behind high tariff barriers, barring competition from abroad. An alliance between the nation's two major political parties upheld this statist model through the 1960s, but lack of GDP growth and large public-sector deficits testified to its inefficiency.

Although the military government (1973-85) enacted major economic reforms during the 1970s, it operated with high fiscal deficits and borrowed extensively to pay for those deficits. In an effort to reorient the stagnated economy toward external markets, the government eliminated price controls and slashed tariffs while providing subsidies to exporters. These reforms of the goods market produced favorable results in the short run: exports, investment, and GDP all increased significantly. When the government went further, however, by deregulating the banking sector in hopes of removing inflationary pressures, the economy became unstable. In 1981 Uruguay's economy went into recession.

One source of instability was the growing "dollarization" of the banks. When foreign-exchange regulations were canceled, United States dollars (mostly from Argentine real estate investment) flowed into Uruguay. Uruguayan banks, in turn, loaned dollars to private companies and ranchers within the country. The danger in this system was the exchange rate: when the government allowed its currency, the Uruguayan new peso (for value of the Uruguayan new peso--see Glossary), to float against the dollar in 1982, the peso value of man 100y Uruguuguayan loans suddenly tripled. Thus, Uruguay facÍÍÍÍed both a recession and a domestic debt crisis in the early 1980s.

In 1986-87 the economy recovered from the recession as real GDP increased by 6.6 percent in 1986 and 4.9 percent in 1987. The renewed emphasis on exports, including several new categories of goods, resulted in a positive trade balance. Real wages, which had fallen by 50 percent in the 1970s but risen by 15 percent in the early 1980s, increased again (but only marginally), as did employment (by 4 percent). These modest improvements could not mask fundamental problems, however. Inflation averaged over 60 percent per year in the 1980s, despite efforts to reduce it. In addition, the domestic debt was largely absorbed by the public sector, but in the process Uruguay's deficit and foreign debt became larger. Debt service alone absorbed about one-quarter of export earnings. During the last two years of the administration of Julio María Sanguinetti Cairolo (1985-90), fiscal pressures forced the government to abandon its growth-promotion strategy, and GDP did not increase. On the contrary, real GDP growth fell to 0.5 percent in 1988, 1.5 percent in 1989, and an estimated - 0.4 percent in 1990.

In 1989 Sanguinetti defended his administration's economic record in terms of what had not happened. In a speech to the General Assembly, he said that Uruguay's political and economic climate remained stable in contrast to its larger neighbors (Argentina and Brazil). The nation's economy "had not collapsed into regional hyperinflation, as was predicted nor had the banking crisis that the government inherited destroyed the financial system nor had the heavy external debt prevented the country from growing." The statement was an apt summary of both the government's cautious philosophy and of Uruguay's limited economic progress in the late 1980s.

The Sanguinetti government could claim credit for steering a sensible course during a difficult decade for Latin American nations. The government did not, however, make much progress addressing a fundamental limitation on the economy and the leading cause of the deficit: the size of the public sector. Powerful public-sector unions made it difficult for the government to reduce public employment. When, for example, the inefficient passenger rail service was discontinued in 1988 because of declining ridership, workers were not released but rather were transferred to other government jobs. The welfarestate model remained largely intact. By the last two years of the decade, however, economists and politicians were beginning to ask basic questions about the state's proper role in the economy.

An even more fundamental question, not addressed in the 1980s, was the economy's heavy dependence on a few livestock products, which were produced by primitive agricultural practices. Although exports could be diversified, for example, by producing not just wool but also woolen textiles and apparel, the supply of raw material depended on methods of raising sheep and cattle that had not changed significantly in two centuries. Livestock ranged over unimproved pastures whose carrying capacity was quite limited production had actually decreased since the beginning of the twentieth century. The vulnerability of the sector was demonstrated in the late 1980s when a two-year drought (1988-89) decimated livestock herds.

Such fundamental issues were still in the background as Luis Alberto Lacalle de Herrera became president in March 1990. Lacalle indicated that his government would continue the cautious adjustment policies of its predecessor, seeking to reduce inflation and debt first and to resume growth second. Lacalle embraced privatization and drew up a bill to eliminate several state monopolies. Continued diversification of exports, including the possibility of exporting services, also appeared to hold good prospects for economic growth.

Data as of December 1990